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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-22043
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NEW ERA OF NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 84-1234845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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ONE GREENWOOD PLAZA, 6550 SOUTH GREENWOOD PLAZA BOULEVARD, ENGLEWOOD, COLORADO
80111
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (303) 694-3933
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 1, 2000, there were 34,921,296 shares of the Registrant's
common stock outstanding and the aggregate market value of such shares held by
nonaffiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on March 1, 1999) was approximately
$2,704,663,023. Shares of the Registrant's common stock held by each executive
officer and director of the Registrant have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the
2000 Annual Meeting of Stockholders are incorporated by reference in Part III of
this Annual Report on Form 10-K to the extent stated herein.
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NEW ERA OF NETWORKS, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 2
Factors That May Affect Future Results...................... 13
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders /
Executive Officers of Registrant.......................... 20
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 22
Item 6. Selected Consolidated Financial Data........................ 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 32
Item 8. Financial Statements and Supplementary Data................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 33
PART III
Item 10. Directors and Executive Officers of the Company............. 33
Item 11. Executive Compensation...................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 33
Item 13. Certain Relationships and Related Transactions.............. 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 34
Signatures.................................................. 36
Consolidated Financial Statements........................... 38
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New Era of Networks, Convoy/DM, MicroScript Server, MicroScript Workstation, the
NEON logotype, NEONet, NEONweb, Neonsoft, NEONaccess, NEONtrack, NEONenrich,
NEONfix, Business EventManager, Enterprise ProcessExecutive, Rapport,
OpenBroker, NEON Impact, NEONsecure, NEONadapter, NEON Physician Access, e-Biz
Integrator, e-Biz 2000 and NEON Trading System are trademarks, and CL/7,
MicroScript and Transaction Distribution Manager, TDM are registered trademarks
of New Era of Networks, Inc. and its subsidiaries. MQSeries is a registered
trademark of International Business Machines Corporation. All other trademarks,
registered trademarks, and trade names contained in this Form 10-K are the
property of the respective owners.
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PART I
This Annual Report on Form 10-K ("Form 10-K") contains forward-looking
statements made within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Act") and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
identify such forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks and uncertainties that could
cause actual results to differ materially from those expressed or forecasted.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Factors That May Affect Future Results"
on pages 13 through 19 in this Form 10-K. Readers should not unduly rely on
forward-looking statements, which reflect only the opinion of NEON as of the
date hereof. Unless required by law, NEON undertakes no obligation to revise
forward-looking statements. Readers should also carefully review the risk
factors set forth in other reports or documents NEON files from time to time
with the Securities and Exchange Commission, particularly the Quarterly Reports
on Form 10-Q and any Current Reports on Form 8-K.
ITEM 1. BUSINESS.
OVERVIEW
New Era of Networks, Inc. ("NEON" or the "Company") is a leading supplier
of Internet infrastructure software and services. Specifically, NEON helps
automate e-Business by providing a range of products and services, which
integrate Internet-facing applications with core operational systems for goods
and services providers, and which facilitate the creation of Net markets. By
enabling information sharing between systems, businesses can automate end-to-end
processes, such as fulfilling an order, at the speed and volume required in the
e-Business environment. NEON products enable e-markets by routing messages and
transforming information at the needed speed and volume. NEON's software
solutions support integration of leading Internet and core business packaged
applications, application server platforms, industry standard protocols, and
proprietary systems. Additionally, the Company provides design, development and
implementation services through its Professional Services organization.
To date, over 2,500 customers worldwide, spanning all major industries
including financial services, healthcare, insurance, manufacturing, and
telecommunications, use NEON products. Various customers of the Company include
ADP, Citibank, GTE Corporation, IBM, JP Morgan & Company, Monsanto Company, Open
Interactive, Primark Financial Services, Sumitomo Bank of California and The
Street.com. As part of its strategy, NEON has established reseller and joint
marketing relationships with complementary e-Business entities such as BEA,
BroadVision, Commerce One, IBM, Microsoft and Sun Microsystems, Inc.
RECENT DEVELOPMENTS
Acquisitions. In June 1999, we acquired all of the outstanding capital
stock of Microscript, Inc. ("Microscript") for an aggregate purchase price of
$33.1 million, of which $8.7 million was paid or payable in cash and
approximately $19 million was paid through the issuance of 423,700 shares of
common stock. In connection with the acquisition, we assumed all options
outstanding under Microscript's option plan. An additional 22,255 shares of
common stock valued at $1.0 million was issued to the shareholders of
Microscript upon the completion of the Microscript audited financial statements
for the year ended December 31, 1998. In July 1999, we agreed with the former
equityholders of Microscript to provide additional cash consideration valued at
approximately $16.6 million to more closely reflect the value agreed upon in the
original purchase negotiations. Microscript is a supplier of application
integration software on the Windows NT platform.
Also in June 1999, we acquired all of the outstanding capital stock of
Convoy Corporation ("Convoy") for an aggregate purchase price of approximately
$42.8 million, payable through the issuance of 807,115 shares of common stock.
In connection with the acquisition, we assumed all options outstanding under
Convoy's option plan. In August 1999, we agreed with the former equityholders of
Convoy to provide additional consideration valued at approximately $8.3 million
payable through the issuance of 618,225 additional shares of common stock to
more closely reflect the value agreed upon in the original purchase
negotiations.
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In May 1999, we acquired all of the outstanding capital stock of SLI
International AG ("SLI") for an aggregate consideration of $22.7 million, of
which $16.5 million was paid in cash and $5.5 million was paid with 138,452
shares of the Company's common stock. 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. SLI is a worldwide provider
of SAP R/3 software implementation, training support and other related change-
management services.
In April 1999, we acquired all of the outstanding capital stock of VIE
Systems, Inc. ("VIE") for an aggregate consideration of $12.0 million 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. In accordance with the
purchase agreement, payments will be made to the respective VIE shareholders to
the extent these performance targets are met, beginning in the fourth quarter of
1999 and continuing every six months until the second quarter of 2002. Assets
acquired by the Company included VIE's products, including its Copernicus EAI
product and formatter patent. VIE is a provider of EAI software with a strong
presence in travel, transportation, financial services, and retail markets.
In February 1999, we acquired all of the outstanding capital stock of D&M
(Asia) Ltd. and Database & Management (S) Pte. Ltd. (collectively "D&M"), two
sister corporations organized under the laws of Hong Kong and Singapore,
respectively, for an aggregate consideration of approximately $6.0 million,
which consisted of $3.0 million in cash and approximately $2.9 million through
the issuance of 48,940 shares of common stock. D&M provides professional
integration services to customers in the Pacific Rim.
We accounted for these acquisitions under the purchase method of
accounting. See Note 3 of Notes to Consolidated Financial Statements.
INDUSTRY BACKGROUND
Utilizing the Internet to do business, christened e-Business, is
dramatically altering business-to-business (B2B), business-to-consumer (B2C),
and business-to-employee interactions. Companies are actively pursuing
innovative business models to take advantage of this e-Business opportunity.
e-Business participants include traditional companies moving to new
Internet-enabled business models, new companies chartered especially to deliver
products and services via the Internet, and e-market makers that facilitate
e-Business through online trading communities. e-Business organizations operate
in an environment distinguished by constant change and complex business
interactions that stretch across an extended, virtual enterprise of
Internet-enabled customers, suppliers and partners.
In this new realm, speed, agility and accuracy are the tools required to
achieve competitive advantage. Companies must conduct business in real-time,
providing immediate communication with customers, vendors and other partners via
clearly defined business processes. In turn, these processes must be constantly
monitored and modified to maximize efficiency. Automating business processes is
fundamental to success in the e-Business environment. From procurement to order
fulfillment, the benefits of automating business processes across the enterprise
are substantial. For example, a company that automates procurement processes
with their suppliers can shorten cycle times and reduce inventory while locating
the best price, all of which lower costs and increase profits. Similarly, an
organization that allows customers to place and check order status via a Web
site and e-mail improves customer satisfaction and increases market opportunity
while decreasing the costs of customer service and order processing.
The e-Business revolution is in its infancy and has substantial growth
potential. Literally every business is moving to establish and enhance its
e-Business capabilities. We see the e-Business world as categorized into two
fundamental groups: Goods and services providers on the one hand and the newly
spawned online trading communities on the other. Goods and services providers
include both established companies and the new Internet-based virtual
businesses. Online trading communities facilitate e-markets for goods and
services. These e-market makers bring together multiple suppliers and consumers
in an electronic marketplace far more efficiently than anything in the physical
world. Ultimately, both types of e-Businesses will need integration services,
but in different ways and for different reasons.
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The growth and sheer volume of e-Business is noteworthy. Forrester Research
states that $7.8 billion dollars worth of B2C transactions transpired in 1998
through companies such as Amazon.com and Web-based arms of companies like Lands'
End. More importantly, Forrester Research estimates growth to $108 billion in
just five years, a thirteen-fold increase. Though less visible, the B2B segment
is substantially larger and growing even more rapidly. Some $43 billion of B2B
commerce was conducted via e-Business in 1998, and Forrester Research expects
this market to reach $1.3 trillion by the year 2003 as businesses of all types
move to Internet-based transactions for buying and selling.
The number of online trading communities increased dramatically in 1999.
While there were only 350 such marketplaces in 1998, there are over 3,000 today.
Further, Forrester predicts this number will double by the end of the year 2000,
a 16-fold increase. The growth of goods and services e-Business and online
trading communities are interdependent. Online trading communities will sprout
in direct response to the escalating opportunities of goods and services
e-Business. Conversely, the potential market for direct e-Business can only be
reached by exploiting the efficiencies afforded by online trading communities.
Goods & Services Providers
Goods and services providers are both traditional "brick and mortar"
companies moving to embrace the Internet and new "dot.com" businesses created as
Web-based entities. Both employ e-Business for two basic functions: buying from
suppliers and selling/supporting their customers. They make purchases either
directly from other companies or indirectly through an online trading community.
Likewise, they sell directly to companies (B2B) or consumers (B2C), or
indirectly via an online trading community.
To accomplish the buying, selling and customer support, companies deploy
e-Business applications designed specifically for these purposes. Companies can
either buy packaged applications or build their own. Software vendors including
Ariba, BroadVision, Commerce One and Open Market offer pre-packaged solutions
for specific functions such as procurement and ordering. Alternatively,
businesses can build custom applications on top of application servers such as
BEA WebLogic, IBM WebSphere, Microsoft IIS, and iPlanet from the Sun/
AOL/Netscape consortium. Application servers can also be built using industry
standard protocols such as EDI, XML, FIX and S.W.I.F.T.
While these applications perform essential e-Business functions, they are
not the total solution. They handle only the first step in the process: Internet
activity. Once initiated, the transaction must be completed. For example, a
customer places an order via a BroadVision application. Once it has been placed,
that order must be processed: products sent, invoices generated, and service
contacts activated. These business processes are completed by operational
systems running core business functions such as order entry, distribution, and
accounting. Most companies already have such operational systems in place. Many
businesses have a combination of packaged Enterprise Resource Planning (ERP)
solutions from vendors such as Oracle, PeopleSoft and SAP in addition to legacy
applications.
The new e-Business applications must work together with existing
operational systems for a business to successfully conduct e-Business. Goods and
services e-Businesses have three basic requirements. First, their systems must
share critical information on customers, products, prices, orders, and
inventory. Second, systems must work together to complete end-to-end processes
such as fulfilling an order. Finally, the entire process must be completed at
speeds sufficient to meet the demands and customer expectations of
Internet-based performance, throughput and volume. Neither Internet applications
nor existing operational systems provide the required integration capabilities.
Companies need additional software to integrate their e-Business applications
with the back-office and ERP systems that run the business.
Online trading communities constitute a new and rapidly expanding market
created to capitalize on the rapidly expanding e-Business marketplace. Formerly
known as portals, online trading communities create Internet-based global
marketplaces coordinating buyers and sellers with common interests.
Priceline.com, AOL, and Quicken.com are examples of well known B2C trading
communities frequented by consumers. The Society for Worldwide Interbank
Financial Telecommunication ("S.W.I.F.T.") is a long established
business-to-business trading community, and new B2B trading communities are
forming at a record pace (e.g., e-steel.com is a recent entry that enables
buyers and sellers of steel to conduct business online).
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Providers of online trading communities face different issues than goods
and services providers, and unique technical challenges. First, they must
attract and retain a high volume of trading partners because the greater the
number of buyers and sellers the more valuable the community becomes. But, each
buyer or seller is interested only in a subset of what is traded in the
community, and they want to see only the offers in which they may have an
interest. For example, if a company only sells disk drives, it does not want to
see offers to purchase components like memory chips. Therefore, online trading
communities must provide mass customization.
Further, actual transactions in an online trading community are complex.
They require coordinating activities between multiple parties. In a securities
trading and settlement process, for example, up to four parties are involved:
the buyer and seller, a trading exchange securities custodian and a depository.
Equally complex are the partners' heterogeneous computing environment of
platforms, protocols and applications which must be supported to ensure
transactions are successfully completed.
In addition to transactions, online trading communities traffic in
information. Data such as purchasing trends, price histories and transaction
volumes travel through the community. Being able to leverage this data is a key
benefit for the trading partners using the community, so online trading
communities need the capacity to handle large volumes of information.
Finally, if a community does not have a critical mass of functionality
available it will not attract enough partners to survive, let alone prosper. For
example, if the trading community offers a marketplace to purchase insurance and
fails to have functional, reliable direct links to the insurance companies, it
provides no value to its users. This means trading communities must have a
plethora of capabilities available, and the ability to quickly add more.
NEON SOLUTIONS
NEON is a leading provider of e-Business Integration software. Its products
enable companies to automate business processes across the extended enterprise
and integrate the underlying applications that must work together to support
these processes.
NEON combines in a single offering five elements we believe are essential
for e-Business Integration software:
(1) Integration Servers -- enable multiple applications to share
information by moving data between systems, determines which information
needs to be routed to which application, and transforms information to meet
the requirements of the receiving application
(2) Process Automation -- maps out multi-step, multi-process business
processes, manages the runtime execution of the process including
interaction with participating applications, monitors key performance and
operational metrics of running processes to locate performance bottlenecks,
and enables modification of processes over time to maximize business
results
(3) Predefined Adapters -- extend NEON offerings to support leading
e-Business packages such as BroadVision and Commerce One and operational
systems such as SAP R/3, PeopleSoft, Oracle and J.D. Edwards. In addition,
NEON offers a wide range of technology adapters for interfacing with custom
and legacy systems.
(4) Internet Communications -- provide tight integration with leading
application servers from vendors such as BEA, IBM, iPlanet and Microsoft.
In addition, NEON provides native support for e-Business and
business-to-business standards including XML, EDI, HTTP, FTP, HTML, FIX and
S.W.I.F.T.
(5) Packaged e-Business Integration Applications -- provide packaged
offerings to meet specific e-Business information sharing and process
automation needs in various industry verticals.
Goods and services providers wanting to buy or sell online use products to
integrate their Internet and partner-facing e-Business applications with their
operational systems. NEON supports packaged e-Business applications as well as
custom systems built on leading application servers. We also support companies
working directly with their suppliers and customers as well as those transacting
via net markets.
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NEON allows e-Business and operational applications to share critical
information on customers, products, orders, inventory, etc. NEON also combines
activities performed by individual e-Business and operational applications into
completely automated business processes. For example, when a customer places an
order over the Web using BroadVision, NEON would route the order to PeopleSoft
for fulfillment and to a legacy financials application for invoicing.
Net market providers use NEON's products at the heart of their
architectures. NEON's ability to route hundreds of messages per second based on
the content of the message, as well as its ability to transform information from
any format to any other format, allows Net markets to support thousands to
millions of active users.
In addition, Net market participants use NEON products to integrate their
existing operational applications with the Net market. For instance, a financial
institution might use NEON's S.W.I.F.T. products to connect to the global
S.W.I.F.T. network.
We believe NEON's e-Business integration platform provides the following
benefits to customers:
Reduces time to market. We enable customers to get their e-Business
applications and Net markets online faster by providing proven, working
integration functionality they would otherwise need to implement on their own.
Provides a comprehensive solution. NEON combines the five elements of an
e-Business integration software product into a single, comprehensive offering.
This eliminates the need for our customers to purchase and integrate separate
solution components from multiple vendors.
Scales to support high transaction throughput. NEON's technology has been
proven in extremely high-volume applications such as securities trading and
cellular phone call mediation.
Provides high reliability. NEON's products use reliable queuing techniques
and other architectural techniques to ensure no transactions are ever lost, even
when applications or systems crash.
Allows rapid response to change. NEON designed its products so customers
can configure them at any time to keep up with changing business requirements.
PRODUCTS AND SERVICES
NEON's e-Business integration products are Internet infrastructure software
designed to provide customers with a comprehensive platform for rapidly
capitalizing on their e-Business capabilities.
e-Business Integration Platforms
NEON e-Biz Integrator. e-Biz Integrator is NEON's flagship e-Business
integration product. It includes comprehensive integration server capabilities
with process automation and Internet communications to meet the needs of both
goods and services providers moving into e-Business, as well as Net market
providers. It is designed for the highest levels of throughput and reliability.
e-Biz 2000. e-Biz 2000 is NEON's Microsoft-centric e-Business integration
product. Built on the Microsoft DNA architecture, e-Biz 2000 offers
industry-leading ease of use that makes it an ideal choice for customers seeking
to deploy large numbers of integration servers in highly distributed
configurations. It is also well suited for organizations with limited technical
capabilities.
IBM MQSeries Integrator. MQSI is a joint product with IBM that carries an
IBM logo, and is sold by both IBM and NEON. It includes NEON's rules and
formatter modules, as well as IBM's MQSeries messaging middleware.
OEM Products. NEON makes components of its products available to software
vendors on an OEM basis. For instance, both IBM and BEA have licensed
NEONRules(TM) and NEONFormatter(TM).
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e-Business Integration Total Solution Products
Adapters -- NEON adapters extend its integration platforms to work with
specific applications or technologies. NEON currently offers adapters for the
following systems:
e-Business Applications: BroadVision, Commerce One
Operational Applications: J.D. Edwards, Oracle, PeopleSoft, SAP, Siebel
B2B and Industry Standards: EDI, FIX, S.W.I.F.T., XML
Technologies: COBOL, Flat Files, ODBC, Protocols, Screens
In addition, NEON offers an e-Adapter Development Kit that lets customers
and partners build adapters for NEON integration servers.
Utilities -- NEON offers a variety of utilities including NEONtrack for
message tracking and repair, NEON Convoy/DM for data conversion, and NEONsecure
for single sign-on security.
SERVICES
Consulting. We provide NEON software installations and consulting services,
as well as generalized consulting on the design and development of e-Business
integration and enterprise-wide application integration utilizing our expertise
in client/server, Internet/intranet and database management technologies. We
also have experience in SAP implementation services. We offer these professional
services often in conjunction with other professional service organizations and
system integrators.
Education. We offer our customers, for a fee, comprehensive technical
skills training and training in our software products. These courses are
conducted at our principal corporate facilities in Englewood (Colorado), New
York City, Pacheco (California), Danvers (Massachusetts), Atlanta, and London,
and at customer locations on request. In addition, some of our partners provide
fee-based training services for which we receive a royalty.
Technical Support. We offer an array of support services that focus on
reporting and tracking work requests from customers. Our maintenance and support
service offers a twenty-four hours a day, seven days a week customer hotline.
e-Business Integration Applications
NEON provides packaged applications for selected vertical markets that
build on the capabilities of its e-Business Integration platform:
FINANCIAL SERVICES
NEON Rapport. Rapport is a comprehensive electronic customer relationship
management (eCRM) application for the financial services industry. It gives
institutions and their clients access to a comprehensive database of client
activity via the Web.
NEON e-Trading Systems. NTS provides the position keeping and order
management platform necessary for a financial institution to implement
electronic trading. It includes integration with back-office execution systems
as well as electronic integration with major stock exchanges.
HEALTHCARE
NEON Physician Access. Physician Access gives healthcare providers the
ability to give doctors comprehensive, up-to-the-minute information on their
patients via a secure Web site. Doctors can access information on their patients
from their office, home, and even from other healthcare institutions. It
includes integration with the many operational systems throughout the enterprise
that maintain patient information.
NEON Enterprise ID. Enterprise ID allows multiple healthcare organizations
operating as a single entity to share patient information as if it were all
located in one place. It provides the ability to cross-reference all patients
with all other patient records throughout the extended enterprise.
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SALES AND MARKETING
We currently market our software and services primarily through our direct
sales organization, complemented by indirect sales channels. As of December 31,
1999, our direct sales force included 76 commissioned sales representatives
located in 12 U.S. states, the United Kingdom, Australia, France, Hong Kong and
Japan. In addition, our multi-tiered channel program provides additional sales
channels for jointly marketed products. As part of this strategy, we have
established distribution relationships with strategic hardware vendors, database
providers, software and toolset developers, systems integrators and
implementation consultants, including companies designing software, database
packages, and hardware integration and consulting services. We have also
developed alliances with key solution providers to targeted vertical industry
sectors, including financial services, healthcare, telecommunications, and
manufacturing.
We believe that future growth also will depend upon our success in
developing and maintaining strategic relationships with distributors, resellers,
and systems integrators. Our strategy is to continue to increase the proportion
of customers served through these indirect channels. We are currently investing,
and plan to continue to invest, significant resources to develop our indirect
channels, which could adversely affect our operating results if our efforts do
not generate license and service revenues necessary to offset such investment.
Our inability to recruit and retain qualified distributors, resellers and
systems integrators could adversely affect our results of operations. Our
success in selling into these indirect distribution channels could also
adversely affect our average selling prices and result in lower gross margins,
since lower unit prices are typically charged on sales through indirect
channels. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
STRATEGIC RELATIONSHIPS
Our strategy has been to expand our indirect channel relationships with
strategic partners including marketing and/or development partners, third-party
distributors, systems integrators and resellers. Examples of certain of our key
strategic relationships include:
IBM. We entered into a multi-year joint development, marketing and
reselling arrangement with IBM in the fourth quarter of 1997. IBM embeds
NEONRules and NEONFormatter components into the IBM-branded product,
MQSeries Integrator. MQSeries Integrator is sold as a standard product
offering by both IBM and NEON. IBM pays a royalty to NEON for IBM's sales
of MQSeries Integrator. In 1999, royalty income from IBM accounted for less
than 10% of total revenues (see "Factors that May Affect Future Operating
Results -- Software license revenue growth is dependent on our relationship
with IBM and other partners.").
Microsoft. In November 1999, NEON and Microsoft announced a strategic
relationship to jointly enhance and market e-commerce integration solutions
based on Microsoft(R) platforms and NEON's e-commerce Integration products
such as e-Biz 2000. NEON is endorsing the Microsoft BizTalk(TM) Framework
and BizTalk products and tools. In addition, NEON is a member of the
BizTalk steering committee as a leading e-commerce integration vendor.
Commerce One. In November 1999, NEON announced an agreement with
Commerce One, a leader in global B2B electronic procurement solutions, that
will enable customers to integrate the Commerce One Solution(TM) with
legacy and ERP applications. NEON's e-Business Integration products,
including NEON e-Biz Integrator and NEON e-Business Adapter Development Kit
(e-ADK), will be integrated with Commerce One's BuySite(TM) Solution to
deliver a fully interactive, multi-enterprise e-commerce solution for
Commerce One customers.
BroadVision. In November 1999, NEON announced the formation of a
strategic alliance with BroadVision to enable businesses to integrate
existing systems with Internet applications to perform B2B and B2C
e-Business. BroadVision will use NEON's e-Biz Integrator to integrate
BroadVision's Web-based One-to-One(TM) Commerce solutions with customers'
applications such as Oracle(R), SAP, PeopleSoft(R), Siebel(R) and legacy
systems.
BEA Systems. In September 1999, NEON and BEA Systems entered into an
agreement to incorporate NEON technology into the BEA eLink(TM) e-commerce
integration suite. BEA has licensed NEONRules and
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NEONFormatter software to deliver on BEA's continuing commitment to provide
customers with the best-of-breed solutions that extend BEA's E-Commerce
Transaction Platform(TM). BEA expects its NEON-based technology to be
available in BEA eLink by mid-year 2000.
NTT Data Corporation. In March 2000, NEON formed a partnership with
NTT Data Corporation, Japan's leading provider of information systems and
computer networking, to provide NEON technology as the platform for NTT's
new e-Business integration solution. Under the agreement, NTT Data will
market, resell, implement and support NEON software for clients who want to
conduct business via the Internet. NEON technology will be resold through
all of NTT Data's Japanese subsidiaries, including those in Tokyo, Tokai,
Nagano, Kyushu, Kansai, Fukushima, and Chugoku.
In addition, we have reseller and joint marketing relationships with
approximately 80 technology companies worldwide.
TECHNOLOGY
Our product suite and services are primarily targeted at enabling and
facilitating the cooperation and inter-operation of multiple applications of
widely differing design and developmental generations. NEON's e-Business and EAI
products operate on a heterogeneous mix of hardware and underlying software
platforms, utilizing existing transaction management capabilities found in the
underlying operating environments.
Our core technologies have been integrated into an enterprise level
integration server architecture that leverages the benefits of individual
modules to deliver the following additional features:
- employs dynamic formatting and guaranteed delivery to abstract the
translation and delivery of information across applications;
- simplifies the intrusion into new or legacy programs needed for such
programs to inter-operate;
- uses a nonprogrammatic and declarative rather than procedural definition
toolset, allowing configuration and maintenance workloads to scale
comfortably by describing formats for input and output as the number of
interfaces increases;
- maintains transaction level reliability and state matching for the
transmission of critical data;
- provides independent scalability across all modules to service
information-intensive enterprises;
- combines implicitly asynchronous architecture and high reliability to
permit all nodes of a network to operate at enhanced efficiency;
- operates transparently over the wide range of computing hardware, network
and operating software often found in today's information technology
environments.
PROPRIETARY TECHNOLOGIES
Rules Engine, NEONRules. The Rules Engine combines the ability to support
the high degree of expressiveness and flexibility of a Boolean logic model with
predictable performance, previously available only in significantly less
functional single field evaluation models. In addition, the Rules Engine is
capable of supporting a high number of rules without suffering performance
degradation. The Rules Engine examines the value of any field, or group of
fields found in or derivable from the message using Boolean operators to
determine subsequent actions. Using either the NEON Graphical User Interface
("GUI") panels, or Application Program Interfaces ("APIs") provided by the Rules
Engine for programmatic rules updates, subscribers can assert rules that will
cause the Rules Engine to select only those instances of messages that meet
their particular needs and specify their format and delivery instructions.
Formatter, NEONFormatter. Applications exchanging data rarely use the same
format even though the data may have consistent semantic meaning. Existing
commercial reformatter tools, whether script or GUI-based, are typically
procedural in nature, requiring that each conversion from one format to another
be individually coded into the tool. This is particularly true when such
applications are a mix of legacy, purchased, and newly
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developed applications. Accomplishing reformatting in the delivery layer frees
programmers from having to manually code all of the transformations. The
Formatter uses a declarative architecture, meaning that format structures and
rules themselves are described during configuration and stored in a format
repository. Conversion of one format to another is derived at execution time by
the Formatter. The Formatter can interpret and build a wide range of fixed,
variable, and recursive formats including proprietary and standard, and can
derive as well as transform data using calculations, tables and exits.
Extended Messaging and Queuing. NEON's Extended Messaging and Queuing
technology provides a fast, simple and portable cross-platform guaranteed
delivery messaging and queuing mechanism without the need to poll queues. A
program sends a message to another by simply naming the target and sending it to
the subscribing application. The sending program no longer needs to be concerned
about the recipient's characteristics or even if it is currently available. The
message is queued locally and is a recoverable component of the sender's
transaction, which is then able to continue processing. A receiving program
obtains one or more messages from the subscribing application as the messages
become available or when the receiving program becomes available. The receipt of
the message then becomes a recoverable component of the receiver's transaction,
and the delivery of messages is guaranteed as to uniqueness and order.
RESEARCH AND DEVELOPMENT
We have made substantial investments since inception in research and
development. We first introduced NEONet in January 1996, and released new
versions periodically through 1999. Each new version of NEONet consisted of
rewritten code providing greater functionality, higher performance and greater
integration capabilities. A version of NEONet incorporating IBM's MQSeries was
introduced in May 1998 and named MQIntegrator. Subsequently, an IBM-branded
version was released, called MQSeries Integrator. In 1999, we introduced e-Biz
Integrator which added process automation and Internet connectivity to the
original NEONet capability.
Our research and development efforts are focused primarily on the extension
of the capabilities of our e-Business integration platforms, operating system
and network platform support, the development of additional functionality and
libraries for targeted vertical markets, and quality assurance and testing. Our
research and development staff is also engaged in advanced development efforts
to exploit our core technology and expand the markets for our products. These
areas include, for example, development of rules-based programming tools to
replace conventional application logic, dynamic generation of interfaces between
existing technology layers, and event-driven workflow dispatching and routing.
We make available new product releases approximately every six months. This
provides a means to disseminate features and functions requested by customers as
we continue to address specific targeted markets. In addition, we believe that
this discipline spurs continual innovation and quality control throughout the
development and quality assurance organizations. As of December 31, 1999, our
research and development staff consisted of 259 persons. Our research and
development expenditures in 1999, 1998 and 1997 were approximately $34.9
million, $15.8 million and $7.7 million, respectively, and represented 28%, 24%
and 34% of total revenues, respectively, during such periods.
To extend the interoperability of our products, we are currently developing
NEON OpenBroker, a gateway between MQSeries Integrator and other products
including Microsoft MSMQ, Object Request Brokers (ORBs), Transaction Processing
(TP) Monitors, and a variety of other products and architectures.
The markets for our products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. Our future success will depend to a substantial
degree upon our ability to enhance our existing products and to develop and
introduce, on a timely and cost-effective basis, new products and features that
meet changing customer requirements and emerging and evolving industry
standards. We budget for research and development based on planned product
introductions and enhancements. Actual expenditures, however, may significantly
differ from budgeted expenditures. Inherent in the product development process
are a number of risks. The development of new, technologically advanced software
products is a complex and uncertain process requiring high levels of innovation,
as well as the accurate anticipation of technological and market trends. The
introduction of new or enhanced products also requires that we manage the
transition from older products in order to minimize disruption in customer
ordering patterns, as well as ensure that adequate supplies of new products can
be delivered to meet customer demand.
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There can be no assurance that we will successfully develop, introduce or manage
the transition to new products. We have in the past, and may in the future,
experience delays in the introduction of our products, due to internal and
external factors. Any future delays in the introduction or shipment of our new
or enhanced products, the inability of such products to gain market acceptance
or problems associated with new product transitions, could adversely affect our
results of operations, particularly on a quarterly basis.
COMPETITION
We compete in markets that are intensely competitive and are expected to
become more competitive as current competitors expand their product offerings
and new competitors enter the market. Our current competitors include a number
of companies offering one or more solutions to the application integration
problem, some of which are directly competitive with our products. We have faced
competition for product sales with the following entities:
Internal Information Technology Departments.
"In-house" Information Technology departments of potential customers have
developed or may develop systems that substitute for some or all of the
functionality offered by our products. We expect that internally developed
application integration systems will continue to be a principal source of
competition for the foreseeable future. In particular, it can be difficult to
sell our products to a potential customer whose internal development group has
already made large investments in and progress towards completion of systems
that our products are intended to replace.
Software Vendors.
We face competition from a variety of vendors offering e-Business and EAI
capabilities, including Mercator Software, Active Software, TIBCO, Software
Technologies Corporation and Vitria Technology, Inc. Other software companies
target the e-Business and EAI market through various alternative technological
solutions, such as data synchronization, transaction monitoring, and
subject-based publish/subscribe messaging systems. Some vendors, some of whom
are also NEON marketing partners, sell software that competes with only one of
our products, but could be expanded or enhanced. For example, Microsoft, BEA
Systems and others provide messaging and queuing solutions that compete with the
NEON Messaging and Queuing module, but in the future these vendors could elect
to provide a more complete integration solution that would also compete with
NEON's dynamic formatting and rules-based engine modules. We also face
competition from relational database vendors such as Oracle, Informix, Sybase
and Microsoft.
System Integrators and Professional Service Organizations.
These entities design and develop custom systems and perform custom
integration of systems and applications. Certain of these firms may possess
industry specific expertise or reputations among potential customers. These
systems integrators and consulting firms can resell our products and may engage
in joint marketing and sales efforts with us. We rely upon these firms for
recommendations of our products during the evaluation stage of the purchase
process, as well as for implementation and customer support services. These
systems integrators and consulting firms may have similar, and often more
established, relationships with our competitors, and there can be no assurance
that these firms will not market or recommend software products that are
competitive with our products.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition, and a larger installed base of customers than we may
have. Many of our competitors may also have well-established relationships with
our current and potential customers. In addition, many of these competitors have
extensive knowledge of the application integration industry, and are capable of
offering a single-vendor solution. As a result, our competitors may be in a
better position than we are to devote significant resources toward the
development, promotion and sale of their products. They may also respond more
quickly to new or emerging technologies and changes in customer requirements.
Current and potential competitors have established or may establish cooperative
relationships
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among themselves or with third parties to increase the ability of their products
to address customer needs. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. We also expect that the competition will increase as a result of software
industry consolidations. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
materially adversely affect our business, financial condition and results of
operations. There can be no assurance that we will be able to compete
successfully against current and future competitors, or that competitive
pressure we face will not materially adversely affect our business, financial
condition and results of operations.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
We rely on a combination of copyright, trademark and trade secret laws, as
well as confidentiality agreements and licensing arrangements, to establish and
protect our proprietary rights. We presently have three patents, and we have one
patent application pending.
Despite our efforts to protect our proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection. Moreover, the
laws of certain countries do not protect proprietary rights to the same extent
as do the laws of the United States. In addition, attempts may be made to copy
or reverse engineer aspects of our products or to obtain and use information
that we regard as proprietary. Accordingly, there can be no assurance that we
will be able to protect our proprietary rights against unauthorized third-party
copying or use, which could harm our business, financial condition and results
of operations. Moreover, there can be no assurance that others will not develop
products that infringe our proprietary rights, or that are similar or superior
to those developed by us. Policing the unauthorized use of our products is
difficult. Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a harmful effect on
our business, financial condition and results of operations.
We also rely on certain technology that we license from third parties,
including software that is integrated with internally developed software and
used in our products to perform certain functions.
There can be no assurance that these third-party technology licenses will
continue to be available to us on commercially reasonable terms. If we lose or
are unable to maintain any of these technology licenses, it could result in
delays or reductions in product shipments until equivalent technology could be
identified, licensed and integrated. Any such delays or reductions in product
shipments would harm our business, financial condition and results of
operations.
As is common in the software industry, we from time to time receive notices
from third parties claiming infringement by our products of such third parties'
proprietary rights. There can be no assurance that third parties will not claim
infringement by us with respect to current or future products. We expect that
application integration software developers will increasingly be subject to
infringement claims as the number of products in different industry segments
overlap. Any claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require us to enter into
royalty or licensing agreements, any of which could have a material adverse
effect upon our business, financial condition and operating results. There can
be no assurance that such royalty or licensing agreements, if required, would be
available on terms acceptable to us, or at all. Moreover, the cost of defending
patent litigation could be substantial, regardless of the outcome. There can be
no assurance that legal action claiming patent infringement will not be
commenced against us, or that we would necessarily prevail in such litigation
given the complex technical issues and inherent uncertainties in patent
litigation. In the event a patent claim against us was successful and we could
not obtain a license on acceptable terms or license a substitute technology or
redesign to avoid infringement, our business, financial condition and results of
operations would be harmed.
We are aware that a number of organizations are utilizing the names Neon
and New Era as either a trademark or tradename or both. In December 1998, we
filed a Declaratory Judgment Action in the Federal District Court for Colorado
to resolve the use of the trademarks "NEON," New Era of Networks, Inc., NEONet
and NEONSOFT. Such claims or any additional claims against us alleging trademark
or tradename infringement could be time consuming and result in costly
litigation. A successful claim regarding the infringement of a trademark
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and/or tradename could result in substantial monetary damages against us or an
injunction prohibiting our use of the particular trademark or tradename. Any
such injunction could harm our corporate or product name recognition and
marketing efforts. Accordingly, any monetary damages or injunction could have a
harmful effect upon our business, financial condition and results of operations.
EMPLOYEES
As of December 31, 1999, we employed 975 persons, including 192 in sales,
marketing and field operations, 259 in research and development, 143 in finance,
legal, information systems and administration and 381 in client services. Of
these, 129 are located in the United Kingdom, 74 are located in Switzerland, 19
are located in Australia, two are located in the Czech Republic, nine are
located in France, 72 are located in the Pacific Rim and the remainder are
located in the United States. None of our employees is represented by a labor
union. We have experienced no work stoppages and believe our relationship with
our employees is good.
Our future success will depend in large part upon the continued service of
our key technical, sales and senior management personnel, none of whom is bound
by an employment agreement. The loss of any of our senior management or other
key research, development, sales and marketing personnel, particularly if lost
to competitors, could have a harmful effect on our business, operating results
and financial condition. In particular, the services of George F. (Rick) Adam,
Jr., Chief Executive Officer, would be difficult to replace. There is
significant competition for employees with the skills required to perform the
services offered by us and there can be no assurance that we will be able to
continue to attract and retain sufficient numbers of highly skilled employees.
We have in the past experienced, and expect in the future to experience, a
significant time lag between the date on which technical and sales personnel are
hired and the time at which these persons become fully productive. If we are
unable to manage the post-sales process effectively, our ability to attract
repeat sales or establish strong account references could be affected, which may
harm our business, financial condition and results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
As described by the following factors, past financial performance should
not be considered a reliable indicator of future performance and investors
should not use historical trends to anticipate results or trends in future
periods.
Our operating results fluctuate significantly and we may not be able to
maintain our historical growth rates.
Although we have had significant revenue growth in recent quarters, such
growth rates may not be sustainable, and you should not use these past results
to predict future operating margins and results. Our quarterly operating results
have fluctuated significantly in the past and may vary significantly in the
future. Our future operating results will depend on many factors, including the
following.
- the continued growth of the e-Business Integration and Enterprise
Application Integration ("EAI") software markets;
- 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.
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
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during each quarter, each of which is difficult to forecast. In addition, as is
common in the software industry, a substantial portion of our revenues in a
given quarter historically have been recorded in the third month of that
quarter, with a concentration of such revenues in the last two weeks of the
third month. If this trend continues, any failure or delay in the closing of
orders during the last part of a quarter will have a material adverse effect on
our business.
As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock price may decline.
Software license revenue growth is dependent on our relationship with IBM and
other partners.
Our revenue growth in 1998, and in particular the fourth quarter, reflected
strong sales of the MQIntegrator and MQSeries Integrator through IBM's
distribution and reseller channel. In 1999 and 1998, royalty revenue from IBM
sales of MQIntegrator and MQSeries Integrator accounted for between 10% and 20%
of our total software license revenues. We expect that IBM and our other
partners will account for a material percentage of our software license revenue
in 2000. Any delay or shortfall in such revenues from our partners could have a
material adverse effect on our business and operating results.
If our sales cycle is longer than we anticipate, our operating results may
suffer.
Although our sales cycles have shortened in the e-Business marketplace,
historically our customers typically have taken a long time to evaluate our
products. Therefore the timing of license revenue is difficult to predict. A
sale of our products to a customer typically involves a significant technical
evaluation and a commitment of capital and other resources by the customer. This
evaluation process frequently results in a sales cycle that lasts several
months. Additional delays are caused by customers' internal procedures to
approve large capital expenditures and to test, implement and accept new
technologies that affect key operations within their organization. Our operating
expense levels are relatively fixed in the short-term and are based in part on
expectations of future revenues. Consequently, any delay in the recognition of
revenue due to a longer sales cycle caused by these factors could result in
operating losses.
We have a short operating history and a history of operating losses.
An investor in our common stock must evaluate the risks, uncertainties,
expenses and difficulties frequently encountered by early stage companies in
rapidly evolving markets. We have had only a limited operating history upon
which an evaluation of our Company and its prospects can be based. Prior to
1996, we recorded only nominal product revenue and, including
acquisition-related charges, we have not been profitable on an annual basis. At
December 31, 1999, our Company had an accumulated deficit of approximately $66.3
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;
- 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.
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Inability to integrate acquired companies may increase the costs of recent
acquisitions.
We may from time to time acquire companies with complementary products and
services in the application integration or other related software markets.
Between September 1997 and March 2000, we acquired eight companies. These
acquisitions will expose us to increased risks and costs, including the
following:
- assimilating new operations, systems, technology and personnel;
- diverting financial and management resources from existing operations.
We may not be able to generate sufficient revenues from any of these
acquisitions to offset the associated acquisition costs. We will also be
required to maintain uniform standards of quality and service, controls,
procedures and policies. Our failure to achieve any of these standards may hurt
relationships with customers, employees, and new management personnel. In
addition, our future acquisitions may result in additional stock issuances which
could be dilutive to our stockholders.
We may also evaluate joint venture relationships with complementary
businesses. Any joint venture we enter into would involve many of the same risks
posed by acquisitions, particularly those risks associated with the diversion of
resources, the inability to generate sufficient revenues, the management of
relationships with third parties, and potential additional expenses, any of
which could have a harmful effect on our business, financial condition and
results of operations.
Our failure to manage growth of operations may adversely affect us.
We must plan and manage effectively in order to successfully offer products
and services and implement our business plan in a rapidly evolving market. We
continue to increase the scope of our operations domestically and
internationally and have grown our headcount substantially. For example, at
January 1, 1996, we had a total of 35 employees and at December 31, 1999 we had
a total of 975 employees. We may further expand domestically or internationally
through internal growth or through acquisitions of related companies and
technologies. This growth will continue to place a significant strain on our
management systems and resources.
For us to effectively manage our growth, we must continue to enact the
following measures:
- improve our operational, financial and management controls;
- improve our reporting systems and procedures;
- install new management and information control systems;
- expand, train and motivate our workforce.
In particular, we are currently migrating our existing accounting software
to a packaged application that will allow greater flexibility in reporting and
tracking results. If we fail to install this accounting and forecasting software
in an efficient and timely manner or if the new systems fail to adequately
support our levels of operations, then we could incur substantial additional
expenses to remedy such failure.
Our operating results are substantially dependent on our suite of e-Business
and EAI products.
A substantial majority of our revenues come from the NEON e-Business and
EAI suite of products and related services, and we expect this pattern to
continue. Accordingly, our future operating results will depend on the demand
for our suite of e-Business and EAI products and related services by future
customers, including new and enhanced releases that are subsequently introduced.
There can be no assurance that the market will continue to demand our current
products or that we will be successful in marketing any new or enhanced
products. If our competitors release new products that are superior to our
products in performance or price, demand for our products may decline. A decline
in demand for NEON as a result of competition, technological change or other
factors would have a harmful effect on our business, financial condition and
results of operations.
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Failure to add customers or expand into new markets may be harmful to our
business.
A significant portion of our revenue has come from a small number of large
purchasers. For example, in 1999 our top ten customers accounted for 38% of
total revenues. In 1999, Industrial Bank of Japan accounted for approximately 7%
of our total revenues. Historically, our revenues have been derived primarily
from sales to large banks and financial institutions. Sales to large banks and
financial institutions accounted for 32% of total revenues in 1999 and
approximately 57% of total revenues in 1998. 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 harmful
effect on our business, financial condition and results of operations.
While we have developed experience marketing our products to financial
institutions, we have less experience with other vertical market segments. New
market segments that we are currently targeting are likely to have significantly
different characteristics than the financial institutions segment. As a result,
we may change our pricing structures, sales methods, sales personnel, consulting
services and customer support. We may not be successful in selling our products
and services to the additional segments targeted. Our inability to expand sales
of our products and services into these additional markets would have a harmful
effect on our business, financial condition and results of operations.
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 harm our business, financial condition and
results of operations.
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 harm 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 harm 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 harm our average selling prices and result in
lower gross margins.
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;
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- currency fluctuations;
- currency exchange or price controls;
- political and economic instability abroad.
Additionally, intellectual property may be more difficult to protect
outside of the United States. International sales can also be affected to a
greater extent by seasonal fluctuations resulting from the lower sales that
typically occur during the summer months in Europe and other parts of the world.
In addition, the market for our products is not as developed outside of North
America. We may not be able to successfully penetrate international markets or
if we do, there can be no assurance that we will grow these markets at the same
rate as in North America.
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;
- 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 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
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arrangements, to establish and protect our proprietary rights. We presently have
three patents and one patent application 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.
Our stock price has been highly volatile.
The trading price of our common stock has fluctuated significantly since
our initial public offering in June 1997. In addition, the trading price of our
common stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by us or our competitors, developments with respect to patents or
proprietary rights, changes in financial estimates by securities analysts and
other events or factors. In addition, the stock market has experienced
volatility that has particularly affected the market prices of equity securities
of many high technology companies and that often has been unrelated or
disproportionate to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of our common stock.
Our inability to attract and retain personnel may adversely affect us.
Our success 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 harmful effect on our future operating results. In
particular George F. (Rick) Adam, our Chief Executive 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
e-Business and EAI software and Internet integration markets, 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.
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 e-Business and 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 harmful 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 harmed.
Global economic uncertainty may affect the capital expenditures of our
customers.
The e-Business and EAI software and Internet integration markets could be
negatively impacted by certain generic factors, including global economic
difficulties and uncertainty, reductions in capital expenditures by
18
<PAGE> 20
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 e-Business
and EAI software market could harm our operating results.
Adoption of the Euro presents uncertainties for our company.
In the first part of 1999, the new "Euro" currency was introduced in
certain European countries that are part of the European Monetary Union, or EMU.
By 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 could have a
harmful effect on the business, financial condition and results of operations of
our Company or require us to incur expenses to remedy such problems.
ITEM 2. PROPERTIES.
We lease facilities located in Englewood, Colorado, which provide for
approximately 40,000 square feet of office space and contain our principal
executive, administrative, engineering, sales, marketing, customer support and
research and development functions. This lease expires in August 2009. We also
lease approximately 18,000 square feet of office space in a building in
Manhattan, New York, approximately 13,000 square feet of office space in London,
England, approximately 57,000 square feet of office space in Pacheco,
California, approximately 17,000 square feet in Alpharetta, Georgia,
approximately 29,000 square feet of office space in Danvers, Massachusetts,
approximately 13,500 square feet of office space in Fraunfield, Switzerland,
approximately 900 square feet of office space in Paris, France, approximately
2,800 square feet of office space in Hong Kong, approximately 2,400 square feet
of office space in Singapore, approximately 2,200 square feet of office space in
Kuala Lumpur, Malaysia, approximately 200 square feet of office space in Tokyo,
Japan, approximately 150 square feet of office space in Frankfurt, Germany, and
approximately 500 square feet of office space in Sydney, Australia. We have
leased approximately 30,000 additional square feet in Englewood, Colorado, which
we expect to occupy in mid-2000. We believe that our existing facilities,
together with such additional space we have committed to lease, will be adequate
for the next 12 months and that sufficient additional space will be available as
needed thereafter.
In addition, we maintain secure Web servers which contain our and our
customers' confidential information. Our operations are dependent in part upon
our ability to protect our internal network infrastructure against damage from
physical break-ins, natural disasters, operational disruptions and other events.
Physical break-ins could result in the theft or loss of our and our customers'
confidential or critical business information. Any such break-in or damage or
failure that causes interruptions in our operations could harm our business,
financial condition and results of operations.
ITEM 3. 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. These
lawsuits have been consolidated into a single class action. 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.
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<PAGE> 21
The Company believes this class action lawsuit is without merit. The Company
intends to deny all material allegations and to defend itself vigorously. An
adverse judgment or settlement in this lawsuit 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
EXECUTIVE OFFICERS OF REGISTRANT
Our executive officers and their ages as of March 1, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
George F. (Rick) Adam, Jr. ........... 53 Chairman of the Board and Chief
Executive Officer
Patrick J. Fortune.................... 52 President and Chief Operating Officer
Stephen E. Webb....................... 51 Senior Vice President, Chief Financial
Officer
Robert I. Theis....................... 38 Executive Vice President, Chief
Marketing Officer
Frederick T. Horn..................... 46 Senior Vice President, President
Commercial Business Unit
Leonard M. Goldstein.................. 52 Senior Vice President, Chief
Administrative and Legal Officer and
Secretary
Peter Hoversten....................... 44 Senior Vice President, Product
Strategy
Michael T. Donaldson.................. 41 Senior Vice President, Worldwide
Marketing
Harold A. Piskiel..................... 53 Director
Steven Lazarus........................ 68 Director
Mark L. Gordon........................ 49 Director
Elisabeth W. Ireland.................. 42 Director
Joseph E. Kasputys.................... 63 Director
Mel Bergstein......................... 57 Director
</TABLE>
Mr. Adam has served as Chairman of the Board, Chief Executive Officer,
President and a Director of the Company since founding the Company in June 1993.
From 1987 to 1993, Mr. Adam was General Partner of Goldman, Sachs & Co. and
served as the Chief Information Technology Officer. From 1980 to 1987, Mr. Adam
was Chief Information Officer and Vice President of Personnel for Baxter Health
Care Corporation. Mr. Adam received a B.S. degree from the U.S. Military
Academy, West Point, New York.
Dr. Fortune has served as a Director of the Company since February 1998 and
President and Chief Operating Officer since January 1999. From October 1995 to
December 1998, Dr. Fortune was Vice President, Information Technology and Chief
Information Officer for Monsanto Company. From September 1994 to September 1995,
Dr. Fortune served as President and Chief Operating Officer of Coram Healthcare
Corporation in Colorado. From December 1991 to August 1994, Dr. Fortune was Vice
President, Information Management at Bristol-Myers Squibb. Dr. Fortune holds a
B.A. degree from the University of Wisconsin, an M.B.A. from Northwestern
University and a Ph.D. in physical chemistry from the University of Wisconsin.
Mr. Webb has served as Senior Vice President and Chief Financial Officer of
the Company since joining the Company in December 1996. Prior to December 1996,
Mr. Webb served as the Executive Vice President and Chief Financial Officer of
Telectronics Pacing Systems, Inc., an international manufacturer and distributor
of implantable electronic cardiac devices, from April 1994 to December 1996.
Prior to working at Telectronics Pacing Systems, Inc., Mr. Webb spent seventeen
years with Hewlett-Packard Company, most recently as Controller of the HP
Software Business Unit. Mr. Webb holds a B.A. degree from Stanford University
and an M.B.A. degree from the Harvard Graduate School of Business.
20
<PAGE> 22
Mr. Theis has served as Executive Vice President and Chief Marketing
Officer since October 1996. Prior to joining the Company, Mr. Theis served as
Managing Director of the Worldwide Financial Services Industry Group of Sun
Microsystems, Inc. from April 1986 to October 1996. Prior to joining Sun
Microsystems, Mr. Theis served as the workstation program manager for Silicon
Graphics. Mr. Theis received a B.S. degree from the University of Pittsburgh,
Pennsylvania.
Mr. Horn has served as President of the Commercial Business Unit and Senior
Vice President of Product Development and Client Services since joining the
Company in July 1996. From January 1994 to July 1996, Mr. Horn was a partner
with Ernst & Young, LLP in the Management Consulting Group, where he specialized
in financial industry consulting. From February 1992 through December 1993, Mr.
Horn served as a Managing Director of SHL Systemhouse, a software services firm.
Prior to joining SHL Systemhouse, Mr. Horn served as a Vice President of
Goldman, Sachs & Co. Mr. Horn received his B.A. degree from Northwestern
University.
Mr. Goldstein has served as Senior Vice President, Senior Counsel and
Secretary since joining the Company in July 1996. From 1976 to July 1996, Mr.
Goldstein practiced law privately with the firm of Feder, Morris, Tamblyn and
Goldstein, for which firm he served as Managing Partner and President. Mr.
Goldstein holds a B.A. degree from American University and a J.D. degree from
the State University of New York at Buffalo School of Law.
Mr. Hoversten has served as Senior Vice President, Product Strategy since
August 1998. From May 1, 1997 to August 1998, he served as Senior Vice
President, Application Development and Field Operations. From January 1989 to
March 1997, Mr. Hoversten served as a Vice President of Technology at Goldman,
Sachs & Co. Mr. Hoversten holds a B.S. degree from the University of
Pennsylvania.
Mr. Donaldson has served as Senior Vice President, Worldwide Marketing,
since joining the Company in December 1998. Prior to joining the Company, Mr.
Donaldson served as Vice President of Technical Marketing for CrossWorlds
Software, Inc. from June 1998 to November 1998 and as Vice President of
Marketing from April 1996 to June 1998. Prior to joining CrossWorlds Software,
Mr. Donaldson served from 1989 to March 1996 in several capacities for Sybase,
Inc., most recently as Director, Technology and Business Planning. Mr. Donaldson
holds a B.S. degree and an M.S. degree from Virginia Tech.
Mr. Piskiel served as Executive Vice President, Chief Technology Officer
and a Director of the Company from March 1995 until the first quarter of 2000,
when he resigned his position to form a separate corporation to further his
interest in developing advanced technology for NEON. A close business
relationship will continue and Mr. Piskiel will remain a Director of the
Company. From 1993 to 1995, Mr. Piskiel served as Vice President of Data
Distribution for Merrill Lynch & Co. From 1984 to 1993, Mr. Piskiel served as
Vice President of Data Administration and Distribution Architecture at Goldman,
Sachs & Co. Mr. Piskiel holds a B.A. degree from Long Island University.
Mr. Lazarus has served as a Director of the Company since April 1995. Since
1986, Mr. Lazarus has served as a senior principal of various venture capital
funds associated with ARCH Venture, including President and Chief Executive
Officer of ARCH Development Corporation and Managing Director of ARCH Venture
Partners. From 1986 to 1994, Mr. Lazarus served as the Associate Dean of the
Graduate School of Business of the University of Chicago. He currently serves as
a director of Amgen, Primark and Illinois Superconductor. Mr. Lazarus holds a
B.A. degree from Dartmouth College and an M.B.A. degree from the Harvard
Graduate School of Business.
Mr. Gordon has served as a Director of the Company since the Company's
inception. Since 1980, Mr. Gordon has been a partner in the law firm of Gordon &
Glickson PC, directing the firm's information technology practice. Mr. Gordon
holds a B.A. degree from the University of Michigan and a J.D. degree from the
Northwestern University School of Law.
Ms. Ireland has served as a Director of the Company since January 1998.
Since January 1994, Ms. Ireland has been a partner with the Hamilton Companies,
an investment partnership. From 1988 to 1994, Ms. Ireland was a private investor
and consultant. From 1986 to 1988, Ms. Ireland was Director of Marketing and
Sales for Bloomberg L.P., a financial information service. Ms. Ireland holds an
A.B. Degree from Smith College and an M.B.A. from the Wharton School at the
University of Pennsylvania.
21
<PAGE> 23
Mr. Kasputys has served as a Director of the Company since July 1998. Mr.
Kasputys has served as Chairman, President and Chief Executive Officer of
Primark Corporation. He currently serves as a Director of Lifeline Systems. Mr.
Kasputys holds a B.A. degree from Brooklyn College and masters and doctorate
degrees in business administration from the Harvard Graduate School of Business
where he was a Baker Scholar and a Warren G. Harding Aerospace Fellow.
Mr. Bergstein has served as a Director of the Company since August 1999.
Since 1994, Mr. Bergstein has been Chairman of the Board and Chief Executive
Officer of Diamond Technology Partners. From 1977 to 1989, Mr. Bergstein was a
partner with Andersen Consulting. Mr. Bergstein holds a B.S. degree in Economics
from the Wharton School of the University of Pennsylvania.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of our Company has been traded on the Nasdaq National
Market under the symbol "NEON" since our initial public offering on June 18,
1997. The following table sets forth the high and low sale prices per share of
our common stock for the periods indicated. All prices have been restated to
reflect a two-for-one stock split that was effected in the form of a 100% stock
dividend to stockholders of record as of November 23, 1998.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998
First Quarter............................................. $12.44 $ 4.75
Second Quarter............................................ $16.50 $11.50
Third Quarter............................................. $23.44 $14.31
Fourth Quarter............................................ $45.19 $14.06
1999
First Quarter............................................. $74.75 $41.50
Second Quarter............................................ $73.38 $34.94
Third Quarter............................................. $44.06 $13.00
Fourth Quarter............................................ $59.00 $20.50
</TABLE>
As of March 1, 2000, there were 644 holders of record of our common stock.
Because many of our shares of common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these record holders. We have never
declared or paid any cash dividends on our common stock. Because we currently
intend to retain all future earnings to finance future growth, we do not
anticipate paying any cash dividends in the foreseeable future.
In connection with our acquisition of MSB Consultants Limited ("MSB"), an
additional 53,908 unregistered shares, valued at $1.8 million, were issued to
the former shareholders of MSB in August and October 1999 upon the attainment of
certain performance criteria. The shares were issued pursuant to an exemption
from registration requirements of the Securities Act afforded by Section 4(2) of
the Securities Act. The stockholders of MSB had access to all relevant
information regarding NEON necessary to evaluate the investment and each
stockholder represented that the shares were being acquired for investment
intent.
22
<PAGE> 24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1999(1) 1998(1) 1997(1) 1996 1995
----------- ----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software licenses........ $ 59,564 $ 40,976 $ 15,970 $ 3,383 $ --
Software maintenance..... 16,178 4,912 755 24 --
Professional services.... 50,482 19,926 5,921 3,738 1,271
----------- ----------- ----------- ---------- ----------
Total revenues............. 126,224 65,814 22,646 7,145 1,271
Cost of revenues........... 40,301 14,607 5,343 3,328 751
----------- ----------- ----------- ---------- ----------
Gross profit............... 85,923 51,207 17,303 3,817 520
Loss from operations....... (71,426) (12,521) (4,251) (5,733) (1,490)
Net loss................... $ (46,312) $ (8,499) $ (3,507) $ (5,672) $ (1,503)
=========== =========== =========== ========== ==========
Net loss per common share,
basic and diluted........ $ (1.44) $ (0.38) $ (0.32) $ (2.10) $ (0.57)
=========== =========== =========== ========== ==========
Weighted average shares of
common stock
outstanding(2)........... 32,247,552 22,277,472 10,958,302 2,706,552 2,617,994
CONSOLIDATED BALANCE SHEET
DATA:
Cash, cash equivalents,
short-term and long-term
investments.............. $ 94,815 $ 196,091 $ 22,724 $ 3,387 $ 1,135
Working capital............ 86,368 195,856 25,928 2,586 1,557
Total assets..... 359,520 298,678 40,229 7,073 2,209
Long-term obligations...... -- -- -- 442 318
Stockholders' equity....... 320,641 275,615 34,731 3,515 1,591
Cash dividends declared per
common share............. -- -- -- -- --
</TABLE>
- ---------------
(1) The 1999 net loss includes acquisition-related charges and restructuring
charges of approximately $44.5 million and $7.5 million, respectively.
Excluding these charges, related tax benefits and a nonrecurring adjustment
to the deferred tax asset valuation allowance, our 1999 net loss is
approximately $7.3 million, or $0.23 per share. The 1998 net loss includes
acquisition-related charges of $19.4 million. Excluding these charges and
related estimated tax benefits, we generated net income of approximately
$9.5 million, or $0.38 per share based on 25,472,383 diluted weighted
average shares outstanding. Exclusive of 1997 acquisition-related charges of
$2.7 million for in-process research and development and amortization of
acquired intangibles, our net loss was $841,000, or $0.08 per share.
(2) All share and per share information has been adjusted to reflect a
two-for-one stock split that was effected in the form of a 100% stock
dividend to stockholders of record as of November 23, 1998.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The discussion in this Report on Form 10-K contains certain trend analysis
and other forward-looking statements. Words such as "anticipate," "believe,"
"plan," "estimate," "expect," "seek" and "intend," and other words of similar
import are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to business
and economic risks and uncertainties which are difficult to predict. Therefore,
our actual results of operations may differ materially from those expressed or
forecasted in the forward-looking statements as a result of a number of factors,
including, but not limited to,
23
<PAGE> 25
those discussed in Item 1 under the heading "Factors That May Affect Future
Results" as well as those discussed in this section and elsewhere in this
Report.
The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to total revenues:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Software licenses......................................... 47% 62% 71%
Software maintenance...................................... 13% 8% --
Professional services..................................... 40% 30% 29%
--- --- ---
Total revenues.................................... 100% 100% 100%
Cost of revenues:
Cost of software licenses*................................ 2% 4% 6%
Cost of services and maintenance*......................... 60% 52% 67%
--- --- ---
Total cost of revenues............................ 32% 22% 24%
Operating expenses:
Sales and marketing....................................... 44% 33% 39%
Research and development.................................. 28% 24% 34%
General and administrative................................ 12% 10% 10%
Restructuring costs....................................... 6% -- --
Acquisition-related charges and amortization.............. 35% 30% 12%
--- --- ---
Total operating expenses.......................... 125% 97% 95%
--- --- ---
Loss from operations........................................ (57)% (19)% (19)%
Other income, net........................................... 6% 4% 3%
--- --- ---
Loss before provision for income taxes...................... (51)% (15)% (16)%
Income tax benefit.......................................... 14% 2% --
--- --- ---
Net loss.................................................... (37)% (13)% (16)%
=== === ===
Net income (loss), excluding acquisition-related and
restructuring charges as adjusted for their respective tax
effects................................................... (6)% 14% (4)%
=== === ===
</TABLE>
- ---------------
* As a percentage of software licenses and professional services and software
maintenance revenues, respectively.
OVERVIEW
We began operations in January 1994 to develop, market and support
enterprise software for application integration. In 1994 and 1995, our company
was in the development stage and was principally focused on product development
and assembling its management team and infrastructure. Software license revenues
were not significant until the commercial release of our NEONet software in
January 1996. Since such time, a substantial portion of our revenues has been
attributable to licenses of NEONet and related services. In November 1996, we
commenced shipment to customers of Release 3.0 of NEONet, which provided
additional capabilities for effective enterprise-wide application integration.
In December 1997, we entered into a license agreement with IBM for the joint
development of a product designed to integrate IBM's MQSeries product with
certain of our products. Under the terms of the agreement, both NEON and IBM
began selling the resulting MQIntegrator or MQSeries Integrator products.
In June 1997, we completed our initial public offering and issued 6,348,000
shares of common stock, and received net proceeds of approximately $34.3
million. In May and December 1998, we completed follow-on offerings and issued
4,757,000 and 4,780,000 shares of our common stock, respectively, and received
net proceeds of approximately $50.6 million and $153.7 million, respectively.
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<PAGE> 26
RECENT ACQUISITIONS
In June 1999, we acquired all of the outstanding capital stock of
Microscript, Inc. ("Microscript") for an aggregate purchase price of $33.1
million, of which $8.7 million was paid or payable in cash and approximately
$19.0 million was paid through the issuance of 423,700 shares of common stock.
An additional 22,255 shares of common stock valued at $1.0 million was issued to
the shareholders of Microscript upon the completion of the Microscript audited
financial statements for the year ended December 31, 1998. In July 1999, we
agreed with the former equityholders of Microscript to provide additional cash
consideration valued at approximately $16.6 million to more closely reflect the
value agreed upon in the original purchase negotiations. Microscript is a
supplier of application integration software on the Windows NT platform.
Also in June 1999, we acquired all of the outstanding capital stock of
Convoy Corporation ("Convoy") for an aggregate purchase price of approximately
$42.8 million, payable through the issuance of 807,115 shares of common stock.
In August 1999, we agreed with the former equityholders of Convoy to provide
additional consideration valued at approximately $8.3 million payable through
the issuance of 618,225 additional shares of common stock to more closely
reflect the value agreed upon in the original purchase negotiations.
In May 1999, we acquired all of the outstanding capital stock of SLI
International AG ("SLI") for an aggregate consideration of $22.7 million, of
which $16.5 million was paid in cash and $5.5 million was paid with 138,452
shares of the Company's common stock. 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. SLI is a worldwide provider
of SAP R/3 software implementation, training support and other related change-
management services.
In April 1999, we acquired all of the outstanding capital stock of VIE
Systems, Inc. ("VIE") for an aggregate consideration of $12.0 million in cash.
In addition, up to $3.0 million of cash may be paid to the shareholders of VIE
upon the achievement of certain performance targets. Assets acquired by the
Company included VIE's products, including its Copernicus EAI product and
formatter patent. VIE is a provider of EAI software with a strong presence in
travel, transportation, financial services, and retail markets.
In February 1999, we acquired all of the outstanding capital stock of D&M
(Asia) Ltd. and Database & Management (S) Pte. Ltd. (collectively "D&M"), a
professional integration service provider on the Pacific Rim, for an aggregate
consideration of approximately $6.0 million, $3.0 million in cash and
approximately $3.0 million through the issuance of 48,940 shares of common
stock.
All of these acquisitions were accounted for under the purchase method of
accounting.
RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues
Our revenues increased from $22.6 million in 1997 to $65.8 million in 1998,
primarily reflecting growth in software licenses sold to new customers and an
increase in sales as a result of our international expansion. Revenues increased
from $65.8 million in 1998 to $126.2 million in 1999, resulting primarily from
increased professional services and maintenance revenues associated with the
expansion of our professional services organization through both internal growth
and acquisitions, as well as continued growth in software licenses sold.
Software license revenue grew from $16.0 million in 1997 to $41.0 million,
or 62% of total revenues, in 1998 and to $59.6 million, or 47% of total
revenues, in 1999. The increase in software license revenue reflected an
increase in market awareness and acceptance of our products, expansion of
international sales resources, the continued growth of an installed base of
accounts to serve as references for new customers, repeat business by existing
customers, and expanded functionality of the NEONet suite of products. Our
royalties from sales of MQIntegrator and MQSeries Integrator by IBM were between
10% and 20% of software license revenue in 1999 and 1998. This royalty income
increased in absolute dollars in 1999 compared with 1998, even though NEON's
1999 revenue excluded royalties earned on fourth-quarter 1999 IBM sales of the
MQIntegrator and MQSeries Integrator products. This one-quarter lag in the
recording of IBM royalty revenue was necessary to accommodate
25
<PAGE> 27
IBM's royalty reporting schedule, which could no longer support current-quarter
royalty reporting. In the second quarter of 1999, we began selling the MQSeries
Integrator product through an IBM reseller arrangement known as Passport
Advantage. In accordance with Staff Accounting Bulletin No. 101, only the net
reseller margin is recorded as license revenue. Although NEON earns royalty
revenue for these sales, it is recognized on a one-quarter lag as noted above.
We expect that future software license revenue will include the NEON e-Biz
platforms and applications, and new products both internally developed and
acquired.
Software maintenance revenue grew from $755,000 or less than 1% of total
revenues in 1997, to $4.9 million or 8% of total revenues in 1998, to $16.2
million or 13% of total revenues in 1999. The increase in maintenance revenue is
due primarily to maintenance sales to new customers and maintenance renewals on
license contracts historically sold by companies acquired by NEON during 1997
through 1999, most notably CAI.
Professional services revenue grew from $5.9 million or 29% of total
revenues in 1997, to $19.9 million or 30% of total revenues in 1998, to $50.5
million or 40% of total revenues in 1999. The growth from 1998 to 1999 was due
primarily to the acquisition of two professional service organizations (SLI and
D&M) in the first half of 1999. The growth from 1997 to 1998 reflected service
engagements associated with the growing sales of the NEONet product.
In 1997, 1998 and 1999, our top ten customers accounted for 56%, 38% and
38% of total revenues, respectively. For the years ended December 31, 1997, 1998
and 1999, our largest customer accounted for 14%, 10% and 7% of total revenues,
respectively. To date, a significant portion of our revenues has been derived
from sales to large banks and financial institutions. For the years ended
December 31, 1997, 1998 and 1999, sales to banks and financial institutions
accounted for 72%, 57% and 32% of total revenues, respectively.
COST OF REVENUES
Cost of revenues consists of costs of software licenses and costs of
services and maintenance. As a percentage of total revenues, total cost of
revenues declined from 24% in 1997, to 22% in 1998, and then increased to 32% in
1999. The decline from 1997 to 1998 resulted primarily from improved service
margins. Cost of revenues increased in both absolute dollars and as a percentage
of revenue in 1999, due primarily to the increase in percentage of professional
services revenue to total revenues.
Cost of software licenses consists primarily of royalty payments and costs
of producing CD's and packaging. In the fourth quarter of 1997, we met the
cumulative $1.9 million royalty requirement to Merrill Lynch & Co. for NEON's
sale of the NEONet product. With the roll-out of the jointly-developed
MQIntegrator and MQSeries Integrator products, we became obligated to pay
royalties to IBM for sales of these products made by our direct sales force.
During 1999, this royalty obligation was not material as most sales of MQSeries
Integrator and MQIntegrator had been made by IBM or an IBM distributor.
Cost of services and maintenance consists primarily of personnel, facility,
and systems costs incurred in providing professional services consulting,
training, and customer support services. As a percent of services and
maintenance revenues, cost of services and maintenance was 67%, 52% and 60% in
1997, 1998 and 1999, respectively. The higher percentage cost in 1997 and 1999
reflected the use, at higher cost, of subcontract labor on certain engagements.
In the third quarter of 1999, management reevaluated the current use of contract
labor and replaced it with employee labor wherever possible. We may continue to
use subcontractors for the delivery of professional services from time to time.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expenses consist of salaries for sales and marketing
personnel, commissions, travel and entertainment, and promotional expenses.
Sales and marketing expenses were $8.8 million, $21.9 million and $54.9 million,
representing 39%, 33% and 43% of total revenues, respectively, in 1997, 1998 and
1999. These increases were due primarily to our expansion of overall sales and
marketing resources and infrastructure, including international expansion in
1997. Our commissioned sales force grew from 25 in 1997, to 54 in 1998 and to 76
in 1999. In addition, we continued to expand the sales team responsible for
supporting indirect
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<PAGE> 28
channel sales. We expect to continue to expand the direct sales force and
professional marketing staff, further increase our international presence, and
continue to develop our indirect sales channels and increase promotional
activity. Accordingly, we expect sales and marketing expense to continue to grow
in absolute dollars.
Research and Development
Research and development expenses include costs associated with the
development of new products, enhancements of existing products and quality
assurance activities. These costs consist primarily of employee salaries,
consultant costs and benefits. We have not capitalized software development
costs and have expensed all of these costs as incurred in accordance with
Statement of Financial Accounting Standards No. 86. Research and development
expenses were $7.7 million, $15.8 million, and $34.9 million, representing 34%,
24% and 28% of total revenues in 1997, 1998 and 1999, respectively. The increase
in research and development expenses is primarily attributable to hiring
additional technical personnel engaged in software development activities. Our
research and development staff grew from 96 in 1997, to 208 in 1998 and 259 in
1999. We currently anticipate that research and development expenses may
continue to increase in absolute dollars as we continue to commit substantial
resources to new product development.
General and Administrative
General and administrative expenses consist primarily of salaries and
related costs, outside professional fees, and software and equipment costs
associated with the finance, legal, human resources, and administrative
functions. General and administrative expenses were $2.3 million, $6.6 million
and $15.6 million, representing 10%, 10% and 12% of total revenues,
respectively, in 1997, 1998 and 1999, respectively. General and administrative
expenses grew in absolute dollars as we added personnel to all administrative
areas. We expect general and administrative expenses to continue to grow in
absolute dollars from expected increases in personnel, implementation of
additional management information systems associated with our business growth,
and continuation of our international expansion.
Restructuring Costs
Management and the board of directors approved a restructuring plan in July
1999 to consolidate duplicate facilities and eliminate redundant positions
created by recent acquisitions.
The restructuring charge in 1999 of $7.4 million includes $3.3 million of
employee separation benefits related to the termination of approximately 150
employees worldwide. The separations have affected all business functions, job
classifications and geographic areas with most of the reductions in North
America and Europe. The charge also includes approximately $4.1 million of costs
for closing and consolidation of office space primarily in North America and
Europe. The restructuring efforts are expected to be complete by June 2000.
Acquisition-related Charges
In July and August 1999, we agreed with the former equityholders of
Microscript and Convoy, respectively, to provide additional consideration to
more closely reflect the value agreed upon in the original purchase
negotiations. Accordingly, approximately $16.6 million in cash was paid to the
former equityholders of Microscript and 618,225 shares of our common stock
valued at $8.3 million was issued to the former Convoy equityholders. These
acquisition charges were reflected in our financial statements for the third
quarter of 1999 as a one-time charge to net income.
Based on independent appraisals of net assets acquired, $13.9 million and
$3.7 million were allocated to in-process research and development and charged
to expense in 1998 for the CAI and MSB acquisitions, respectively. In 1997, $2.6
million was allocated to in-process research and development projects and was
charged to operations in connection with the acquisition of Menhir in September
1997. Also in connection with these acquisitions, we allocated approximately
$7.0 million to marketable software products acquired which is being amortized
over periods of three to five years, and approximately $45.9 million to goodwill
which is being amortized over periods of seven to ten years. Amortization
expense of approximately $66,000, $1.8 million and
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<PAGE> 29
$19.4 million was recorded in 1997, 1998 and 1999, respectively. See "In-Process
Research and Development Costs" below.
Other Income, Net
Other income, net includes interest income earned on cash, cash
equivalents, short-term and long-term marketable securities, notes
receivable -- related party, interest expense, foreign currency gains and
losses, and other nonoperating income and expenses. We recorded net other income
of $7.1 million in 1999. This compares to net other income of $2.7 million in
1998 and $745,000 in 1997. The increase in net other income from 1997 to 1998
and again from 1998 to 1999 resulted primarily from the interest earned on cash
invested from the proceeds of our public offering in June 1997 and our follow-on
offerings in May and December 1998. During 1999, we funded a short-term
construction loan to Greenwood Plaza Partners, LLP for approximately $19.7
million toward construction of two buildings and a parking structure. For 1999,
we recorded $684,000 of interest income earned on this note. We anticipate
interest income will decline in future periods as cash balances may be used to
fund potential future acquisitions and our ongoing operations.
Income Tax Benefit
We reported no income tax expense in 1997. We recognized income tax
benefits of $1.3 million in 1998 and $18.0 million in 1999. The benefit for 1999
was approximately 28.0% of our pretax loss from operations. The effective rate
varied from the statutory rate principally because of non-deductible charges and
amortization related to business acquisitions. Our deferred tax assets at
December 31, 1997 of $3.4 million were fully offset by a valuation allowance.
During 1998 our deferred tax assets increased by $5.6 million to approximately
$9.0 million primarily due to intangibles we acquired from CAI that were
expensed, but which we amortize over 15 years for tax purposes, and additions to
our tax credit carryovers. We concluded in 1998 that it was more likely than not
that we would recognize $5.0 million of our deferred tax assets, and we adjusted
the valuation allowance to $4.0 million.
During 1999 our deferred tax assets, net of deferred tax liabilities,
increased by approximately $10.6 million to $19.6 million. The increase was
primarily from operating loss carryforwards, including tax deductions arising
from the exercise of stock options, shorter amortization lives for purchased
intangible than allowed for tax purposes, acquired operating loss carryovers,
and increased tax credit carryforwards. Deferred tax liabilities of
approximately $14.5 million were also recognized for purchased intangibles,
other than goodwill, that have no tax basis.
We increased the valuation allowance against our deferred tax assets from
$4.0 million at December 31, 1998, to approximately $11.9 million. A portion of
the valuation allowance, $2.7 million relates to tax loss carryforwards of
purchased businesses. If these deferred tax assets are realized, the benefit
will reduce goodwill arising from the Convoy and Microscript acquisitions. An
additional portion of the allowance, $9.2 million relates to stock option
compensation deductions included in our net operating loss carryforwards. If and
when we determine to reverse that portion of the valuation allowance, the
benefit will be added to paid-in capital, rather than being shown as a reduction
of future income tax expense.
Net Loss
We reported a net loss of $46.3 million, or $1.44 per share, for the year
ended December 31, 1999. The loss includes acquisition-related and restructuring
charges of $44.5 million and $7.5 million, respectively. Excluding these
charges, related tax benefits and a nonrecurring adjustment to the deferred tax
asset valuation allowance, we generated a net loss of approximately $7.3
million, or $0.23 per share. Our net loss for 1998 was $8.5 million, or $0.38
per share. The loss includes acquisition-related charges of $19.4 million for
in-process research and development and amortization of acquired intangibles.
Excluding these charges and the related estimated tax benefit, we generated net
income of approximately $9.5 million, or $0.38 per share, based on 25,472,383
diluted weighted average shares outstanding. Giving effect to expenses
associated with the Menhir acquisition, the Company reported a net loss of $3.5
million, or $0.64 per share, in 1997. Excluding the $2.7 million charge for
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<PAGE> 30
acquired in-process research and development and amortization of acquired
intangibles, the net loss was approximately $841,000 or $0.08 per common share.
Liquidity and Capital Resources
As of December 31, 1999, our principal sources of liquidity consisted of
$94.8 million of cash, cash equivalents, and short-term and long-term
investments in marketable securities, compared with $196.1 million at December
31, 1998. This decrease was primarily due to cash paid for acquisitions, and
cash used for operations, including acquisition-related charges and
restructuring expenses. No amounts were outstanding under the line of credit
during the years ended December 31, 1999 or 1998. We had working capital of
$86.4 million and $195.9 million at December 31, 1999 and 1998, respectively.
Included in determining such amounts are short-term deferred revenue and
customer deposits of $13.6 million and $19.4 million for the years ended
December 31, 1999 and 1998, respectively. The majority of short-term deferred
revenue represents annual maintenance fees charged to customers, which is
recognized ratably as revenue over the support service contract period.
We used $35.9 million in cash for operating activities during the year
ended December 31, 1999 compared to $1.5 million in cash during the year ended
December 31, 1998. The decrease in operating cash flow was due primarily to the
net loss from operations for the year ended December 31, 1999. As adjusted to
eliminate the effect of noncash charges and benefits, this net loss was $13.6
million. Cash payments for acquisition charges of approximately $16.6 million
and cash paid for restructuring charges of approximately $3.5 million had a
significant impact on cash used for operations.
Our accounts receivable, net, increased to $38.8 million at December 31,
1999 compared to $28.3 million at December 31, 1998. Of the $10.5 million
increase in accounts receivable, net, $7.9 million of the increase was due to
acquisitions which occurred in the first two quarters of 1999. 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 $96.9 million in cash for investing activities for the year ended
December 31, 1999 compared to $36.8 million for the year ended December 31,
1998. In both periods, one of the primary investing activities was the net
purchase 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 year
ended December 31, 1999, we continued 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 both 1999 and 1998, we purchased
furniture, fixtures and equipment necessary to support our expanding operations.
During 1999, we funded approximately $19.7 million in 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. During the third quarter of 1999,
the Company began leasing the completed portion of the buildings from GPP 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 $31.4 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 $7.9 million in cash during 1999 compared to
$205.4 million during 1998. For the 1999 period, this cash was from exercises of
common stock options and the Employee Stock Purchase Plan. In 1998, we received
$208.0 million in net proceeds from our May and December 1998 follow-on
offerings and $1.0 million in proceeds from the exercise of stock options,
warrants and the Employee Stock Purchase Plan. In August 1999, the Company's
Board of Directors authorized the repurchase of up to 10% of NEON's outstanding
shares of common stock over a 12-month period. As of March 2000, we have
repurchased 20,000 shares at a total cost of approximately $347,000. The Company
may purchase additional shares from time to time on the open market.
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<PAGE> 31
In July 1999, we agreed with the former equityholders of Microscript to pay
additional purchase consideration to more closely reflect the purchase value
agreed upon in the purchase negotiations. This required additional cash
expenditures of $16.6 million in the third quarter of 1999.
We believe our existing balances of cash, cash equivalents and short-term
and long-term investments in marketable securities will be sufficient to meet
our anticipated working capital and capital expenditure needs for at least 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.
Foreign Currency Risk
We operate wholly owned subsidiaries located in England, France,
Switzerland, Germany, Australia, Japan, Malaysia, Hong Kong and Singapore. Sales
and expenses from these operations are typically denominated in local currency,
thereby creating exposure 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 this 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. See
Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."
Recently Issued Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 was
to be effective for all fiscal quarters of fiscal years beginning after June 15,
1999. SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, SFAS No. 137 "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Data of FASB Statement No. 133" ("SFAS 137") was issued. SFAS 137 deferred the
effective date until fiscal years beginning after June 15, 2000. We have not
engaged in hedging activities or invested in derivative instruments.
Year 2000 Readiness
Many currently installed computer systems and software products were coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these code fields needed to accept four digit entries to distinguish 21st
century dates from 20th century dates, and the failure to do so could result in
the loss of revenues.
All of our hardware and software systems successfully transitioned to the
year 2000. We have not experienced any significant problems as a result of Year
2000 Problems with our own systems or those of our vendors. However, the
potential still exists for a noncompliant system, either within NEON or at a
vendor, to malfunction due to the Year 2000 issue and cause a disruption to our
business. Due to the uncertain nature of this issue, we can not determine at
this time whether the consequences of Year 2000 failures will have a material
impact on our results of operations and financial condition. We believe that,
with the successful transition to the year 2000, the possibility of significant
interruptions of normal operations should be minimal.
In-Process Research and Development
During 1998, we acquired Century Analysis, Inc. ("CAI"), and MSB
Consultants ("MSB"). We continued to incur research and development expenses in
1999 on 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 December 31, 1998; specific activities for 1999
follow.
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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 an additional $4.2 million would be
required over the 12 to 18 months following the acquisition to develop the
products to commercial viability.
We have continued to invest additional R&D dollars in the acquired IPR&D
projects. In 1999, we expended approximately one-hundred-ninety 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 have 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.
On December 31, 1998, we projected the remaining costs required to complete
the next generation Impact/ TDM project would be approximately $1.7 million,
should this project be completed as anticipated on the acquisition date. In
1999, we spent approximately $850,000 toward the further development of
Impact/TDM. 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 cost 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 its acquisition by NEON. For these projects to
reach technological feasibility, additional efforts were projected to cost
approximately $850,000. In 1999, NEON spent roughly $500,000 toward these
component-related projects. Portions of CAI's component-related technology have
been incorporated into NEON's products. Additional components will be further
rolled into NEON product releases in the year 2000.
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 progress 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, we spent roughly $450,000 towards the
development of XML and CORBA technology in 1999. XML Technology was released in
the third quarter of 1999 and further enhancements will be made into the first
part of 2000. CORBA technology is being developed into a stand alone adapter
product, which is currently scheduled to be released in Q1 2000.
MSB was working on 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 an additional $850,000 would be
required over the 18 to 24 months following the acquisition to develop the
aforementioned products to commercial viability.
We continued to invest R&D dollars in the acquired IPR&D projects during
1999. As of the end of 1999, all the projects are finished and have been fully
incorporated into NEON's product development. The timeline and expectations for
completion of these projects did not differ materially from what was anticipated
at the time of the purchase and the projects were released as planned. The
revenue and costs associated with these projects did not materially differ from
the initial valuation.
We believe the work performed as of the valuation date had encompassed many
of the critical elements needed to complete the Price Server project. We
estimated approximately $1,500,000 in development costs was incurred as of the
acquisition date and approximately $220,000 was required to complete the
remaining development tasks. We spent roughly $270,000 in 1999 on this project.
The Pricing module for banking applications became available during the first
half of 1999. The Price Server project is complete and has been incorporated
into the NEON product infrastructure.
In order to achieve milestones for the aRTe project, we estimate MSB had
invested 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 about $175,000 in 1999 on this project. aRTe's
functionality was incorporated into a NEON product introduced in mid-1999.
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It was estimated $75,000 had been incurred as of the acquisition date for
the Quantum Leap project and approximately $400,000 would be required to
complete the product. We spent roughly $380,000 in 1999 on this project. The
first version of this product was released in the fourth quarter of 1998, and
further development efforts were made throughout 1999 to incorporate Quantum
Leap technology into another product released in the second half of 1999.
We do not break down revenues attributable specifically to CAI- and
MSB-derived products. As products are offered both as a suite and as individual
applications, NEON license fees are not necessarily application specific.
However, we believe 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. We
believe 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 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 and are consistent with the numbers presented in this analysis. The
only change was that CORBA 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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the ordinary course of operations, our financial position and cash flows
are subject to a variety of risks, which include market risks associated with
changes in foreign currency exchange rates and movements in interest rates. We
do not, in the normal course of business, use derivative financial instruments
for trading or speculative purposes. Uncertainties that are either nonfinancial
or nonquantifiable, 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 1999, 34% of our total
revenue was generated from our international operations, and the net assets of
our foreign subsidiaries totaled 6% of consolidated net assets as of December
31, 1999. Our exposure to currency exchange rate changes is 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 England, France,
Switzerland, Australia, Germany, Japan, Malaysia, Hong Kong and Singapore. These
foreign subsidiaries use 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. We do not believe that
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possible near-term changes in exchange rates will result in a material effect on
our future earnings or cash flows and, therefore, have chosen not to enter into
foreign currency hedging instruments. There can be no assurance that such
approach will be successful, especially in the event of a sudden and significant
decline in the value of the U.S. dollar relative to foreign currencies.
INTEREST RATES
Our exposure to market risk associated with changes in interest rates
relates primarily to our investments in marketable securities and our
related-party note receivable. Our investments, including cash equivalents,
consist of U.S., state and municipal bonds, as well as domestic corporate bonds,
with maturities of greater than 12 months. All short-term 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. Our short-term investment objectives are safety, liquidity and
yield. Additionally, interest income on our related party receivable is based on
a floating interest rate of 90-day LIBOR plus 2.05%. Changes in interest rates
could impact our anticipated interest income or could impact the fair market
value of our investments. However, we believe these changes in interest rates
will not cause a material impact on our financial position, results of
operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements and the report of the independent public
accountants appear on pages 37 through 60 of this Report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the sections entitled
"Proposal No. 1: Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for the 2000 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of the Company's fiscal year ended December 31, 1999 (the "2000 Proxy
Statement"), except that the information required by this item concerning the
executive officers of the Company is incorporated by reference to the
information set forth in the section entitled "Executive Officers of the
Registrant" at the end of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the sections entitled
"Proposal No. 1: Election of Directors -- Compensation of Directors" and
"Executive Officer Compensation" in the Company's 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Beneficial Share Ownership by
Principal Stockholders and Management" in the Company's 2000 Proxy Statement.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Transactions" in the Company's 2000 Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
1. Consolidated Financial Statements. The following consolidated financial
statements of the Registrant and subsidiaries are filed as part of this Report:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... 39
Consolidated Balance Sheets................................. 40
Consolidated Statements of Operations....................... 41
Consolidated Statements of Stockholders' Equity............. 42
Consolidated Statements of Cash Flows....................... 43
Notes to Consolidated Financial Statements.................. 44
</TABLE>
2. Financial Statement Schedules.
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or rules thereto.
3. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 -- Share Purchase Agreement dated June 12, 1998 by and among
Registrant, MSB Consultants Limited and the shareholders
of MSB (which is incorporated herein by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K
filed June 26, 1998).
2.2 -- Share Acquisition Agreement dated September 30, 1998 by
and among Registrant and the shareholders of Century
Analysis Incorporated (which is incorporated herein by
reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed October 14, 1998).
3.1 -- Amended and Restated Certificate of Incorporation, as
amended through May 21, 1997 (which is incorporated herein
by reference to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-1, Registration No.
333-20189 ("Registrant's 1997 S-1")).
3.2 -- Amended and Restated Bylaws of Registrant, as amended
through February 2, 1998 (which is incorporated by
reference to Exhibit 3.2 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
3.3 -- Certificate of Determination of Rights, Preferences and
Privileges of Series A Preferred Stock (included in
Exhibit 4.1).
4.1 -- Form of Registrant's Common Stock Certificate (which is
incorporated herein by reference to Exhibit 4.1 to the
Registrant's 1997 S-1).
</TABLE>
34
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.2 -- Preferred Shares Right Agreement, dated as of August 5,
1998 between the Registrant and Bank Boston N.A.,
including the Certificate of Designator, the Form of
Rights Certificate and the Summary of Rights attached
thereto as Exhibits A, B and C, respectively (which is
incorporated herein by reference to Exhibit 1 to the
Registrant's Registration Statement on Form 8-K/A
Amendment No. 1 filed August 17, 1998).
10.1* -- Form of Indemnification Agreement entered into by
Registrant with each of its directors and executive
officers (which is incorporated herein by reference to
Exhibit 10.1 to the Registrant's 1997 S-1).
10.2* -- 1995 Stock Option Plan, (amended and restated as of
January 3, 1997) and related agreements (which is
incorporated herein by reference to Exhibit 10.2 to the
Registrant's 1997 S-1).
10.3* -- 1997 Director Option Plan and related agreements (which
is incorporated herein by reference to Exhibit 10.3 to the
Registrant's 1997 S-1).
10.4* -- 1997 Employee Stock Purchase Plan and related agreements
(which is incorporated herein by reference to Exhibit 10.4
to the Registrant's 1997 S-1).
10.5* -- 1998 Nonstatutory Stock Option Plan and related
agreements (which is incorporated herein by reference to
Exhibit 10.5 to the Registrant's 1998 10-k).
10.6 -- Warrant to Purchase Stock issued to Silicon Valley Bank
dated April 12, 1996 (which is incorporated herein by
reference to Exhibit 10.5 to the Registrant's 1997 S-1).
10.7 -- Registration Rights Agreement between the Registrant and
certain parties named therein dated May 9, 1995 (which is
incorporated herein by reference to Exhibit 10.9 to the
Registrant's 1997 S-1).
10.8 -- Amendment No. 1 to Registration Rights Agreement between
the Registrant and certain parties named therein dated
September 20, 1995 (which is incorporated herein by
reference to Exhibit 10.10 to the Registrant's 1997 S-1).
10.9 -- Amendment No. 2 to Registration Rights Agreement between
the Registrant and certain parties named therein dated
June 3, 1996 (which is incorporated herein by reference to
Exhibit 10.11 to the Registrant's 199 7 S-1).
10.10 -- Standard Commercial Lease between Greenwood Plaza
Partners, LLC and the Registrant dated July 22, 1999.
23.1 -- Consent of Arthur Andersen LLP.
24.1 -- Power of Attorney (which is included on page 36 herein).
27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Indicates management compensatory plan, contract or arrangement.
(b) Reports on Form 8-K.
Not applicable.
35
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized on this 28th day of
March 2000.
NEW ERA OF NETWORKS, INC.
By: /s/ STEPHEN E. WEBB
-----------------------------------
Stephen E. Webb,
Senior Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George F. (Rick) Adam and Leonard M.
Goldstein, his or her attorneys-in-fact, with full power of substitution, for
him or her in any and all capacities, to sign any and all amendments to this
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact or their substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant on March 28, 2000 and in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GEORGE F. (RICK) ADAM, JR. Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer and Director (principal executive
George F. (Rick) Adam, Jr. officer)
/s/ PATRICK J. FORTUNE President and Chief Operating Officer
- -----------------------------------------------------
Patrick J. Fortune
/s/ STEPHEN E. WEBB Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial officer)
Stephen E. Webb
/s/ LONNIE S. CLARK Director of Accounting and Financial Reporting
- ----------------------------------------------------- (principal accounting officer)
Lonnie S. Clark
/s/ STEVEN LAZARUS Director
- -----------------------------------------------------
Steven Lazarus
/s/ MARK L. GORDON Director
- -----------------------------------------------------
Mark L. Gordon
/s/ HAROLD A. PISKIEL Director
- -----------------------------------------------------
Harold A. Piskiel
/s/ ELISABETH W. IRELAND Director
- -----------------------------------------------------
Elisabeth W. Ireland
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOSEPH E. KASPUTYS Director
- -----------------------------------------------------
Joseph E. Kasputys
/s/ MEL BERGSTEIN Director
- -----------------------------------------------------
Mel Bergstein
</TABLE>
37
<PAGE> 39
NEW ERA OF NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... 39
Consolidated Balance Sheets................................. 40
Consolidated Statements of Operations....................... 41
Consolidated Statements of Stockholders' Equity............. 42
Consolidated Statements of Cash Flows....................... 43
Notes to Consolidated Financial Statements.................. 44
</TABLE>
38
<PAGE> 40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New Era of Networks, Inc.:
We have audited the accompanying consolidated balance sheets of NEW ERA OF
NETWORKS, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
New Era of Networks, Inc., as of December 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
January 26, 2000
39
<PAGE> 41
NEW ERA OF NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 49,796,989 $174,173,008
Short-term investments in marketable securities........... 7,682,786 10,658,577
Accounts receivable, net of allowance for uncollectible
accounts of $1,885,000 and $800,000, respectively...... 38,796,513 28,310,275
Unbilled revenue.......................................... 3,251,144 3,124,536
Prepaid expenses and other................................ 5,827,503 2,356,324
Note receivable, related party............................ 19,666,135 --
Deferred income taxes, net................................ -- 147,300
------------ ------------
Total current assets.............................. 125,021,070 218,770,020
------------ ------------
Property and equipment:
Computer equipment and software........................... 17,023,054 9,327,048
Furniture, fixtures and equipment......................... 4,345,324 2,360,538
Leasehold improvements.................................... 3,273,280 1,569,125
------------ ------------
24,641,658 13,256,711
Less-accumulated depreciation............................. (7,126,379) (2,701,024)
------------ ------------
Property and equipment, net............................... 17,515,279 10,555,687
Long-term investments in marketable securities.............. 37,335,205 11,259,810
Intangibles, net............................................ 170,565,822 51,876,649
Deferred income taxes, net.................................. 7,700,765 4,845,500
Other assets, net........................................... 1,382,354 1,370,283
------------ ------------
Total assets...................................... $359,520,495 $298,677,949
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,118,010 $ 5,650,308
Accrued liabilities....................................... 19,111,975 7,856,926
Deferred revenue.......................................... 13,570,715 9,406,637
------------ ------------
Total current liabilities......................... 38,800,700 22,913,871
Deferred revenue............................................ 78,437 149,137
------------ ------------
Total liabilities................................. 38,879,137 23,063,008
------------ ------------
Commitments and contingencies (Note 8)
Stockholders' equity (Note 6):
Preferred stock, 2,000,000 shares authorized; none issued
or outstanding at December 31, 1999.................... -- --
Common stock, $.0001 par value, 200,000,000 shares
authorized, 34,051,573 and 30,333,778 shares issued and
outstanding as of December 31, 1999 and 1998,
respectively........................................... 3,405 3,033
Additional paid-in capital................................ 389,199,732 295,570,769
Treasury stock (20,000 shares of common stock, at cost)... (347,375) --
Accumulated deficit....................................... (66,329,148) (20,016,790)
Cumulative other comprehensive income (loss).............. (1,885,256) 57,929
------------ ------------
Total stockholders' equity........................ 320,641,358 275,614,941
------------ ------------
Total liabilities and stockholders' equity........ $359,520,495 $298,677,949
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
40
<PAGE> 42
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Software licenses................................. $ 59,564,445 $ 40,975,703 $15,969,840
Software maintenance.............................. 16,177,439 4,912,447 755,048
Professional services............................. 50,482,268 19,925,923 5,920,554
------------ ------------ -----------
Total revenues............................ 126,224,152 65,814,073 22,645,442
------------ ------------ -----------
Cost of revenues:
Cost of software licenses......................... 1,405,289 1,701,458 899,710
Cost of services and maintenance.................. 38,895,808 12,906,012 4,442,908
------------ ------------ -----------
Total cost of revenues.................... 40,301,097 14,607,470 5,342,618
------------ ------------ -----------
Gross profit........................................ 85,923,055 51,206,603 17,302,824
------------ ------------ -----------
Operating expenses:
Sales and marketing............................... 54,861,589 21,941,568 8,823,830
Research and development.......................... 34,872,684 15,839,483 7,730,411
General and administrative........................ 15,620,060 6,571,100 2,334,185
Acquisition charges............................... 25,148,349 17,597,000 2,600,000
Restructuring costs............................... 7,449,621 -- --
Amortization of intangibles....................... 19,396,837 1,778,410 65,836
------------ ------------ -----------
Total operating expenses.................. 157,349,140 63,727,561 21,554,262
------------ ------------ -----------
Loss from operations................................ (71,426,085) (12,520,958) (4,251,438)
Other income, net................................... 7,132,347 2,743,746 744,805
------------ ------------ -----------
Loss before provision for income taxes.............. (64,293,738) (9,777,212) (3,506,633)
Income tax benefit.................................. 17,981,380 1,278,400 --
------------ ------------ -----------
Net loss............................................ $(46,312,358) $ (8,498,812) $(3,506,633)
============ ============ ===========
Net loss per common share, basic and diluted........ $ (1.44) $ (0.38) $ (0.32)
============ ============ ===========
Weighted average shares of common stock outstanding
(Note 2).......................................... 32,247,552 22,277,472 10,958,302
============ ============ ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
41
<PAGE> 43
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A, SERIES B AND
SERIES C CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
------------------------ ------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS)
---------- ----------- ---------- ------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996....................... 20,016,963 $11,385,000 2,718,182 $ 272 $ 141,407 $ (8,011,345) $ --
Issuance of common stock
upon initial public
offering, net of issuance
costs of
$3,861,852............... -- -- 6,348,000 634 34,225,513 -- --
Conversion of preferred
stock --
Series A................. (9,169,028) (2,000,000) 4,075,122 408 1,999,592 -- --
Series B................. (6,183,339) (1,875,000) 2,748,148 274 1,874,726 -- --
Series C................. (4,664,596) (7,510,000) 2,073,148 208 7,509,792 -- --
Issuance of common stock
upon exercise of stock
options.................. -- -- 249,714 26 439,249 -- --
Cumulative translation
adjustment............... -- -- -- -- -- -- 57,146
Net loss................... -- -- -- -- -- (3,506,633) --
---------- ----------- ---------- ------ ------------ ------------ ------------
Total comprehensive loss... -- -- -- -- -- -- --
---------- ----------- ---------- ------ ------------ ------------ ------------
Balances, December 31,
1997....................... -- $ -- 18,212,314 $1,822 $ 46,190,279 $(11,517,978) $ 57,146
Issuance of common stock in
public offerings, net of
issuance costs of
$12,308,142.............. -- -- 9,537,000 954 204,321,780 -- --
Issuance of common stock
upon exercise of stock
options and warrants..... -- -- 862,064 85 2,774,215 -- --
Issuance of common stock in
business combinations.... -- -- 1,548,124 155 38,151,812 -- --
Tax benefit related to the
exercise of stock
options.................. -- -- -- -- 3,225,488 -- --
Issuance of common stock in
connection with Employee
Stock Purchase Plan...... -- -- 174,276 17 907,195 -- --
Cumulative translation
adjustment............... -- -- -- -- -- -- 783
Net loss................... -- -- -- -- -- (8,498,812) --
---------- ----------- ---------- ------ ------------ ------------ ------------
Total comprehensive loss... -- -- -- -- -- -- --
---------- ----------- ---------- ------ ------------ ------------ ------------
Balances, December 31,
1998....................... -- $ -- 30,333,778 $3,033 $295,570,769 $(20,016,790) $ 57,929
Issuance of common stock
upon exercise of stock
options and warrants..... -- -- 1,443,217 144 6,346,094 -- --
Issuance of common stock in
business combinations.... -- -- 2,142,741 215 84,754,887 -- --
Reverse excess accrual for
issuance costs related to
the December 1998 public
offering................. -- -- -- -- 107,458 -- --
Restructuring charges--due
to option
remeasurement............ -- -- -- -- 650,454 -- --
Issuance of common stock in
connection with Employee
Stock Purchase Plan...... -- -- 131,837 13 1,770,070 -- --
Purchase of treasury
stock.................... -- -- -- -- -- -- --
Cumulative translation
adjustment............... -- -- -- -- -- -- (1,177,322)
Unrealized loss on
marketable securities.... -- -- -- -- -- -- (765,863)
Net loss................... -- -- -- -- -- (46,312,358) --
---------- ----------- ---------- ------ ------------ ------------ ------------
Total comprehensive loss... -- -- -- -- -- -- --
---------- ----------- ---------- ------ ------------ ------------ ------------
Balances, December 31,
1999....................... -- $ -- 34,051,573 $3,405 $389,199,732 $(66,329,148) $( 1,885,256)
========== =========== ========== ====== ============ ============ ============
<CAPTION>
TREASURY
STOCK TOTAL
--------- ------------
<S> <C> <C>
Balances, December 31,
1996....................... $ -- $ 3,515,334
Issuance of common stock
upon initial public
offering, net of issuance
costs of
$3,861,852............... -- 34,226,147
Conversion of preferred
stock --
Series A................. -- --
Series B................. -- --
Series C................. -- --
Issuance of common stock
upon exercise of stock
options.................. -- 439,275
Cumulative translation
adjustment............... -- --
Net loss................... -- --
--------- ------------
Total comprehensive loss... -- (3,449,487)
--------- ------------
Balances, December 31,
1997....................... $ -- $ 34,731,269
Issuance of common stock in
public offerings, net of
issuance costs of
$12,308,142.............. -- 204,322,734
Issuance of common stock
upon exercise of stock
options and warrants..... -- 2,774,300
Issuance of common stock in
business combinations.... -- 38,151,967
Tax benefit related to the
exercise of stock
options.................. -- 3,225,488
Issuance of common stock in
connection with Employee
Stock Purchase Plan...... -- 907,212
Cumulative translation
adjustment............... -- --
Net loss................... -- --
--------- ------------
Total comprehensive loss... -- (8,498,029)
--------- ------------
Balances, December 31,
1998....................... $ -- $275,614,941
Issuance of common stock
upon exercise of stock
options and warrants..... -- 6,346,238
Issuance of common stock in
business combinations.... -- 84,755,102
Reverse excess accrual for
issuance costs related to
the December 1998 public
offering................. -- 107,458
Restructuring charges--due
to option
remeasurement............ -- 650,454
Issuance of common stock in
connection with Employee
Stock Purchase Plan...... -- 1,770,083
Purchase of treasury
stock.................... (347,375) (347,375)
Cumulative translation
adjustment............... -- --
Unrealized loss on
marketable securities.... -- --
Net loss................... -- --
--------- ------------
Total comprehensive loss... -- (48,255,543)
--------- ------------
Balances, December 31,
1999....................... $ 347,375 $320,641,358
========= ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
42
<PAGE> 44
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (46,312,358) $ (8,498,812) $ (3,506,633)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization........................... 23,428,770 3,459,187 701,636
Minority interest share of losses....................... (12,720) -- --
Charge for acquired in-process research and
development........................................... -- 17,597,000 2,600,000
Acquisition charges paid with common stock.............. 8,268,759 -- --
Option remeasurement noncash restructuring charges...... 650,453 -- --
Provision for deferred income taxes..................... (18,550,680) (4,992,800) --
Imputed interest on purchase consideration.............. -- 90,000 --
Loss on sale of property and equipment.................. 350,498 -- --
Changes in assets and liabilities --
Accounts receivable, net.............................. (2,601,074) (13,087,311) (7,430,450)
Unbilled revenue...................................... 503,634 (918,453) (2,261,319)
Prepaid expenses and other assets..................... (1,997,573) (1,270,191) (1,030,195)
Accounts payable...................................... (2,881,145) 1,228,156 980,815
Accrued liabilities................................... (2,017,367) 1,794,786 345,003
Accrued restructuring charges......................... 3,288,582 -- --
Deferred revenue...................................... 1,718,647 3,071,143 950,622
------------- ------------ ------------
Net cash used in operating activities............... (36,163,574) (1,527,295) (8,650,521)
------------- ------------ ------------
Cash flows from investing activities:
Purchases of short-term investments in marketable
securities.............................................. (18,618,952) (12,161,058) (10,514,390)
Proceeds from sales of short-term investments............. 21,644,755 12,016,871 500,000
Purchases of long-term investments in marketable
securities.............................................. (33,474,449) (6,200,583) (5,059,227)
Proceeds from sales of long-term investments.............. 6,515,033 -- --
Business combinations, net of cash acquired............... (38,374,902) (22,160,671) (2,800,000)
Purchases of equity investments........................... -- (400,000) --
Purchases of property and equipment....................... (10,752,785) (7,273,860) (1,811,744)
Investment in note receivable--related party.............. (19,666,135) -- --
Purchase of developed software............................ (4,194,842) (600,000) --
------------- ------------ ------------
Net cash used in investing activities............... (96,922,277) (36,779,301) (19,685,361)
------------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuances of common stock................... 8,111,522 220,312,388 38,527,274
Purchase of treasury stock................................ (347,375) -- --
Common stock issuance costs............................... 107,458 (12,308,142) (3,861,852)
Tax benefit related to the exercise of stock options...... -- 3,225,488 --
Proceeds from notes payable to banks...................... -- -- 609,807
Principal payments on notes payable to banks.............. -- (5,830,772) (2,676,451)
------------- ------------ ------------
Net cash provided by financing activities........... 7,871,605 205,398,962 32,598,778
------------- ------------ ------------
Effect of exchange rate changes on cash..................... 838,227 (69,720) --
Net increase (decrease) in cash and cash equivalents........ (124,376,019) 167,092,366 4,262,896
Cash and cash equivalents, beginning of period.............. 174,173,008 7,150,362 2,887,466
------------- ------------ ------------
Cash and cash equivalents, end of period.................... $ 49,796,989 $174,173,008 $ 7,150,362
============= ============ ============
Supplemental cash flow information:
Cash paid during the year for --
Interest................................................ $ 34,720 $ 46,675 $ 95,661
============= ============ ============
Taxes................................................... $ 974,797 $ 370,085 $ --
============= ============ ============
Supplemental disclosure of noncash information:
Common stock issued for business combinations............. $ 76,486,343 $ 38,151,967 $ --
============= ============ ============
Accrued business combination costs........................ $ 251,957 $ 496,511 $ 20,160
============= ============ ============
Common stock issued for acquisition charges............... $ 8,268,759 $ -- $ --
============= ============ ============
Restructuring cost--option remeasurement.................. $ 650,454 $ -- $ --
============= ============ ============
Restructuring cost--loss on asset disposition............. $ 350,498 $ -- $ --
============= ============ ============
Accrued deferred offering costs........................... $ -- $ 484,665 $ --
============= ============ ============
Conversion of preferred stock to common stock............. $ -- $ -- $ 11,385,000
============= ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
43
<PAGE> 45
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) DESCRIPTION OF BUSINESS
New Era of Networks, Inc. and its consolidated subsidiaries (collectively
referred to herein as "NEON" or the "Company") develop, market and support
e-Business and Enterprise Application Integration ("EAI") software and services.
Specifically, NEON helps automate e-Business by providing a range of products
and services that integrate Internet-facing applications with core operational
systems for goods and services providers, and also facilitate the creation of
Net markets. The Company's architectural platform provides organizations with a
structured software platform for the rapid and efficient integration and ongoing
maintenance of disparate systems and applications across the enterprise. The
Company's packaged software solutions support EAI across popular hardware
platforms, operating systems, and database types. NEON combines in a single
offering the five elements we believe are essential for e-Business integration
software: integration servers, process automation, predefined adapters, Internet
communications, and packaged e-Business integration applications. Additionally,
the Company provides design, development and implementation services through its
professional services organization and SLI Consulting subsidiary.
The Company markets its software and related services primarily through its
direct sales organization, complemented by other indirect sales channels
including VARs, OEMs and international distributors. Through December 31, 1999,
the Company has shipped software products or provided integration services to
approximately 2,500 customers worldwide.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is their
local currency. Assets and liabilities of international subsidiaries are
translated to U.S. dollars at year-end exchange rates, and income statement
items are translated at average exchange rates for the year. Resulting
translation adjustments are recorded as a separate component of equity. Gains
and losses resulting from foreign currency transactions are included in income.
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period-end translation) or realized
(upon settlement of the transactions). Unrealized transaction gains and losses
applicable to permanent investments by the Company in its foreign subsidiaries
are included as cumulative translation adjustments, and unrealized translation
gains or losses applicable to short-term intercompany receivables from or
payables to the Company and its foreign subsidiaries are included in income.
Revenue Recognition
The Company generates revenue from sales of software licenses and
professional service arrangements. The Company recognizes license fee revenue
when the licensed software has been delivered, customer acceptance has occurred,
all significant Company obligations have been satisfied, payment is due within
twelve months and the fee is fixed, determinable and deemed collectible.
Software maintenance revenue related to software licenses is recognized ratably
over the term of each maintenance arrangement. Revenue from professional service
arrangements is recognized on either a time and materials or
progress-to-completion basis as the services are performed and amounts due from
customers are deemed collectible and contractually nonrefundable. To date, all
progress-to-completion projects have generally been performed over periods of
less than one year. At each reporting
44
<PAGE> 46
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date, the Company evaluates each project and determines whether an accrual for
estimated losses is required. Revenues recognized under the
progress-to-completion basis, which have not yet been invoiced, are recorded as
unbilled revenues in the accompanying consolidated balance sheets.
The Company also generates revenue through a reseller arrangement. In
accordance with Staff Accounting Bulletin No. 101, the net reseller margin is
recognized as revenue when the licensed software has been delivered, customer
acceptance has occurred, and all significant company obligations have been
satisfied.
Amounts collected or billed prior to satisfying the above revenue
recognition criteria are reflected as deferred revenue in the accompanying
consolidated balance sheets. As of December 31, 1999 and 1998, the total
deferred revenue was $13,649,152 and $9,555,774, respectively.
Cost of Services and Maintenance
Cost of services related to professional service arrangements and
maintenance include the direct labor costs incurred plus a related overhead
allocation. Service contracts that are material in amount are generally
performed on a time and materials basis. Service contracts performed on a
fixed-fee basis are generally completed in less than 90 days or are routine in
nature.
Research and Development
Research and development costs are expensed as incurred and include
salaries, supplies and other direct costs.
Cash Equivalents and Short-Term Investments in Marketable Securities
The Company invests certain of its excess cash in government and corporate
debt instruments. All highly liquid investments with original maturities of
three months or less are considered to be cash equivalents. The recorded amounts
for cash equivalents and short-term investments approximate fair market value
due to the short-term nature of these financial instruments. Under the criteria
set forth in Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"), debt and
marketable equity securities are required to be classified in one of three
categories: trading, available-for-sale, or held to maturity. The Company's debt
and equity securities qualify under the provisions of SFAS 115 as
available-for-sale. Such securities are recorded at fair value, and unrealized
holding gains and losses, net of the related tax effect, are not reflected in
earnings but are reported as a separate component of stockholders' equity
(deficit) until realized. A decline in the market value of an available-for-sale
security below cost that is deemed other than temporary is charged to earnings
and results in the establishment of a new cost basis for the security. The net
unrealized gains and losses are insignificant at both December 31, 1999 and
1998.
Realized gains and losses are determined on the specific identification
method and are reflected in income. Interest on corporate bonds is accrued
through the balance sheet date.
Long-Term Investments in Marketable Securities
Included in long-term investments in the accompanying consolidated balance
sheets are investments in certain debt instruments with maturities are greater
than 12 months. The Company carries such investments at amortized cost as it
intends to hold such investments to maturity. At December 31, 1999 and 1998, the
recorded amounts for long-term investments approximate fair market value.
45
<PAGE> 47
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment, net
Depreciation of property and equipment is computed on a straight-line basis
over the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and software.......................... 3 years
Furniture, fixtures and equipment........................ 5-7 years
Leasehold improvements................................... 2-10 years
</TABLE>
Depreciation expense was approximately $4,342,000, $1,665,000 and $633,000
in 1999, 1998 and 1997, respectively.
Costs of internal use software, whether purchased or developed internally,
are capitalized and amortized over the estimated useful life of the software in
accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use."
Software Development Costs and Purchased Software Products
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," capitalization of software development costs begins upon
the establishment of technological feasibility of the product and ends when the
product is ready for general release. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. Capitalized costs will be amortized based on current and future
revenue for each product with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of each product, ranging
from three to five years. As of December 31, 1999, the Company had not
capitalized any costs in accordance with this pronouncement.
As of December 31, 1999 and 1998, the Company has recorded approximately
$25,092,000 and $7,069,000 allocated to software products acquired in business
combinations and purchases, which is included in Intangibles, net in the
accompanying consolidated balance sheets. The Company recognized approximately
$3,255,000 and $562,000 of amortization expense in 1999 and 1998, respectively,
related to such capitalized costs. Unamortized costs of $21,275,233 and
$7,055,113 are included in intangibles, net as of December 31, 1999 and 1998,
respectively.
Goodwill
The Company recorded goodwill in connection with the purchase business
combinations described in Note 3 in the aggregate amount of approximately
$166,155,000 that is being amortized on a straight-line basis over seven- to
ten-year periods. Amortization recognized for 1999 and 1998 was approximately
$15,832,000 and $1,216,000, respectively. Unamortized costs of $149,107,721 and
$44,821,536 are included in Intangibles, net in the accompanying consolidated
balance sheets as of December 31, 1999 and 1998, respectively.
Income Taxes
The current provision for income taxes represents actual or estimated
amounts payable or refundable on tax returns filed or to be filed for each year.
Deferred tax assets and liabilities are recorded for the estimated future tax
effects of temporary differences between the tax basis of assets and liabilities
and amounts reported in the consolidated balance sheets. Deferred tax assets are
also recognized for net operating loss and tax credit carryforwards. The overall
change in deferred tax assets and liabilities for the period, exclusive of
deferred tax assets and liabilities recorded in purchase accounting for
businesses acquired, measures the deferred tax expense or benefit for the
period. Effects of changes in enacted tax laws on deferred tax assets and
liabilities are reflected
46
<PAGE> 48
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as adjustments to tax expense in the period of enactment. Deferred tax assets
are reduced by a valuation allowance based on an assessment of available
evidence if deemed more likely than not that some or all of the deferred tax
assets will not be realized (see Note 6).
Cumulative Other Comprehensive Income (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. The Company adopted SFAS 130 during fiscal
1998. The components of other comprehensive income that have impacted the
Company through December 31, 1999 are cumulative translation adjustments and
unrealized gain (loss) on marketable securities.
Net Loss Per Common Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"), by retroactively restating loss per
share amounts for all periods presented. Under SFAS 128, basic earnings (loss)
per share is determined by dividing net income (loss) from continuing operations
available to common shareholders by the weighted average number of common shares
outstanding during each period. Diluted earnings per share includes the effects
of potentially issuable common stock, but only if dilutive. The treasury stock
method, using the average price of the Company's common stock for the period, is
applied to determine dilution from options and warrants. The if-converted method
is used for convertible securities. Because of reported losses, there are no
differences between basic and diluted per share amounts for the Company for any
of the years presented.
Potentially dilutive securities excluded under SFAS 128 as antidilutive are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Number of common shares issuable upon --
Exercise of outstanding stock options (Note 7)... 6,594,364 5,369,512 4,204,050
</TABLE>
Concentration of Credit Risk
The Company's accounts receivable are concentrated with certain customers
in the financial services industry. During the years ended December 31, 1999 and
1998, the Company recognized approximately 32% and 57%, respectively, of its
revenue from financial services industry clients (see Note 8).
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable, cash
equivalents and short-term investments. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company has a cash investment policy which
restricts investments to ensure preservation of principal and maintenance of
liquidity.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
47
<PAGE> 49
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
New Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities" ("SFAS 133") establishes accounting and reporting standards for
derivative instruments and for hedging activities. Among other things, the
statement requires that an entity recognize all derivative instruments on the
balance sheet as either assets or liabilities, and to account for those
instruments at fair value. In July 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Data
of FASB Statement No. 133" ("SFAS 137") was issued. SFAS 137 deferred the
effective date of SFAS 133 until the first fiscal quarter of fiscal years
beginning after June 15, 2000. The Company expects to adopt SFAS 133 effective
January 1, 2001. Adoption of SFAS 133 is not expected to have a material impact
on the Company's financial position or results of operations.
Reclassifications
Certain reclassifications have been made in prior years' financial
statements to conform to the 1999 presentation.
(3) BUSINESS COMBINATIONS
Microscript, Inc.
On June 28, 1999, the Company acquired all of the outstanding capital stock
of Microscript, Inc. ("Microscript"), a Massachusetts corporation. 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 shares of the Company's
common stock. The Company also issued stock options valued at approximately
$5,000,000 and exercisable for 110,428 shares of the Company's common stock in
exchange for all outstanding Microscript stock options. The fees and expenses
related to the acquisition were approximately $345,000. An additional 22,255
shares of the Company's common stock valued at $467,000 were issued as
additional purchase consideration upon the completion of the Microscript audited
financial statements for the year ended December 31, 1998. 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), which is being
amortized over three years. Other intangibles ($16,373,000) and goodwill
($9,911,000), are being amortized on a straight-line basis over seven years.
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 recorded a deferred tax liability and
corresponding increase to goodwill of $8,538,000 as the value assigned to the
software products and other intangibles is not amortizable for tax purposes.
In July 1999, in response to a post-closing decline in the market price of
the Company's common stock, the Company paid the former equityholders of
Microscript additional cash of $16,600,000 to more closely reflect the value
agreed upon in the original purchase negotiations. This adjustment to the
purchase consideration was reflected in the Company's financial statements for
the third quarter of 1999 as a one-time charge to net income.
48
<PAGE> 50
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Convoy Corporation
On June 9, 1999, the Company acquired all of the outstanding capital stock
of Convoy Corporation, a Delaware corporation ("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 shares of its common stock valued at $36,267,000. The
Company also issued 105,333 stock options, valued at approximately $4,733,000
and exercisable for shares of the Company's common stock in exchange for all
outstanding Convoy stock options and warrants. 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), which is being amortized
over three years. Other intangibles ($5,344,000) and goodwill ($30,559,000)
acquired are being amortized on a straight-line basis over seven years. 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 recorded a deferred tax liability
and corresponding increase to goodwill of $5,330,000 as the value assigned to
the software products and other intangibles is not amortizable for tax purposes.
In August 1999, in response to a post-closing decline in the market price
of the Company's common stock, the Company agreed with the former equityholders
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 was issued to the prior Convoy equityholders. This
adjustment to the purchase consideration was reflected in the Company's
financial statements for the third quarter of 1999 as a one-time charge to net
income of approximately $8,269,000.
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. Through December 31, 1999, none of these additional shares
had been 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. A portion of the purchase price was allocated
to other intangibles ($9,360,000) and goodwill ($12,296,000) and is being
amortized on a straight-line basis over a seven-year period. Upon finalization
of the purchase price allocation in the third quarter of 1999, we recorded a
deferred tax liability and corresponding increase to goodwill of $2,031,000 as
the value assigned to other intangibles is not amortizable for tax purposes.
SLI's other assets were valued at approximately $4,813,000 and its liabilities
assumed totaled approximately $3,769,000.
49
<PAGE> 51
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 and
$50,000 of fees and expenses related to this transaction. In addition, up to
$3,000,000 of contingent cash consideration may be paid to the shareholders of
VIE upon the achievement of certain performance targets. Payments will be made
to the respective VIE shareholders to the extent these performance targets are
met, beginning in the fourth quarter of 1999 and continuing every six months
until the second quarter of 2002. Contingent consideration of $19,000 was earned
in 1999 and added to goodwill related to this acquisition.
The portion of the purchase price in excess of the fair value of the net
tangible assets of VIE was allocated to goodwill ($11,949,000) and is being
amortized on a straight-line basis over a five-year period. VIE's other assets
were valued at approximately $670,000 and its liabilities assumed totaled
approximately $569,000.
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 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.
Century Analysis Incorporated
Effective as of September 1, 1998, the Company acquired all of the
outstanding capital stock of Century Analysis Inc., a California corporation
("CAI"), by means of a Share Acquisition Agreement by and among CAI, the
shareholders of CAI and the Company.
The aggregate consideration paid by the Company was approximately
$42,500,000, payable as follows: $21,000,000 in cash, $2,018,000 in short-term
notes payable to CAI shareholders, $18,000,000 through the issuance of 880,062
shares of the Company's common stock and $1,500,000 of fees and expenses related
to this transaction. The Company also issued stock options exercisable for
shares of the Company's common stock to assume all outstanding CAI stock options
valued at approximately $1,000,000. An additional 391,138 shares of the
Company's common stock, valued at approximately $15,600,000, were issued in
December 1998 upon the achievement of certain performance criteria by CAI. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the assets, liabilities and operating results of CAI have been
included in the accompanying consolidated financial statements from the
effective date of the acquisition.
50
<PAGE> 52
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An independent valuation of CAI's net assets was performed to assist in the
allocation of the purchase price. Approximately $13,857,000 of the purchase
price represented the intangible value of in-process research and development
projects that had not yet reached technological feasibility. The related
technology has no alternative future use and will require substantial additional
development by the Company. This amount was charged to operations in the quarter
ended September 30, 1998. A portion of the purchase price was also assigned to
marketable software products ($5,814,000) and goodwill ($44,930,000), which are
being amortized on a straight-line basis over five- and ten-year periods,
respectively. CAI's other assets were valued at approximately $6,800,000 and its
liabilities assumed totaled approximately $12,500,000.
MSB Consultants Limited
Effective as of June 1, 1998, the Company acquired all of the outstanding
capital stock of MSB Consultants Limited ("MSB"), a corporation organized under
the laws of the United Kingdom, by means of a Share Purchase Agreement by and
among the shareholders of MSB and the Company.
The aggregate consideration paid by the Company was $5,175,000, of which
$1,200,000 was paid in cash and approximately $3,600,000 was paid through the
issuance of 276,924 shares of common stock of the Company. The fees and expenses
related to the acquisition were approximately $375,000. Shares valued at
$1,785,000 and $1,215,000 were issued in 1999 and 1998 upon achievement of
certain performance targets during the two-year period following closing. These
amounts were added to goodwill relating to this acquisition. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
assets, liabilities and operating results of MSB have been included in the
accompanying consolidated financial statements from the effective date of the
acquisition.
An independent valuation of MSB's net assets was performed to assist in the
allocation of the purchase price. Approximately $3,740,000 of the purchase price
represented the intangible value of in-process research and development projects
that had not yet reached technological feasibility. The related technology has
no alternative future use and will require substantial additional development by
the Company. This amount was charged to operations in the quarter ended June 30,
1998. A portion of the purchase price was also assigned to marketable software
products ($770,000) and goodwill ($3,698,000 as adjusted) which are being
amortized on a straight-line basis over three- and seven-year periods,
respectively. MSB's other assets were valued at $963,000 and its liabilities
assumed totaled $996,000.
Menhir Limited
Effective September 1, 1997, the Company acquired all of the outstanding
capital stock of Menhir Limited ("Menhir"), a corporation organized under the
laws of the United Kingdom. The total purchase price of $3,000,000, including
fees and expenses of approximately $200,000, was paid in cash. The acquisition
was accounted for under the purchase method of accounting and, accordingly, the
operating results of Menhir have been included in the accompanying consolidated
financial statements from the effective date of the acquisition.
An independent valuation of Menhir's net assets was completed to assist in
allocation of the purchase price. Approximately $2,600,000 of the purchase price
represented the intangible value of in-process research and development projects
that had not yet reached technological feasibility. The related technology had
no alternative future use and will require substantial additional development by
the Company. This amount was charged to operations in the quarter ended
September 30, 1997. A portion of the purchase price was also assigned to
marketable software products ($460,000) and goodwill ($310,000) which are being
amortized on a straight-line basis over three- and seven-year periods,
respectively. Menhir's other assets assumed in the transaction were valued at
approximately $1,063,000 and liabilities assumed were approximately $1,433,000.
The following unaudited tabulations present the pro forma effect of the
above described business combinations on the Company's results of operations for
the years ended December 31, 1999 and 1998, as if the
51
<PAGE> 53
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transactions occurred on January 1 of each year presented. Adjustments are
reflected for additional amortization of intangibles and the interest on the
cash portion of the purchase prices. The pro forma results have not been
adjusted for charges related to acquired in-process research and development of
$17,597,000 in 1998.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------
HISTORICAL
UNAUDITED
RESULTS OF PRO FORMA
AS REPORTED ACQUISITIONS ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues.......................... $126,224,152 $14,351,878 $ -- $140,576,030
Income (loss) from operations..... $(71,426,085) $(1,773,658) $(7,344,351) $(80,544,094)
Net income (loss)................. $(46,312,358) $ 1,152,091 $(8,520,123) $(53,680,390)
Net (loss) per share, basic and
diluted......................... $ (1.44) $ $ (1.62)
Historical pro forma weighted
average shares of common stock
outstanding, basic and
diluted......................... 32,247,552 33,101,216
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------
HISTORICAL
UNAUDITED
RESULTS OF PRO FORMA
AS REPORTED ACQUISITIONS ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues......................... $ 65,814,073 $ 47,544,097 $ -- $113,358,170
Income (loss) from operations.... $(12,520,958) $(10,422,639) $(23,326,796) $(46,270,393)
Net income (loss)................ $ (8,498,812) $ (2,839,880) $(27,368,624) $(38,707,316)
Net (loss) per share, basic and
diluted........................ $ (0.38) $ (1.52)
Historical pro forma weighted
average shares of common stock
outstanding, basic and
diluted........................ 22,277,472 25,491,140
</TABLE>
(4) RESTRUCTURING COSTS
In July 1999, the Company's management and board of directors approved
restructuring plans, which included initiatives to integrate the operations of
the recently acquired companies, consolidate duplicative facilities, and reduce
overhead. Total accrued restructuring costs of $7,450,000 were recorded in the
third quarter related to these initiatives. Management expects the restructuring
efforts to be finalized by June 2000.
Accrued restructuring charges include $3,301,000 representing the cost of
involuntary employee separation benefits related to approximately 150 employees
worldwide. Employee separation benefits include severance, medical and other
benefits. Employee separations affect the majority of business functions, job
classes and geographies, with a majority of the reductions in North America and
Europe. The restructuring plans also include costs totaling $4,149,000
associated with the closure and consolidation of office space, principally in
North America and Europe.
<TABLE>
<CAPTION>
REMAINING
ACCRUAL AT
TOTAL YEAR-TO-DATE DECEMBER 31,
ACCRUED SPENDING 1999
---------- ------------ ------------
<S> <C> <C> <C>
Employee separations........................... $3,301,000 $(2,641,000) $ 660,000
Facility closure costs......................... 4,149,000 (1,521,000) 2,628,000
---------- ----------- ----------
Total accrued restructuring costs.... $7,450,000 $(4,162,000) $3,288,000
========== =========== ==========
</TABLE>
52
<PAGE> 54
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) NOTES PAYABLE
Notes Payable to Banks
During 1996, the Company entered into a loan and security agreement with a
bank that provides for a revolving facility and an equipment facility.
Borrowings of up to $2,000,000 are available under the revolving facility and
bear interest at the bank's prime rate plus 1/2%. Borrowings up to $1,000,000
at the bank's prime rate plus 1% can be made for the purchase or refinancing of
qualified equipment under the equipment facility. All outstanding borrowings
were repaid during 1997, and no balances under these facilities existed at
December 31, 1999 or 1998.
In connection with the loan and security agreement discussed above, the
Company issued to the bank warrants which were exercised during 1998 for the
purchase of 13,802 shares of Company common stock for $3.63 per share.
(6) INCOME TAX BENEFIT
The provision (benefit) for income taxes is comprised of the following for
the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Current --
Federal................................................. $ -- $ 2,958,100
State................................................... 500,000 697,300
Foreign................................................. 69,300 59,000
------------ -----------
Total current provision......................... 569,300 3,714,400
Deferred --
Federal................................................. (11,054,242) (4,763,900)
State................................................... (1,797,438) (874,000)
Foreign................................................. (1,699,000) --
Increase in valuation allowance........................... (4,000,000) 645,100
------------ -----------
Total deferred benefit.......................... (18,550,680) (4,992,800)
------------ -----------
Total income tax benefit........................ $(17,981,380) $(1,278,400)
============ ===========
</TABLE>
53
<PAGE> 55
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, PURCHASE STOCK-BASED 1999 DECEMBER 31,
1998 ACCOUNTING COMPENSATION PROVISION 1999
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Deferred tax assets:
Allowance for bad debts.... $ 132,200 $ -- $ -- $ 592,900 $ 725,100
Trademark costs............ 18,800 -- -- (18,800) --
Accrued vacation........... 126,800 -- -- 159,165 285,965
Tax credits carryforward... 1,168,600 -- -- 1,521,000 2,689,600
Net operating loss
carryforward............ 2,142,700 -- 9,182,000 9,860,900 21,185,600
Loss carryforwards
acquired................ -- 2,695,000 -- -- 2,695,000
Purchased intangibles...... 5,373,800 -- -- 926,400 6,300,200
Other...................... 5,400 -- -- 202,500 207,900
----------- ------------ ----------- ----------- ------------
Total deferred tax
assets........... 8,968,300 2,695,000 9,182,000 13,244,065 34,089,365
----------- ------------ ----------- ----------- ------------
Deferred tax liabilities:
Depreciation............... 24,500 -- -- (182,500) (158,000)
Developed software......... -- -- -- (385,000) (385,000)
Purchased intangibles...... -- (15,842,715) -- 1,874,115 (13,968,600)
----------- ------------ ----------- ----------- ------------
Total deferred tax
liabilities...... 24,500 (15,842,715) -- 1,306,615 (14,511,600)
----------- ------------ ----------- ----------- ------------
Total net deferred
tax assets....... 8,992,800 (13,147,715) 9,182,000 14,550,680 19,577,765
Valuation allowance.......... (4,000,000) (2,695,000) (9,182,000) 4,000,000 (11,877,000)
----------- ------------ ----------- ----------- ------------
Deferred tax assets, net..... $ 4,992,800 $(15,842,715) $ -- $18,550,680 $ 7,700,765
=========== ============ =========== =========== ============
</TABLE>
Presented in the balance sheets as:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net current deferred tax assets............................. $ -- $ 147,300
Net deferred tax assets, noncurrent......................... $7,700,765 $4,845,500
---------- ----------
Deferred tax assets, net of valuation allowance............. $7,700,765 $4,992,800
========== ==========
</TABLE>
The increase in deferred tax assets during 1999 results primarily from
operating losses, tax deductions arising from the exercise of stock options, a
more rapid amortization of the intangible assets of CAI and VIE than is allowed
for tax purposes, loss carryforwards acquired from Convoy and Microscript, and
increased tax credit carryforwards. As described in Note 3, deferred tax
liabilities were recognized during 1999 in purchase accounting for the lack of
tax basis in intangibles acquired, other than goodwill. Changes in the valuation
allowance are reflected in the table above. A portion of the valuation allowance
at December 31, 1999, $2,695,000, relates to the acquired tax loss carryforwards
of the businesses purchased. If these deferred tax assets are realized, the
benefit will reduce goodwill arising from the Convoy and Microscript
acquisitions rather than future income tax expense. The remainder of the
allowance, $9,182,000, relates to stock option compensation deductions included
in our net operating loss carryforwards. If and when that portion of the
valuation allowance is reversed, the benefit will be added to paid-in capital,
rather than being shown as a reduction of future income tax expense.
54
<PAGE> 56
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Based on a judgmental assessment of present circumstances, management
believes that net deferred tax assets in excess of the valuation allowance will,
more likely than not, be realized as a reduction of future income taxes payable.
If actual future operating results differ significantly from present
expectations, management's judgment in this regard may change. If future
increases in the valuation allowance are deemed necessary based on changed
circumstances, the income tax provisions of future periods may be adversely
affected.
As of December 31, 1999, the Company had net operating loss carryforwards
totaling approximately $57.8 million, including the acquired loss carryforwards.
These carryforwards expire beginning in 2010. The Company also has research and
development tax credit carryforwards of approximately $2.7 million expiring
beginning in 2010.
The income tax benefit calculated using the federal statutory rate is
different than the income tax benefit for financial reporting purposes as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Income tax benefit at the federal statutory rate.......... $(22,502,808) $(3,324,252)
State income tax benefit, net of federal tax effect....... (843,335) (116,575)
Foreign tax benefit at lower effective rate............... 1,831,085 --
Nondeductible expenses, including intangibles charged off,
but not amortizable for foreign tax purposes............ 10,079,314 1,713,919
Increase in tax credit carryforwards...................... (1,521,000) (624,830)
Change in valuation allowance............................. (4,000,000) 645,100
Other..................................................... (1,024,636) 369,238
------------ -----------
Net benefit for income taxes.............................. $(17,981,380) $(1,278,400)
============ ===========
</TABLE>
Income (loss) before provisions for income taxes reflected in the
accompanying consolidated statement of operations is attributable to domestic
and foreign sources as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
United States............................................. $(54,331,534) $(5,572,682)
United Kingdom............................................ (5,805,533) (4,148,575)
Switzerland............................................... (2,562,099) --
Hong Kong................................................. (630,701) --
Czech Republic............................................ (482,838) --
Other..................................................... (406,786) (13,152)
Eliminations.............................................. (74,247) (42,803)
------------ -----------
Consolidated.............................................. $(64,293,738) $(9,777,212)
============ ===========
</TABLE>
(7) STOCKHOLDERS' EQUITY
Public Offerings
In June 1997, the Company completed its initial public offering ("IPO") and
issued 6,348,000 shares of its common stock to the public at a price of $6.00
per share. The Company received approximately $34,226,000 of cash, net of
underwriting discounts, commissions and other offering costs. Upon completion of
the offering, all outstanding shares of Series A, Series B, and Series C
preferred stock (a total of 20,016,963 shares) were converted into 8,896,418
shares of common stock.
In May 1998, the Company sold 4,757,000 shares of its common stock to the
public at a price of $11.38 per share, which resulted in net proceeds to the
Company of $50,595,000. In December 1998, the Company sold
55
<PAGE> 57
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4,780,000 shares of its common stock to the public at a price of $34.00 per
share which resulted in net proceeds to the Company of $153,727,000.
Reverse Stock Split, Change in Authorized Shares and Authorization of Treasury
Share Repurchase
On May 16, 1997, the Company's Board of Directors approved the amendment
and restatement of the Company's certificate of incorporation to effect (i) a
two-for-nine reverse split of the Company's common stock, (ii) an increase in
the number of authorized shares of common stock to 45,000,000, and (iii) the
authorization of 2,000,000 shares of preferred stock undesignated as to series.
The amendment also established a classified board of directors divided into
three classes having initial terms of one, two and three years, respectively,
and subsequent terms of three years. The accompanying consolidated financial
statements have been retroactively adjusted with respect to common stock to
reflect the reverse stock split. Following approval of the stockholders of
certain amendments to the Company's certificate of incorporation, the Series A,
Series B, and Series C convertible preferred stock were converted into shares of
common stock on the basis of nine preferred shares for two common shares upon
closing of the IPO.
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.
In August 1999, the Company's Board of Directors authorized the repurchase
of up to 10% of NEON's outstanding shares of common stock over a 12-month
period. During August 1999, a total of 20,000 shares were repurchased by the
Company at a total cost of approximately $347,000.
Stock Split
On November 11, 1998, the Company's Board of Directors approved a
two-for-one stock split, payable in the form of a stock dividend to stockholders
of record as of November 23, 1998. All share and per share data in these
financial statements have been retroactively adjusted to reflect this stock
split.
Stock Options
The Company's 1995 Stock Option Plan (the "1995 Plan"), as amended,
provides for the grant of options to purchase up to an aggregate of 7,066,666
shares of common stock to employees and nonemployees; of which 266,666 shares
are available for grants to nonemployees and consultants. In May 1998, the
Company's Board of Directors approved an amendment to the 1995 Plan to include a
provision providing for automatic increases in the number of shares available
for grant each fiscal year. Incentive stock options granted to employees have an
exercise price equal to the fair market value of the underlying shares at the
date of grant. The exercise price of nonqualified options granted to employees
and consultants is determined by the Board of Directors. The term of all options
granted may not exceed 10 years; options granted through 1999 have a term of
five years. Options vest as determined by the Board, but generally vesting
occurs as to one-sixth of the shares after one year, an additional one-third
after two years and the remainder after three years from the date of grant. If
employment is terminated for any reason, vested options must be exercised within
60 days of termination or they are automatically canceled.
In 1998, the Company's Board of Directors approved the adoption of an
additional option plan for its employees (the "1998 Plan") and reserved
2,575,000 shares for issuance under the plan. The 1998 Plan provides for the
granting of nonstatutory stock options. The Board of Directors determines the
term of each award, the exercise price and conditions under which the option
becomes exercisable. The term of all options granted may not exceed 10 years;
options granted through 1998 have a term of five years. Generally, vesting
occurs as to one-fourth of the shares vest after one year, and an additional one
forty-eighth of the shares vest each month for the following three years.
56
<PAGE> 58
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As part of the acquisitions of Microscript, Convoy and CAI, all outstanding
stock options of those companies were exchanged for options to purchase, in the
aggregate, 251,178 shares of the Company's common stock.
Nonemployee Options
During 1996, the Company granted, from the 1995 Plan, stock options to
nonemployees for 35,158 shares at a weighted average exercise price of $3.01 per
share (range of $1.13 to $7.32) and recognized expense of $72,917 related to
these options based on the value of the services received. During 1999 and 1998,
888 and 23,154 options to purchase common stock were exercised at an average
exercise price of $2.25 and $3.12 per share, respectively. At December 31, 1999,
1,776 options remained outstanding and exercisable at a weighted average
exercise price of $5.20 per share. The accounting for these options is the same
under APB 25 and SFAS 123.
Director Plan
The Company adopted an option plan (the "Director Plan") during 1997 for
its nonemployee directors. The Director Plan provides for the automatic grant to
each nonemployee director, on the day following each annual shareholder meeting,
of an option to purchase 10,000 shares of the Company's common stock at an
exercise price equal to the fair market value of the common stock on the date of
grant. In addition, each new nonemployee director joining the Board of Directors
will automatically be granted an option to purchase 32,332 shares of the
Company's common stock at an exercise price equal to the fair market value at
date of grant. The Board of Directors has reserved an aggregate of 200,000
shares for issuance under the Director Plan, of which none remain available for
grant at December 31, 1999.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the "Purchase Plan") permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed 10% of an employee's eligible compensation or, for the initial plan
period (July 1, 1997 through January 31, 1998), 20% of eligible compensation, at
a price equal to 85% of the lower of the fair market value of the common stock
on the first or last day of the plan period. The Purchase Plan will terminate in
ten years. The Board of Directors has reserved an aggregate of 1,033,332 shares
of common stock for issuance under the Purchase Plan, and has approved a
provision for an automatic increase in the number of shares available for grant
each fiscal year. At December 31, 1999, 727,219 shares remain available under
the Purchase Plan.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options and similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
costs for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
that pro forma disclosures are made of net income or loss and net income or loss
per share, assuming the fair value based method of SFAS 123 had been applied.
The Company has elected to account for its stock-based compensation plans under
APB 25. Accordingly, for purposes of the pro forma disclosures presented below,
the Company has computed the fair values of all
57
<PAGE> 59
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options granted during 1999, 1998 and 1997 using the Black-Scholes pricing model
and the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate............................... 5.26% 5.10% 5.98%
Expected lives........................................ 3.0 years 3.0 years 3.0 years
Expected volatility................................... 78.0% 65.5% 49.5%
Expected dividend yield............................... 0% 0% 0%
</TABLE>
To estimate expected lives of options for this valuation, it was assumed
options will be exercised upon becoming fully vested at the end of three years.
For the periods ended December 31, 1996 and 1995, all options were assumed to
vest. During 1999, 1998 and 1997, a forfeiture rate of 15% was assumed on all
option grants. Cumulative compensation cost recognized in pro forma net income
or loss with respect to options that are forfeited prior to vesting is adjusted
as a reduction of pro forma compensation expense in the period of forfeiture.
Because the Company's common stock was not publicly traded at December 31, 1996,
the expected market volatility for 1996 was based on an average of five other
companies deemed to have characteristics similar to the Company for periods
subsequent to their IPO's. Actual volatility of the Company's common stock was
used to calculate the 1999, 1998 and 1997 information. Fair value computations
are highly sensitive to the volatility factor assumed in that the greater the
volatility, the higher the computed fair value of options granted.
The total fair value of options granted was computed to be approximately
$62,018,000, $17,206,000 and $5,575,000 for the years ended December 31, 1999,
1998 and 1997, respectively. These amounts are amortized ratably over the
vesting periods of the options. Pro forma stock-based compensation, net of the
effect of forfeitures, was $14,535,227, $4,208,404 and $1,138,781 for 1999, 1998
and 1997, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and pro forma net loss per
common share would have been reported as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Net loss --
As reported............................... $(46,312,358) $ (8,498,812) $(3,506,633)
Pro forma................................. $(60,847,585) $(12,707,216) $(4,645,414)
Pro forma net loss per common share --
As reported............................... $ (1.44) $ (0.38) $ (0.32)
Pro forma................................. $ (1.89) $ (0.57) $ (0.42)
</TABLE>
Weighted average shares used to calculate pro forma net loss per share were
determined as described in Note 2, except in applying the treasury stock method
to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.
58
<PAGE> 60
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's option plans for the years ended December 31,
1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................. 5,369,512 $ 7.40 4,204,050 $ 4.34 2,754,212 $2.46
Granted................... 3,411,561 30.66 2,327,781 13.39 2,463,142 5.85
Canceled.................. (803,390) 24.61 (314,057) 5.72 (763,580) 3.03
Exercised................. (1,383,319) 4.59 (848,262) 3.17 (249,724) 1.76
---------- ------ --------- ------ --------- -----
Outstanding at end of
year.................... 6,594,364 $19.14 5,369,512 $ 7.40 4,204,050 $4.34
========== ====== ========= ====== ========= =====
Exercisable at end of
year.................... 1,345,629 820,315 413,472
========== ========= =========
</TABLE>
The weighted average exercise prices and weighted average fair values of
options granted during 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ---------------------------- ----------------------------
NUMBER OF FAIR EXERCISE NUMBER OF FAIR EXERCISE NUMBER OF FAIR EXERCISE
OPTIONS VALUE PRICE OPTIONS VALUE PRICE OPTIONS VALUE PRICE
--------- ------ -------- --------- ----- -------- --------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise price less than market
price (assumed options of
acquired companies).......... 148,228 $39.78 $ 3.14 102,950 12.69 $ 6.58 -- -- --
Exercise price equal to market
price........................ 3,263,333 $17.20 $31.91 2,204,831 7.11 $15.04 2,163,142 $2.29 $5.82
Exercise price greater than
market price................. -- -- $ -- 20,000 7.95 $19.53 300,000 1.37 6.05
--------- --------- ---------
3,411,561 2,327,781 2,463,142
========= ========= =========
</TABLE>
The following table summarizes information about the employee stock options
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -----------------------
NUMBER OF WEIGHTED
OPTIONS AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1999 LIFE IN YEARS PRICE 1999 PRICE
- ------------------------ -------------- ------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
$ 0.86- 1.13................... 166,668 1.0 $ 1.12 165,878 $ 1.12
$ 2.07- 2.25................... 2,097 4.5 $ 2.15 1,617 $ 2.16
$ 3.13- 4.50................... 714,350 2.5 $ 4.13 491,158 $ 4.04
$ 4.75- 7.06................... 1,217,539 2.9 $ 6.04 418,916 $ 6.18
$ 7.19-10.25................... 143,123 4.7 $ 7.95 55,227 $ 7.71
$11.50-17.25................... 1,823,994 4.8 $14.64 118,498 $13.65
$17.38-24.44................... 878,195 4.5 $19.57 81,730 $18.73
$26.19-39.25................... 698,598 4.7 $36.59 9,807 $33.96
$39.31-58.63................... 774,750 4.3 $44.40 3,065 $42.54
$59.00-75.38................... 175,050 4.2 $61.35 0 $ 0
- ------------ --------- --- ------ --------- ------
$ 0.86-75.38 .................. 6,594,364 4.0 $19.14 1,345,629 $ 6.54
============ ========= === ====== ========= ======
</TABLE>
59
<PAGE> 61
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) RELATED PARTY TRANSACTIONS
During 1999, the Company funded approximately $19,666,000 toward a
short-term loan to Greenwood Plaza Partners, LLP ("GPP") for construction of two
buildings and a parking structure. GPP is principally owned by the Company's
Chairman/Chief Executive Officer. The Company is currently leasing the completed
portions of the buildings from GPP for use as its principal corporate
headquarters. The initial lease term is for 10 years at an annual rental amount
of approximately $941,000 and commenced upon occupancy of the building during
August 1999. This initial annual lease rate is subject to two scheduled lease
escalations in years six and nine at market rates. Total rent expense paid by
the Company in 1999 under this lease was $425,000.
In connection with this loan, the Company has committed to fund up to an
additional $11,774,000. The loan matures in April 2000 and bears interest at a
floating interest rate of 90-day LIBOR plus 2.05%. For 1999, the Company
recorded interest income of approximately $684,000 from this note. GPP intends
to obtain permanent financing from a third-party lender. The terms of the note
receivable are consistent with those that were in place with GPP's previous
construction financing lender and have been approved by the Company's Board of
Directors. The loan is secured by the project's assets, the project's rental
income and the personal guarantee of the Company's Chairman/Chief Executive
Officer.
A company owned by the Company's Chairman and Chief Executive Officer and
relatives provides air transportation service for the Company. Total expenses
incurred during the years 1999, 1998 and 1997 for services rendered by this
related party was approximately $354,000, $309,000 and $57,000, respectively.
On August 1, 1996, the Company entered into an employment agreement whereby
the Company issued a revolving line of credit to an employee. Under this
agreement, the employee may borrow up to $170,000, interest accrues at the prime
interest rate, and borrowings are secured by the employee's stock options in the
Company. The agreement matures on January 1, 2008, and interest is payable on a
quarterly basis. Amounts outstanding under this agreement at January 1, 1999
will be payable in equal monthly installments through the maturity date. The
amount outstanding under this agreement at December 31, 1999 and 1998 was
approximately $138,000 and $150,000, respectively.
(9) COMMITMENTS AND CONTINGENCIES
Cost of Software Licenses
Cost of software licenses in 1996 and 1997 represents royalties paid to a
customer under the terms of a software development agreement. The customer was
also a holder of the Company's Series C preferred stock. The agreement granted
the commercial rights to the developed software to the Company. The Company paid
the customer a royalty of 30% of all license, maintenance, support and upgrade
fees derived from the software on a quarterly basis, subject to a cumulative
maximum of $1,900,000. In 1997, the agreement was amended to adjust the royalty
percentage to 10%. Effective January 1, 1997, the Company began accruing the
royalty at 10% and continued at this rate until the cumulative maximum was
reached. Royalties for the year ended December 31, 1997 were approximately
$899,000 and were paid during 1997.
In May of 1998, with the roll-out of the jointly-developed MQIntegrator and
MQSeries Integrator products, the Company began paying royalties to IBM for
sales of these products made by the Company's direct sales force. In 1999 and
1998, a significant portion of cost of software licenses were attributable to
this royalty obligation. In 2000, the Company's royalty obligation to IBM is
expected to increase as sales of these products increase.
In August of 1998, the Company began accruing royalties to JP Morgan for
the sales of Business Event Manager. The Company's obligation under this
arrangement is subject to a cumulative maximum of $3,750,000. As of December 31,
1999, the Company has accrued approximately $138,000 toward this cumulative
maximum.
60
<PAGE> 62
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating Leases
The Company leases its administrative offices, research facilities and
certain equipment under noncancellable operating lease agreements. Rent expense
under these leases for the years ended December 31, 1999, 1998 and 1997 was
approximately $6,111,000, $2,494,000 and $650,000, respectively. The following
is a schedule of future minimum lease payments for the years ending December 31:
<TABLE>
<S> <C>
2000................................................... $ 6,050,000
2001................................................... 6,220,000
2002................................................... 5,833,000
2003................................................... 5,698,000
2004................................................... 4,916,000
Thereafter............................................. 27,789,000
-----------
$56,506,000
===========
</TABLE>
Known Claims
As of January 26, 2000, the Company has received no actual claims (except
as noted in Note 13 below) and currently does not believe that the notices it
has received will give rise to valid claims. It is impossible for the Company to
currently estimate the magnitude of the financial impact, if any, these existing
allegations might have on the Company's business, financial condition, or
results of operations.
(10) SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS
In the fourth quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
components of an enterprise for which separate financial information is
available and is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and assess
performance of the segments of an enterprise. The operating segments are managed
separately because each operating segment represents a strategic business unit
that offers different products and serves different markets.
The Company classifies its business activities into three operating
segments: The Americas, Europe and Asia Pacific, and Corporate and Other.
Information regarding the Company's operations in these three operating
segments, which are managed separately, are set forth below. For consolidated
results, the accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. There are no
significant intersegment sales or transfers between the segments for the periods
presented.
61
<PAGE> 63
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 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................... $71,876 $43,137 $ 11,211 $126,224 $43,603 $18,351 $ 3,860 $ 65,814
Total cost of revenues........... 16,870 16,456 6,975 40,301 7,077 3,488 4,043 14,607
------- ------- --------- -------- ------- ------- -------- --------
Gross profit..................... 55,006 26,681 4,236 85,923 36,526 14,863 (183) 51,207
Selling and marketing............ 25,810 16,464 12,588 54,862 11,765 5,976 4,200 21,942
Research and development......... -- -- 34,873 34,873 -- -- 15,839 15,839
General and administrative....... -- -- 15,620 15,620 -- -- 6,571 6,571
------- ------- --------- -------- ------- ------- -------- --------
Operating profit before
acquisition-related and
restructuring charges.......... 29,196 10,217 (58,845) (19,432) 24,761 8,887 (26,793) 6,855
Restructuring costs.............. -- -- 7,445 7,445 -- -- -- --
Acquisition-related charges...... -- -- 44,548 44,548 -- -- 19,376 19,376
------- ------- --------- -------- ------- ------- -------- --------
Operating profit (loss).......... 29,196 10,217 (110,838) (71,425) 24,761 8,887 (46,169) (12,521)
Other income and expense, net.... -- -- 7,132 7,132 -- -- 2,744 2,744
------- ------- --------- -------- ------- ------- -------- --------
Net income (loss) before tax..... 29,196 10,217 (103,706) (64,293) 24,761 8,887 (43,425) (9,777)
Tax.............................. -- -- 17,981 17,981 -- -- (1,278) (1,278)
------- ------- --------- -------- ------- ------- -------- --------
Net income (loss) after tax...... $29,196 $10,217 $ (85,725) $(46,312) $24,761 $ 8,887 $(42,147) $ (8,499)
======= ======= ========= ======== ======= ======= ======== ========
<CAPTION>
1997
-----------------------------------------
EUROPE CORPORATE
THE AND ASIA AND
AMERICAS PACIFIC OTHER TOTAL
-------- -------- --------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total revenues................... $16,304 $6,342 $ -- $22,646
Total cost of revenues........... 3,928 515 900 5,343
------- ------ -------- -------
Gross profit..................... 12,376 5,827 (900) 17,303
Selling and marketing............ 5,543 1,568 1,713 8,824
Research and development......... -- -- 7,730 7,730
General and administrative....... -- -- 2,334 2,334
------- ------ -------- -------
Operating profit before
acquisition-related and
restructuring charges.......... 6,833 4,259 (12,677) (1,585)
Restructuring costs.............. -- -- -- --
Acquisition-related charges...... -- -- 2,666 2,666
------- ------ -------- -------
Operating profit (loss).......... 6,833 4,259 (15,343) (4,251)
Other income and expense, net.... -- -- 745 745
------- ------ -------- -------
Net income (loss) before tax..... 6,833 4,259 (14,598) (3,506)
Tax.............................. -- -- -- --
------- ------ -------- -------
Net income (loss) after tax...... $ 6,833 $4,259 $(14,598) $(3,506)
======= ====== ======== =======
</TABLE>
62
<PAGE> 64
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's revenues from major customers (revenues in excess of 10% of
total revenues) are from entities involved in the banking and financial services
industries. The revenues from such customers as a percentage of total revenues
for each of the three years ended December 31 are as follows:
<TABLE>
<CAPTION>
CUSTOMER 1999 1998 1997
- -------- ---- ---- ----
<S> <C> <C> <C>
Company A................................................... 7% 10% --
Company B................................................... 1% 1% 14%
</TABLE>
(11) INTANGIBLES, NET, OTHER ASSETS, NET AND OTHER INCOME, NET
Intangibles, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
Goodwill, net............................................ $149,107,721 $44,821,536
Purchased software products, net......................... 21,275,233 7,055,113
Trademarks and other..................................... 182,868 --
------------ -----------
$170,565,822 $51,876,649
============ ===========
</TABLE>
Other assets, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Notes receivable............................................ $ 142,051 $ 155,000
Prepaids.................................................... -- 212,091
Deposits.................................................... 822,550 487,731
Equity investments.......................................... 351,786 387,500
Other....................................................... 65,967 127,961
---------- ----------
$1,382,354 $1,370,283
========== ==========
</TABLE>
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Payroll and payroll related expenses....................... $10,854,576 $4,687,183
Accrued restructuring charges.............................. 3,288,582 --
Accrued royalties.......................................... 379,012 303,499
Accrued business combination and deferred offering costs... 446,250 981,176
Accrued sales, use, vat and other taxes.................... 1,399,624 489,969
Accrued contractor costs................................... 879,237 443,071
Other...................................................... 1,864,694 952,028
----------- ----------
$19,111,975 $7,856,926
=========== ==========
</TABLE>
63
<PAGE> 65
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other income, net consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Interest income.................................. $6,837,314 $2,893,124 $867,156
Related party interest income.................... 683,732 -- --
Interest expense................................. (62,173) (46,675) (82,434)
Other............................................ (326,526) (102,703) (39,917)
---------- ---------- --------
$7,132,347 $2,743,746 $744,805
========== ========== ========
</TABLE>
64
<PAGE> 66
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables present unaudited quarterly consolidated statement of
operations data for each quarter in the two years ended December 31, 1999. This
data has been derived from unaudited consolidated financial statements totals
that have been prepared on the same basis as the audited consolidated financial
statements and include all adjustments (consisting only of normal recurring
adjustments) that Management considers necessary for a fair presentation of such
information. Management believes quarter-to-quarter comparisons of our financial
results should not be relied upon as an indication of future performance, and
operating results may fluctuate from quarter to quarter in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1999 1999 1999 1999
----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software licenses............... $ 20,905 $ 12,428 $ 8,866 $ 17,366
Software maintenance............ 5,301 4,077 3,702 3,097
Professional services........... 12,400 15,361 13,573 9,148
----------- ----------- ----------- -----------
Total revenues............ 38,606 31,866 26,141 29,611
----------- ----------- ----------- -----------
Cost of revenues:
Cost of software licenses....... 489 509 261 146
Cost of services and
maintenance................... 10,648 11,730 10,320 6,198
----------- ----------- ----------- -----------
Total cost of revenues.... 11,137 12,239 10,581 6,344
----------- ----------- ----------- -----------
Gross profit.................... 27,469 19,627 15,560 23,267
Operating expenses:
Sales and marketing............. 15,538 16,078 13,421 9,825
Research and development........ 9,259 9,404 9,322 6,888
General and administrative...... 4,041 4,623 3,890 3,066
Charge for acquired in-process
research and development...... -- -- -- --
Restructuring costs............. -- 7,445 -- --
Amortization of intangibles and
other acquisition-related
charges....................... 7,187 32,309 3,352 1,700
----------- ----------- ----------- -----------
Total operating
expenses................ 36,025 69,859 29,985 21,479
----------- ----------- ----------- -----------
Income (loss) from operations... (8,556) (50,232) (14,425) 1,788
Other income (expense), net..... 1,452 1,736 1,760 2,184
----------- ----------- ----------- -----------
Net income (loss) before
provision for income
taxes................... $ (7,104) $ (48,496) $ (12,665) $ 3,972
Income tax benefit............... 1,967 13,560 3,844 (1,390)
----------- ----------- ----------- -----------
Net income (loss)......... $ (5,137) $ (34,936) $ (8,821) $ 2,582
=========== =========== =========== ===========
Net income (loss) per share,
basic........................... $ (0.15) $ (1.06) $ (0.28) $ 0.08
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding, basic........ 33,861,328 33,008,293 31,488,578 30,632,010
=========== =========== =========== ===========
Net income (loss) per share,
diluted......................... $ (0.15) $ (1.06) $ (0.28) $ 0.08
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding, diluted...... 33,861,328 33,008,293 31,488,578 34,421,437
=========== =========== =========== ===========
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1998 1998 1998 1998
----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software licenses............... $ 16,422 $ 10,714 $ 7,268 $ 6,573
Software maintenance............ 2,408 1,244 840 420
Professional services........... 8,479 5,505 3,352 2,589
----------- ----------- ----------- -----------
Total revenues............ 27,309 17,463 11,460 9,582
----------- ----------- ----------- -----------
Cost of revenues:
Cost of software licenses....... 586 452 442 222
Cost of services and
maintenance................... 5,726 3,518 2,135 1,526
----------- ----------- ----------- -----------
Total cost of revenues.... 6,312 3,970 2,577 1,748
----------- ----------- ----------- -----------
Gross profit.................... 20,997 13,493 8,883 7,834
Operating expenses:
Sales and marketing............. 8,776 5,733 3,828 3,606
Research and development........ 6,064 4,169 2,915 2,691
General and administrative...... 2,608 1,804 1,168 992
Charge for acquired in-process
research and development...... -- 13,857 3,740 --
Restructuring costs............. -- -- -- --
Amortization of intangibles and
other acquisition-related
charges....................... 1,165 482 82 49
----------- ----------- ----------- -----------
Total operating
expenses................ 18,613 26,045 11,733 7,338
----------- ----------- ----------- -----------
Income (loss) from operations... 2,384 (12,552) (2,850) 496
Other income (expense), net..... 1,061 896 491 296
----------- ----------- ----------- -----------
Net income (loss) before
provision for income
taxes................... $ 3,445 $ (11,656) $ (2,359) $ 792
Income tax benefit............... (1,278) -- -- --
----------- ----------- ----------- -----------
Net income (loss)......... $ 4,723 $ (11,656) $ (2,359) $ 792
=========== =========== =========== ===========
Net income (loss) per share,
basic........................... $ 0.18 $ (0.43) $ (0.11) $ 0.04
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding, basic........ 26,165,444 27,003,514 20,677,012 18,309,284
=========== =========== =========== ===========
Net income (loss) per share,
diluted......................... $ 0.16 $ (0.43) $ (0.11) $ 0.04
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding, diluted...... 30,094,866 27,003,514 20,677,012 20,332,594
=========== =========== =========== ===========
</TABLE>
65
<PAGE> 67
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) LITIGATION
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. These
lawsuits have been consolidated into a single class action. 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 this class action lawsuit is without merit. The Company intends to deny
all material allegations and to defend itself vigorously. An adverse judgment or
settlement in this lawsuit 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.
66
<PAGE> 68
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 -- Share Purchase Agreement dated June 12, 1998 by and among
Registrant, MSB Consultants Limited and the shareholders
of MSB (which is incorporated herein by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K
filed June 26, 1998).
2.2 -- Share Acquisition Agreement dated September 30, 1998 by
and among Registrant and the shareholders of Century
Analysis Incorporated (which is incorporated herein by
reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed October 14, 1998).
3.1 -- Amended and Restated Certificate of Incorporation, as
amended through May 21, 1997 (which is incorporated herein
by reference to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-1, Registration No.
333-20189 ("Registrant's 1997 S-1")).
3.2 -- Amended and Restated Bylaws of Registrant, as amended
through February 2, 1998 (which is incorporated by
reference to Exhibit 3.2 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
3.3 -- Certificate of Determination of Rights, Preferences and
Privileges of Series A Preferred Stock (included in
Exhibit 4.1).
4.1 -- Form of Registrant's Common Stock Certificate (which is
incorporated herein by reference to Exhibit 4.1 to the
Registrant's 1997 S-1).
4.2 -- Preferred Shares Right Agreement, dated as of August 5,
1998 between the Registrant and Bank Boston N.A.,
including the Certificate of Designator, the Form of
Rights Certificate and the Summary of Rights attached
thereto as Exhibits A, B and C, respectively (which is
incorporated herein by reference to Exhibit 1 to the
Registrant's Registration Statement on Form 8-K/A
Amendment No. 1 filed August 17, 1998).
10.1* -- Form of Indemnification Agreement entered into by
Registrant with each of its directors and executive
officers (which is incorporated herein by reference to
Exhibit 10.1 to the Registrant's 1997 S-1).
10.2* -- 1995 Stock Option Plan, (amended and restated as of
January 3, 1997) and related agreements (which is
incorporated herein by reference to Exhibit 10.2 to the
Registrant's 1997 S-1).
10.3* -- 1997 Director Option Plan and related agreements (which
is incorporated herein by reference to Exhibit 10.3 to the
Registrant's 1997 S-1).
10.4* -- 1997 Employee Stock Purchase Plan and related agreements
(which is incorporated herein by reference to Exhibit 10.4
to the Registrant's 1997 S-1).
10.5* -- 1998 Nonstatutory Stock Option Plan and related
agreements (which is incorporated herein by reference to
Exhibit 10.5 to the Registrant's 1998 10-k).
10.6 -- Warrant to Purchase Stock issued to Silicon Valley Bank
dated April 12, 1996 (which is incorporated herein by
reference to Exhibit 10.5 to the Registrant's 1997 S-1).
10.7 -- Registration Rights Agreement between the Registrant and
certain parties named therein dated May 9, 1995 (which is
incorporated herein by reference to Exhibit 10.9 to the
Registrant's 1997 S-1).
10.8 -- Amendment No. 1 to Registration Rights Agreement between
the Registrant and certain parties named therein dated
September 20, 1995 (which is incorporated herein by
reference to Exhibit 10.10 to the Registrant's 1997 S-1).
</TABLE>
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.9 -- Amendment No. 2 to Registration Rights Agreement between
the Registrant and certain parties named therein dated
June 3, 1996 (which is incorporated herein by reference to
Exhibit 10.11 to the Registrant's 199 7 S-1).
10.10 -- Standard Commercial Lease between Greenwood Plaza
Partners, LLC and the Registrant dated July 22, 1999.
23.1 -- Consent of Arthur Andersen LLP.
24.1 -- Power of Attorney (which is included on page 36 herein).
27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Indicates management compensatory plan, contract or arrangement.
<PAGE> 1
EXHIBIT 10.10
STANDARD COMMERCIAL LEASE
BETWEEN
GREENWOOD PLAZA PARTNERS, LLC
AS LESSOR
AND
NEW ERA OF NETWORKS, INC.
AS LESSEE
ONE/TWO Greenwood Plaza Net Rent
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE/SECTION Page #
- --------------- ------
<S> <C> <C>
1.00 BASIC LEASE TERMS 1
1.01 Parties 1
1.02 Leased Premises 1
1.03 Term 1
1.04 Base Rent 1
1.05 Address for Payment of Base Rent 1
1.06 Permitted Use 1
1.07 Security Deposit 1
2.00 RENT 1
2.01 Base Rent 1
2.02 Taxes and Assessments 1
2.03 Utilities 2
2.04 Repairs and Maintenance 2
2.05 Triple Net Lease 2
2.06 Late Payment Charge 2
2.07 Increase in Insurance Premiums 2
2.08 Security Deposit 2
2.09 Holding Over 2
3.00 OCCUPANCY AND USE 3
3.01 Use 3
3.02 Signs 3
3.03 Compliance with Laws, Rules and Regulations 3
3.04 Warranty of Possession 3
3.05 Inspection 3
3.06 Acceptance of Leased Premises 3
3.07 Non-Smoking Building 3
4.00 UTILITIES AND SERVICE 3
4.01 Building Services 3
4.02 Theft or Burglary 3
4.03 Intentionally Deleted 3
4.04 Intentionally Deleted 3
4.05 Window Coverings 3
4.06 Intentionally Deleted 3
5.00 REPAIRS AND MAINTENANCE 4
5.01 Intentionally Deleted 4
5.02 Intentionally Deleted 4
5.03 Intentionally Deleted 4
5.04 Lessee Damages 4
6.00 ALTERATIONS AND IMPROVEMENTS 4
6.01 Lessor Improvements 4
6.02 Lessee Improvements 4
6.03 Mechanics Lien 4
7.00 CASUALTY AND INSURANCE 4
7.01 Substantial Destruction 4
7.02 Partial Destruction 4
7.03 Lessor's Insurance 4
7.04 Waiver of Subrogation 4
7.05 Hold Harmless 5
8.00 CONDEMNATION 5
8.01 Substantial Taking 5
8.02 Partial Taking 5
9.00 ASSIGNMENT OR SUBLEASE 5
9.01 Lessor Assignment 5
9.02 Lessee Assignment 5
9.03 Conditions of Assignment 5
9.04 Subordination 5
9.05 Estoppel Certificates 5
10.00 INTENTIONALLY DELETED 6
11.00 DEFAULT AND REMEDIES 6
11.01 Default by Lessee 6
11.02 Remedies for Lessee's Default 6
</TABLE>
ONE / TWO Greenwood Plaza Net Rent
<PAGE> 3
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<S> <C> <C>
12.00 INTENTIONALLY DELETED 6
13.00 HAZARDOUS MATERIALS 6
13.01 Hazardous Materials 6
14.00 DEFINITIONS 7
14.01 Abandon 7
14.02 Act of God or Force Majeure 7
14.03 Building 7
14.04 Commencement Date 7
14.05 Completion Date 7
14.06 Square Feet 7
15.00 LESSEE'S INSURANCE 7
15.01 Fire and Extended Coverage 7
15.02 General Liability and Property 7
15.03 Endorsements 7
16.00 MISCELLANEOUS 8
16.01 Waiver 8
16.02 Act of God 8
16.03 Attorney's Fees 8
16.04 Successors 8
16.05 Rent Tax 8
16.06 Captions 8
16.07 Notice 8
16.08 Submission of Lease 8
16.09 Corporate Authority 8
16.10 Severability 8
16.11 Lessor's Liability 8
16.12 Indemnity 8
16.13 Amendment 8
16.14 Limitation of Warranties 8
16.15 Governing Law 9
16.16 Parking 9
16.17 Entire Agreement 9
16.18 Renewal Option 9
16.19 Intentionally Deleted 9
Lessor/Lessee Signature Block 9
EXHIBITS
Exhibit "A" - The Leased Premises 10
Exhibit "A-1" - The Leased Premises Floor Plan 11
Exhibit "B" - Rules and Regulations 20
Exhibit "C" - Lessor Improvements 21
Exhibit "D" - Acceptance of Leased Premises/Tenant Estoppel Certificate 22
Exhibit "E" - Rent Schedule 23
</TABLE>
ONE / TWO Greenwood Plaza Net Rent
<PAGE> 4
STANDARD COMMERCIAL LEASE
ARTICLE 1.00 BASIC LEASE TERMS
1.01 PARTIES. This Standard Commercial Lease (this "Lease") made as of this
22nd day of July, 1999, is entered into by and between: Greenwood Plaza
Partners, LLC. (Lessor), and New Era of Networks, Inc., a Delaware corporation,
(Lessee)
1.02 LEASED PREMISES. In consideration of the rents, terms, provisions and
covenants of this Lease, Lessor hereby leases, lets and demises to Lessee the
following described premises ("Leased Premises") as further delineated on
Exhibit "A" attached hereto and by reference incorporated herein:
Approximately 64,443 RSF, on all three (3) floors
ONE Greenwood Plaza
6550 Greenwood Plaza Blvd.
Englewood, Colorado 80111
And
Approximately 134,634 RSF, on all five (5) floors, the Basement and Atrium
TWO Greenwood Plaza
6560 Greenwood Plaza Blvd.
Englewood, Colorado 80111
1.03 TERM. Subject to and upon the conditions set forth herein, the term of
this Lease shall commence on the "Commencement Date" (which Lessor shall use its
best efforts to establish as August 13, 1999 for the first floor of ONE
Greenwood, October 8, 1999 for the second floor of ONE Greenwood, November 19,
1999 for the third floor of One Greenwood and May 1, 2000 for all of Two
Greenwood.) The term of this Lease shall expire 120 months thereafter, May 1,
2010 (the "Expiration Date").
1.04 BASE RENT. Base rent is per the following rent schedule:
Years 1-5 $18.50 per rentable square foot per year
Years 6-8 $21.75 per rentable square foot per year
Years 9-10 $23.80 per rentable square foot per year
1.05 ADDRESS FOR PAYMENT OF BASE RENT.
Greenwood Plaza Partners, LLC
5000 South Quebec Street, Suite 605
Denver, Colorado 80237
1.06 PERMITTED USE. General Office
1.07 SECURITY DEPOSIT. Security deposit is $80,000.00.
The Security Deposit will be returned, together with interest earned
on it as long as no default, on the fifth anniversary of the
Commencement Date, so long as no event of default has occurred before
that date.
ARTICLE 2.00 RENT
2.01 BASE RENT. Lessee shall pay monthly as base rent during the term of
this Lease the sum of money set forth in Section 1.04 of this Lease, which
amount shall be payable to Lessor at the address shown above. One (1) monthly
installment of base rent for the first month's rent shall be due and payable on
the Commencement Date, and a like monthly installment shall be due and payable
as per the Rent Schedule - Exhibit E, on or before the first day of each
calendar month during the term of this Lease succeeding the Commencement Date;
provided,: (a) if the Commencement Date should be a date other than the first
day of a calendar month, the monthly base rent set forth above shall be prorated
to the end of that calendar month, and all succeeding installments of rent shall
be payable on or before the first day of each succeeding calendar month during
the term of this Lease; and (b) if the Completion Date for the additional
portions of the Leased Premises are other than those indicated on Exhibit E,
the monthly base rent shall be prorated accordingly. Lessee shall pay, as
additional rent, all other sums due under this Lease. All rent shall be paid
without demand, setoff, deduction or offsets, except as allowed by this Lease.
2.02 TAXES AND ASSESSMENTS. (a) Lessee agrees to pay (except for Property
Taxes for which the Lessor will escrow monthly from proceeds of Additional Rent
pursuant to Section 2.01), as they become due and payable, and before they
become delinquent, all valorem taxes, both general and special assessments and
governmental charges lawful levied or assessed against the leased premises, or
any part thereof, and upon all the improvements thereto during or with respect
to any period, all or any part of which is included in the term of this Lease or
any renewal or extension thereof and to submit to Lessor promptly evidence of
such payment. Lessee shall pay, in addition to the amount set forth in the
preceding sentence, all taxes and assessments which are not presently in effect,
but which may hereinafter be enacted and which would be chargeable to Lessee as
a consequence of the ownership of the leased premises if in fact Lessee were the
owner thereof in fee simple at the time of such assessment of levy. All such
taxes and assessments for, during or with respect to the year in which this
Lease is terminated, shall be prorated as of the date of termination. Lessee
shall also, in like manner, pay all and any interest and penalties thereon
occasioned by its own failure to pay such taxes and assessments as they become
due and payable. Lessor shall without delay transmit to Lessee all notices and
statements received by Lessor of taxes due or assessments made with respect to
leased premises.
(b) Notwithstanding anything herein to the contrary, Lessee shall not be
obligated to pay any income, franchise, corporation, estate,
inheritance, succession or transfer tax levied against Lessor.
ONE / TWO Greenwood Plaza Net Rent
1
<PAGE> 5
(b) Lessee shall have the right to contest or review by legal or other
proceedings, or in such other manner as Lessee may deem suitable, any
assessed valuation, real estate tax or assessment; provided that,
unless Lessee will have paid such tax or assessment under protest,
Lessee shall furnish to Lessor a surety bond or other security
satisfactory to Lessor securing the payment of such contested item or
items and all interest, penalty and cost in connection therewith upon
the final determination of such contest or review. Lessor shall, if so
requested by Lessee, join in any proceeding for contest or review or
such taxes or assessments, but the entire cost of such proceedings
(including any cost, expense or attorney's fees sustained by Lessor in
connection therewith) shall be borne by Lessee. Any amount already
paid by Lessee and subsequently recovered as the result of such
contest or review shall be for the account of Lessee.
(c) In the event Lessee fails to pay any taxes and assessments as required
by the paragraph. Lessor may at its option pay such taxes and
assessments and invoice Lessee for such amounts as additional rental
pursuant to Section 2.01.
2.03 UTILITIES. The cost and charges for all utility services, including
but not limited to gas, water, electricity, telephone, refuse or garbage
collection and sewerage shall be paid by Lessee. Lessor shall not be required to
pay for any utility service, upkeep or supplies in connection with the leased
premises.
2.04 REPAIRS AND MAINTENANCE. Unless otherwise expressly provided, (a)
Lessor shall not be required to make any improvements, replacements or repairs
of any kind or character to the leased premises of the improvements and
equipment situated thereon, during the term of the Lease.
(b) Throughout the term of the Lease, Lessee at its sole cost and expense,
shall take good care of the leased premises, all improvements,
equipment, appurtenances of the leased premises, alleyways,
passageways, parking areas, sidewalks, curbs and vaults adjoining the
leased premises, and shall at all times make all necessary repairs and
replacements thereto, whether structural or nonstructural. The term
repairs as used in this paragraph shall include, but not limited to,
all necessary or appropriate replacements and renewals, and all
necessary or appropriate alterations, additions and betterment's.
(c) The necessity for and adequacy of the repairs to the leased premises
made or required to be made pursuant to this paragraph shall be
measured by standards which are appropriate for first-class building
of similar construction and age containing similar facilities and
which are necessary to maintain the leased premises at all times
consistent with such standards. Lessee shall promptly (or immediately
in case of emergency), make such repairs, replacements, renewals or
additions, or perform such items of maintenance to the leased premises
as required in order to maintain the leased premises at the standard
required by the applicable provisions for this Lease.
(d) Lessor shall not be required to furnish any services or facilities or
to make any repairs in or about the leased premises, Lessee hereby
assuming the full and sole responsibility for all repairs to, and for
any condition, operation, maintenance and management of, the Leased
premises as of the date and during the term of this Lease.
(e) Lessee shall, at its own sole cost and expense, keep the sidewalks,
curbs, entrances, passageways, parking spaces and areas free of snow,
ice rubbish and obstructions.
2.05 TRIPLE NET INTENT. It is the purpose and intent of Lessor that the
rent provided in Section 2.01 shall be absolutely net to Lessor, and that Lessee
shall pay, without notice or demand, and without abatement, deduction or setoff
and save Lessor harmless from and against, all costs, taxes, insurance, exposure
of repair, and other charges and expenses and obligations of every kind and
nature whatsoever relating to the leased premises which may arise or become due
during the term of this Lease; and in the event of any nonpayment of any of the
foregoing, Lessor shall have, in addition to all other rights and remedies, all
of the rights and remedies provided for herein or by law in the case of
nonpayment of rent.
2.06 LATE PAYMENT CHARGE. Other remedies for nonpayment of rent
notwithstanding, if the monthly base rent and additional rent payment is not
received by Lessor on or before the first day of the month for which the rent is
due, or if any other payment due Lessor by Lessee is not received by Lessor on
or before the first day of the month next following the month in which Lessee
was invoiced, a late payment charge equal to the greater of $250.00 or five
percent (5%) of such past due amount shall become due and payable, after a 5 day
grace period, in addition to such amounts owed under this Lease.
2.07 INCREASE IN INSURANCE PREMIUMS. If an increase in any insurance
premiums paid by Lessor for the Building is caused by Lessee's use of the
Leased Premises in a manner other than as set forth in Section 1.06, or if
Lessee vacates the Leased Premises and causes an increase in such premiums, then
Lessee shall pay to Lessor, as additional rent, the amount of such increase to
Lessor.
2.08 SECURITY DEPOSIT. The security deposit set forth in Section 1.07 shall
be held by Lessor in a federally insured interest bearing account for the
performance of Lessee's covenants and obligations under this Lease, it being
expressly understood that the security deposit shall not be considered an
advance payment of rental or a measure of Lessor's damage in case of default
hereunder by Lessee. Upon the occurrence of any event of default by
Lessee or breach by Lessee of Lessee's covenants under this Lease, Lessee
forfeits any rights to the interest earned and Lessor may, from time to time,
without prejudice to any other remedy, use the security deposit to the extent
necessary to make good any arrears of base rent or additional rent, or to repair
any damage or injury, or pay any expense or liability incurred by Lessor as
a result of the event of default or breach of covenant, and so long as Lessee is
not in default hereunder, any remaining balance of the security deposit shall
be returned by Lessor to Lessee within thirty (30) days following the fifth
anniversary of the Commencement Date so long as no event of default has occurred
before that date or sooner termination of this Lease. If any portion of the
security deposit is so used or applied, Lessee shall, upon ten (10) days written
notice from Lessor, deposit with Lessor by cash or cashier's check an amount
sufficient to restore the security deposit to its original amount.
2.09 HOLDING OVER. In the event that Lessee does not vacate the Leased
Premises upon the Expiration Date or sooner termination of this Lease, Lessee
shall be a tenant at will for the holdover period and all of the terms and
provisions of this Lease shall be applicable during that period, except that
Lessee shall pay Lessor as rental for the period of such holdover an amount
equal to 150% of the base rent plus additional rent which would have been
payable by Lessee had the holdover period been a part of the original term of
this Lease. Lessee agrees to vacate and deliver the Leased Premises to
Lessor upon Lessee's receipt of notice from Lessor to vacate. The rental payable
during the holdover period shall be payable to Lessor on demand. No holding
over by Lessee, whether with or without the consent of Lessor, shall operate to
extend the term of this Lease.
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ARTICLE 3.00 OCCUPANCY AND USE
3.01 USE. Lessee warrants and represents to Lessor that the Leased
Premises shall be used and occupied only for the purpose as set forth in Section
1.06. Lessee shall occupy the Leased Premises, conduct its business and control
its agents, employees, contractors, invitees and visitors in such a manner
as is lawful, reputable. Lessor represents and warrants to Lessee that on the
Commencement Date, the Leased Premises will be in compliance with all current
laws, ordinances, orders, rules, regulations, and other governmental
requirements relating to the use, condition, and occupancy of the Leased
Premises, and all rules, orders, regulations and any body having jurisdiction
over the Leased Premises and the Building of which the Leased Premises are a
part. Lessee shall not permit any operation in the Leased Premises, which
interferes with Lessor in its management of the Building. Lessee shall neither
permit any waste on the Leased Premises nor allow the Leased Premises to be used
in any way, which would, in the opinion of Lessor, be extra, hazardous on
account of fire or which would in any way increase or render void the insurance
on the Building.
3.02 SIGNS. No sign of any type or description shall be erected, placed or
painted on the exterior of the Leased Premises or Building except those signs
submitted by Lessee to Lessor in writing and approved by Lessor in writing, and
which signs are in conformance with Lessor's sign criteria established for the
Building.
3.03 COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Lessee, at Lessee's sole
cost and expense, shall comply with all laws (and interpretations thereof),
ordinances, orders, rules and regulations, now in force or which may hereafter
be in force, of state, federal, municipal or other agencies or bodies having
jurisdiction over use, condition and occupancy of the Leased Premises. Lessee
will comply with the rules and regulations of the Building adopted by Lessor
which are set forth on Exhibit "B", attached to and incorporated by reference
into this Lease. Lessor shall have the right, at all times, to change and/or
amend the rules and regulations in any reasonable manner as may be deemed
advisable for the safety, care, cleanliness, preservation of good order and
operation or use of the Building or the Leased Premises. All changes and
amendments to the rules and regulations of the Building will be sent by Lessor
to Lessee in writing and shall thereafter be carried out and observed by Lessee.
3.04 WARRANTY OF POSSESSION. Lessor warrants that it has the right and
authority to execute this Lease, and Lessee, upon payment of the required rents
and subject to the terms, conditions, covenants and agreements contained in this
Lease, shall have possession of the Leased Premises during the full term of
this Lease as well as any extension or renewal thereof, if any. Lessor shall not
be responsible for the acts or omissions of any other lessee or third party that
may interfere with Lessee's use and enjoyment of the Leased Premises.
3.05 INSPECTION. Lessor shall have the right, at all reasonable hours, upon
reasonable requests, to enter the leased premises for the following reasons:
inspections, determining Lessee's use of the leased premises, or determining if
an act of default under this Lease has occurred.
3.06 ACCEPTANCE OF LEASED PREMISES: As each portion of the Leased Premises
is ready for occupation per the terms of 1.03, Lessee shall execute an
Acceptance of Premises/Tenant Estoppel Certificate essentially in the form
attached hereto as Exhibit "D" and by reference incorporated herein,
acknowledging that the Lessee has assumed possession of that portion of the
Leased Premises and confirming the Commencement Date/Completion Date for the
term of this Lease as described in Section 1.03. Said Acceptance of
Premises/Tenant Estoppel Certificate shall be executed by Lessee at the time
Lessee receives keys and assumes possession of each portion of the Leased
Premises. Lessor will construct the Leased Premises promptly based upon an
agreed construction schedule in a good and workmanlike manner and in
conformance with all applicable federal, state and local laws. Lessor warrants
the design, construction and materials of the Leased Premises and materials of
the Leased Premises and all components of the Leased Premises including,
without limitation, heating, ventilating, air conditioning, roof, mechanical,
electrical, and other systems for one (1) year after the date of Substantial
Completion (for each portion of the Leased Premises from the dates of the
Acceptance of Premises Tenant Estoppel Certificate), and will repair, restore,
renovate and replace as its cost with goods and material of equal quality in
any part of the Premises that is or becomes defective during that period.
Lessor will indemnify Lessee against and hold Lessee harmless from any material
loss, liability and expense (including reasonable attorney's fees and court
costs) arising out of a breach of this warranty or any material defect of
workmanship's, design or materials in that period.
3.07 NON-SMOKING BUILDING. The Lessor has adopted a policy of non-smoking
(for all employees, agents or invitees) in all confined spaces, common areas
or leased areas, within the Building. The Lessee, his employees, agents or
invitees, will identify certain designated areas outside the Building for
smoking. Lessee hereby acknowledges that such designated outdoor areas are
necessary and reasonable to prevent smoking by Lessee, Lessee's employees,
agents and invitees in unauthorized areas of the Building.
ARTICLE 4.00 UTILITIES AND SERVICE
4.01 BUILDING SERVICES. Lessor shall make available gas, water, electricity
and telephone to the Leased Premises during the term of this Lease.
4.02 THEFT OR BURGLARY. Lessor shall not be liable to Lessee for losses to
Lessee's property or personal injury caused by criminal acts or entry by persons
into the Leased Premises or the Building.
4.03 INTENTIONALLY DELETED.
4.04 INTENTIONALLY DELETED.
4.05 WINDOW COVERINGS. Lessor shall furnish and install window coverings on
all exterior windows in the Leased Premises so as to maintain a uniform
exterior appearance of the Building. Lessee shall not remove or replace these
window coverings or install any other window covering which would affect the
exterior appearance of the Building. Lessee may install lined or unlined over
draperies on the interior sides of the window coverings furnished by Lessor
for interior appearance or to reduce light transmission, provided such over
draperies do not affect the exterior appearance of the Building or affect the
operating of the Building's heating, ventilating and air conditioning systems.
4.06 INTENTIONALLY DELETED.
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ARTICLE 5.00 REPAIRS AND MAINTENANCE
5.01 INTENTIONALLY DELETED.
5.02 INTENTIONALLY DELETED.
5.03 INTENTIONALLY DELETED.
5.04 LESSEE DAMAGES. Lessee shall deliver the Leased Premises to Lessor in
as good condition as existed at the Commencement Date of this Lease, ordinary
wear and tear excepted. The cost and expense of any repairs necessary to
restore the condition of the Leased Premises shall be borne by Lessee.
ARTICLE 6.00 ALTERATIONS AND IMPROVEMENTS
6.01 LESSOR IMPROVEMENTS. If construction to the Leased Premises is to be
performed by Lessor prior to or during Lessee's occupancy, Lessor shall use
reasonable efforts to complete the construction of the improvements to the
Leased Premises, in accordance with plans and specifications agreed to by Lessor
and Lessee, which plans and specifications are attached hereto as Exhibit "C"
and are made a part of this Lease by reference. Within seven (7) days of receipt
of plans and specifications, Lessee shall execute a copy of the plans and
specifications and, if applicable, change orders setting forth the amount of any
costs to be borne by Lessee. In the event Lessee fails to execute the plans and
specifications and change order within the seven (7) day period, Lessor may, at
its sole option, declare this Lease cancelled or notify Lessee that the base
rent shall commence on the Completion Date even though the improvements to be
constructed by Lessor may not be complete. Any changes or modifications to the
approved plans and specifications shall be made and accepted by written change
order or agreement signed by both Lessor and Lessee and shall constitute an
amendment to this Lease.
6.02 LESSEE IMPROVEMENTS. Lessee shall not make or allow to be made any
alterations or physical additions in or to the Leased Premises without first
obtaining the prior written consent of Lessor, which consent may in the
reasonable judgement of Lessor be denied. Any alterations, physical additions or
improvements made by Lessee to the Leased Premises shall at once become the
property of Lessor and shall be surrendered to Lessor upon the Expiration Date
or sooner termination of this Lease; provided, however, that Lessor, at its
option, may require Lessee to remove any physical additions and/or repair any
alterations in order to restore the Leased Premises to the condition existing at
the Commencement Date, all costs of removal and/or alterations to be borne by
Lessee. This Section 6.02 shall not apply to moveable equipment or furniture
owned by Lessee, which may be removed by Lessee at the Expiration Date or sooner
termination of the term of this Lease only if Lessee is not then in default and
if such equipment and furniture are not then subject to any other rights, liens
and interest of Lessor.
6.03 MECHANICS LIEN. Lessee shall not permit any mechanic's or
materialman's lien(s) or other lien to be placed upon the Leased Premises or the
Building on account done by, for or at the request of Lessee and nothing in this
Lease shall be deemed or construed in any way as constituting the consent or
request of Lessor, express or implied, by inference or otherwise, to any person
for the performance of any labor or the furnishing of any materials to the
Leased Premises, or any part thereof, nor as giving Lessee any right, power, or
authority to contract for or permit the rendering of any services or the
furnishing of any materials that would give rise to any mechanic's,
materialman's or other lien against the Leased Premises or the Building. In the
event any such lien is attached to the Leased Premises or the Building, then, in
addition to any other right or remedy of Lessor, Lessor may, but shall not be
obligated to, obtain the release of or otherwise discharge the same. Lessee
shall pay any amount paid by Lessor for any of the aforesaid purposes to Lessor
on demand as additional rent. At Lessor's request, Lessee shall post a
completion bond or other financial security deemed adequate by Lessor to avoid
the potential for the placement of liens upon the property.
ARTICLE 7.00 CASUALTY AND INSURANCE
7.01. SUBSTANTIAL DESTRUCTION. If the Leased Premises should be totally
destroyed by fire or other casualty, or if the Leased Premises should be damaged
so that rebuilding cannot reasonably be completed within ninety (90) working
days after the date of written notification by Lessee to Lessor of the
destruction, this Lease shall terminate and Lessee shall be relieved of its
obligation to pay base rent and additional rent during the unexpired portion of
the Lease, effective as of the date of the substantial destruction.
7.02 PARTIAL DESTRUCTION. If the Leased Premises should be partially
damaged by fire or other casualty, and rebuilding or repairs can reasonably be
completed within ninety (90) working days from the date of written notification
by Lessee to Lessor of the destruction, this Lease shall not terminate, and
Lessor shall at its sole risk and expense proceed with reasonable diligence to
rebuild or repair the Building or other improvements to substantially the same
condition in which they existed prior to the damage. If the Leased Premises are
to be rebuilt or repaired and are untenantable in whole or in part following the
damage, the rentals payable under this Lease during the period for which the
Leased Premises are untenantable shall be adjusted to such an extent as may be
fair and reasonable under the circumstances.
7.03 LESSOR'S INSURANCE. Lessor shall maintain two million dollars in
liability insurance, however, Lessor shall not be obligated any way or manner to
insure any personal property (including, but not limited to, any furniture,
machinery, goods or supplies) of Lessee upon or within the Leased Premises, any
fixtures installed or paid for by Lessee upon or within the Leased Premises, or
any improvements which Lessee may construct on the Leased Premises.
7.04 WAIVER OF SUBROGATION. Anything in this Lease to the contrary
notwithstanding, Lessor and Lessee hereby waive and release each other of and
from any and all right of recovery, claim, action or cause of action, against
each other, their agents, officers and employees, for any loss or damage that
may occur to the Leased Premises, improvements to the Building of which the
Leased Premises are a part, or personal property within the Building, by reason
of fire or the elements, regardless of cause or origin, including negligence of
Lessor or Lessee and
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their agents, contractors, officers and employees. Lessor and Lessee agree
immediately to give their respective insurance companies which have issued
policies of insurance covering all risk of direct physical loss, written notice
of the terms of the mutual waivers contained in this Section 7.04, and to have
the insurance policies properly endorsed, if necessary, to prevent the
invalidation of the insurance coverage by reason of the mutual waivers.
7.05 HOLD HARMLESS. Lessor shall not be liable to Lessee's employees,
contractors, agents, invitees, licensees or visitors, or to any other person,
for an injury to person or damage to property on or about the Leased Premises
caused by any act or omission of Lessee, its agents, servants or employees, or
of any other person entering upon the Leased Premises under express or
implied invitation by Lessee, or caused by the improvements located on the
Leased Premises becoming out of repair, the failure or cessation of any service
provided by Lessor, or caused by leakage of gas, oil, water or steam or by
electricity emanating from the Leased Premises. Lessee agrees to indemnify and
hold harmless Lessor of and from any loss, attorney's fees, expenses or claims
arising out of any such damage or injury.
ARTICLE 8.00 CONDEMNATION
8.01 SUBSTANTIAL TAKING. If all or a substantial part of the Leased
Premises are taken for any public or quasi-public use under any governmental
law, ordinance or regulation, or by right of eminent domain or by purchase in
lieu thereof, and the taking would prevent or materially interfere with the use
of the Leased Premises for the use specified in Section 1.06, then this Lease
shall terminate and Lessee shall be relieved of its obligation to pay base rent
and additional rent during the unexpired portion of the term of this Lease
effective on the date physical possession is taken by the condemning authority.
Lessee shall have no claim to the condemnation award or proceeds in lieu
thereof.
8.02 PARTIAL TAKING. If a portion of the Leased Premises shall be taken for
any public or quasi-public use under any government law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
this Lease is not terminated as provided in Section 8.01, Lessor shall, at
Lessor's sole risk and expense, restore and reconstruct the Building and other
improvements on the Leased Premises to the extent necessary to make it
reasonably tenantable. The rental payable during the unexpired portion of the
term of this Lease shall be adjusted to such an extent as may be fair and
reasonable under the circumstances. Lessee shall have no claim to the
condemnation award or proceeds in lieu thereof.
ARTICLE 9.00 ASSIGNMENT OR SUBLEASE
9.01 LESSOR ASSIGNMENT. Lessor shall have the right to sell, transfer or
assign, in whole or in part, its rights and obligations under this Lease and in
the Building to a transferee who is capable of performing Lessor's obligations
under this Lease and assumes and agrees to do so. Any such sale, transfer or
assignment shall operate to release Lessor from any and all liabilities under
this Lease arising after the date of such sale, assignment or transfer.
9.02 LESSEE ASSIGNMENT. Lessee shall not assign, in whole or in part, this
Lease, or allow it to be assigned, in whole or in part, by operation of law or
otherwise (including without limitation by transfer of a majority interest of
stock, merger, or dissolution, which transfer of majority interest of stock,
merger or dissolution shall be deemed an assignment) or mortgage or pledge the
same, or sublet the Leased Premises, in whole or in part, without the prior
written consent of Lessor which will not be unreasonably withheld, conditioned
or delayed, and in no event shall any such assignment or sublease ever release
Lessee or any guarantor from any obligation or liability hereunder. No assignee
or sublease of the Leased Premises or any portion thereof may assign or sublet
the Leased Premises or any portion thereof without the prior written consent
of Lessor, which will not be unreasonably withheld, conditioned or delayed.
9.03 CONDITIONS OF ASSIGNMENT. If Lessee desires to assign or sublet all or
any part of the Leased Premises over 3,000 Rentable Square Feet, Lessee shall so
notify Lessor at least thirty (30) days in advance of the date on which Lessee
desires to make such assignment or sublease. Lessee shall submit to Lessor a
non-refundable processing fee of $300.00 for each such requests and shall
provide Lessor with a copy of the proposed assignment or sublease and such
reasonable information as Lessor might request concerning the proposed sublease
or assignee to allow Lessor to make informed judgments as to the financial
condition, reputation, operations and general desirability of the proposed
sublessee or assignee. Within fifteen (15) days after Lessor's receipt of
Lessee's proposed assignment or sublease and all required information concerning
the proposed assignee, to include a non-refundable processing fee, Lessor shall
have the following options: (1) to cancel this Lease as to the portion thereof
proposed to be assigned or subleased; (2) to consent to the proposed assignment
or sublease, (3) to refuse, in the exercise of its good faith and reasonable
judgement, to consent to the proposed assignment or sublease, which refusal
shall be deemed to have been exercised unless Lessor gives Lessee written notice
providing otherwise. Upon the occurrence of any event of default, if all or any
part of the Leased Premises are then assigned or sublet, Lessor, in addition to
any other remedies provided by this Lease or provided by law, may, at its
option, collect directly from the assignee or sublessee all rents becoming due
to Lessee by reason of the assignment or sublease, and Lessor shall have a
security interest in all properties on the Leased Premises to secure payment of
such sums. Any collection directly by Lessor from the assignee or sublessee
shall not be construed to constitute a novation or a release of Lessee or any
guarantor from the further performance of its obligations under this Lease.
9.04 SUBORDINATION. Lessee accepts this Lease subject and subordinate to
any recorded mortgage or deed of trust lien presently existing or hereafter
created upon the Building and to all existing recorded restrictions, covenants,
easements and agreements with respect to the Building. Lessor is hereby
irrevocably vested with full power and authority to subordinate Lessee's
interest under this Lease to any first mortgage or deed of trust lien hereafter
placed on the Leased Premises or the Building, so long as Lessee receives a
subordination, non-disturbance and attornment agreement in form and substance
reasonably satisfactory to it and Lessee shall, upon demand, execute additional
instruments subordinating this Lease as Lessor may require. If the interests of
Lessor under this Lease shall be transferred by reason of foreclosure or other
proceedings for enforcement of any first mortgage or deed of trust lien on the
Leased Premises or the Building, Lessee shall be bound to, the transferee
(sometimes hereinafter called the "Purchaser") at the option of the Purchaser,
under the terms, covenants and conditions of this Lease for the balance of the
term of this Lease remaining, including any extensions or renewals, with the
same force and effect as if the Purchaser were Lessor under this Lease, and, if
requested by the Purchaser, Lessee agrees to attorn to the Purchaser, including
the first mortgagee under any such mortgage if it be the Purchaser, as its
Lessor.
9.05 ESTOPPEL CERTIFICATES. Lessee shall furnish, from time to time, within
ten (10) days after receipt of a request from Lessor or Lessor's
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mortgagee, a statement certifying, if applicable, the following; Lessee is in
possession of the Leased Premises; the Leased Premises are acceptable; the Lease
is in full force and effect; the Lease is unmodified; Lessee claims no present
charge, lien or claim of offset against rentals; the base rent and additional
rent is paid for the current month, but is not prepaid for more than one (1)
month and will not be prepaid for more than one (1) month in advance; there is
no existing default by reason of some act or omission by Lessor; and such other
matters as may be reasonably required by Lessor or Lessor's mortgagee. Lessee's
failure to deliver such statement, in addition to being a default under this
Lease, shall be deemed to establish conclusively that this Lease is in full
force and effect except as declared by Lessor, that Lessor is not in default of
any of its obligations under this Lease, and that Lessor has not received more
than one (1) month's Base rent and additional rent in advance.
ARTICLE 10.00 INTENTIONALLY DELETED
ARTICLE 11.00 DEFAULT AND REMEDIES
11.01 DEFAULT BY LESSEE. The following shall be deemed to be events of
default by Lessee under this Lease: (1) Lessee shall fail to pay when due any
installment of base rent or additional rent or any other payment required
pursuant to this Lease; or (2) Lessee shall abandon or vacate all or any
substantial portion of the Leased Premises; or (3) Lessee shall materially fail
to comply with any term, provision or covenant of this Lease, other than the
payment of base rent and additional rent, and the failure is not cured within
ten (10) days after written notice to Lessee, unless the failure cannot
reasonably be cured within ten (10) days, in which event Lessee will not be in
default so long as it commences the cure within ten (10) days and diligently
pursues it to completion; or (4) Lessee shall file a petition or be adjudged
bankrupt or insolvent under any applicable federal or state bankruptcy or
insolvency law or admit that it cannot meet its financial obligations as they
become due; or a receiver or trustee shall be appointed for all or substantially
all of the assets of Lessee; or Lessee shall make a transfer in fraud of
creditors or shall make an assignment for the benefit of creditors; or (5)
Lessee shall do or permit to be done any act which results in a lien being filed
against the Leased Premises or the Building of which the Leased Premises are a
part and the lien is not released within thirty (30) days after Lessee received
notice of it.
11.02 REMEDIES FOR LESSEE'S DEFAULT. Upon the occurrence of any event of
default set forth in this Lease, Lessor shall have the option to pursue any one
(1) or more of the remedies set forth herein as proscribed by law: (1) Lessor
may enter upon and take possession of the Leased Premises, by picking or
changing locks if necessary, and lock out, expel or remove Lessee and any other
person who may be occupying all or any part of the Leased Premises, and relet
the Leased Premises on behalf of Lessee and receive the rental directly by
reason of the reletting Lessee agrees to pay Lessor on demand any deficiency
that may arise by reason of any reletting of the Leased Premises; further,
Lessee agrees to reimburse Lessor for any expenditures made by it in order to
relet the Leased Premises, including, but not limited to, leasing commissions,
remodeling and repair costs. (2) Lessor may enter upon the Leased Premises, by
picking or changing locks if necessary, and do whatever Lessee is obligated to
do under the terms of this Lease. Lessee shall reimburse Lessor on demand for
any reasonable and direct expenses which Lessor may incur in effecting
compliance with Lessee's obligations under this Lease; further, Lessee agrees
that Lessor, shall not be liable for any damages resulting to Lessee from
effecting compliance with Lessee's obligations under this Lease unless caused
by the negligence of Lessor, its agents, contractors, or designees. (3) Lessor
may terminate this Lease, in which event Lessee shall immediately surrender the
Leased Premises to Lessor, and if Lessee fails to surrender the Leased
Premises, Lessor may, without prejudice to any other remedy which it may have
for possession or arrearage in base rent and/or additional rent, enter upon and
take possession of the Leased Premises, by picking or changing locks if
necessary, and lock out, expel or remove Lessee and any other person who may be
occupying all or any part of the Leased Premises. Lessee agrees to pay on
demand the amount of all direct loss and damage which Lessor may suffer by
reason of the termination of this Lease under this Section 11.02, whether
through inability to relet the Leased Premises on satisfactory terms or
otherwise. A rent concession or waiver of base rent and/or additional rent
shall not relieve Lessee of any obligation to pay any other charge due and
payable under this Lease including without limitation any sum due under section
2.03. Notwithstanding anything contained in this Lease to the contrary, this
Lease may be terminated by Lessor only by mailing or delivering written notice
of such termination to Lessee, and no other act or omission of Lessor shall be
construed as a termination of this Lease.
ARTICLE 12.00 INTENTIONALLY DELETED
ARTICLE 13.00 HAZARDOUS MATERIALS
13.01 HAZARDOUS MATERIALS. In the event Hazardous Materials, as defined
below, are discovered to be present in, on, or below the Leased Premises or the
Building, Lessee shall not be required to pay any portion of the penalties,
fines or costs related to the presence of Toxic Materials and their removal,
including any costs incurred to comply with any and all rules, regulations,
codes, ordinances, statutes, and other requirements of any lawful governmental
authority respecting Hazardous Materials, pollution, harmful chemicals and other
materials which existed on or below the Leased Premises or the Building prior to
Lessee's occupancy of the Leased Premises; provided, however, if and to the
extent the presence of such Toxic Materials is directly or indirectly caused by
Lessee or its agents, employees or contractors, Lessee shall, at its sole cost
and expense, remove the same.
As used herein, the term "Hazardous Materials" shall include, but not be
limited to, any hazardous or toxic substance, material or waste which is or
becomes regulated by any local governmental authority, the United States
Government, or designated as a "hazardous substance" pursuant to Section 311 of
the Federal Water Pollution Control Act (33 U.S.C. (1317)), defined as a
"hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation
and Recovery Act, 42 U.S.C. (6901 et. seq.) (42 U.S.C. (6903)), or defined as a
"hazardous substance pursuant to Section 101 of the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. (9601 et. seq. (42 U.S.C.
9601)).
Lessee shall not (either with or without negligence) cause or permit the escape,
disposal or release of any biologically or chemically active or other hazardous
substances, or materials in the Leased Premises of the Building. Lessee shall
not allow the storage or use of such substances or materials in any manner not
sanctioned by law or by the highest standards prevailing in the industry for the
storage and use of such
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substances or materials, nor allow to be brought into the Building any such
materials or substances except to use in the ordinary course of Lessee's
business, and then only after prior written notice is given to Lessor of the
identity of such substances or materials. Without limitation, Hazardous
Materials and materials shall include those described in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. Section 9601 et. seq., the Resource Conservation and Recovery Act, as
amended, 42 U.S.C. Section 6901 et. seq., any applicable state or local laws and
the regulations adopted under these acts. If any lender or governmental agency
shall ever require testing to ascertain whether or not there has been any
release of Hazardous Materials, then the reasonable costs thereof shall be
reimbursed by Lessee to Lessor upon demand as additional charges if such
requirement applies to the Leased Premises. In addition, Lessee Shall execute
affidavits, representations and the like from time to time at Lessor's request
concerning Lessee's best knowledge and belief regarding the presence of
Hazardous Materials on the Leased Premises or the Building. In all events,
Lessee shall indemnify Lessor in the manner elsewhere provided in this Lease
from any release of Hazardous Materials on the Leased Premises or the Building
during the term of this Lease occurring, or elsewhere if caused by Lessee or
persons acting under Lessee. The within covenants shall survive the Expiration
Date or earlier termination of this Lease.
ARTICLE 14.00 DEFINITIONS
14.01 ABANDON. "Abandon" is defined as the vacating of all or a
substantial portion of the Leased Premises by Lessee, and whether or not Lessee
is in default of the rental payments due under this Lease.
14.02 ACT OF GOD OR FORCE MAJEURE. An "Act of God" or "Force Majeure" is
defined as strikes, lockouts, sit-downs, material or labor restrictions by any
governmental authority, unusual transportation delays, riots, floods, washouts,
explosions, earthquakes, fire, storms, weather (including wet grounds or
inclement weather which prevents construction), acts of the public enemy, wars,
insurrections and any other cause not reasonably within the control of Lessor
and which by the exercise of due diligence Lessor is unable, wholly or in part,
to prevent or overcome.
14.03 BUILDING. "Building" as used in this Lease means the Building
described in Section 1.02, including the Leased Premises and the land upon
which the Building is situated.
14.04 COMMENCEMENT DATE. "Commencement Date" shall be the date set forth in
Section 1.03. The Commencement Date shall constitute the commencement of the
term of this Lease for all purposes, except as provided in Section 2.01.
14.05 COMPLETION DATE. Each "Completion Date" shall be Substantial
Completion of each portion of the Leased Premises, Building, parking,
landscaping and all Building specifications as described in Exhibit C, subject
only to minor punch list items that do not interfere with Lessee's use of the
Leased Premises for its intended purpose, all of which shall be corrected by
Lessor, at its cost, within sixty (60) days after the Lessee's occupancy and
issuance of an unconditional certificate of occupancy. The cure of the punch
list items will be done with as little disturbance to Lessee as possible. Upon
termination or expiration of this Lease, except for ordinary wear and tear,
damages caused by Lessor or Lessor's representatives, condemnation, and damages,
Lessee shall deliver the Leased Premises back to Lessor in the then as is
condition. The Completion Date of the first floor of ONE Greenwood Plaza shall
constitute the Commencement Date of the term of this Lease for all purposes,
except as provided in Section 2.01. Lessor shall use its reasonable efforts to
establish the Completion Dates as the date set forth in Section 1.03. In the
event that the improvements to the several portions of the Leased Premises have
not in fact been completed as of those dates, Lessee shall notify Lessor in
writing of its objections. Lessor shall have a reasonable time after delivery of
the notice in which to take such corrective action as may be necessary and shall
notify Lessee in writing as soon as it deems such corrective action has been
completed and the applicable portion of the Leased Premises is ready for
occupancy. Upon completion of construction of each portion of the Leased
Premises as described in Section 1.03, Lessee and Lessor shall execute an
Acceptance of Leased Premises/Tenant Estoppel Certificate substantially in the
form of Exhibit "D", attached hereto and incorporated by reference herein.
14.06 SQUARE FEET. "Square Feet" or "Square Foot" as used in this Lease
includes the area contained within the Leased Premises together with a common
area percentage factor of the Leased Premises proportionate to the total area of
the Building.
ARTICLE 15.00 LESSEE'S INSURANCE
15.01 FIRE AND EXTENDED COVERAGE. Lessee shall, during the term of this
lease, maintain at its expense, a policy of fire and extended coverage
insurance, with vandalism and malicious mischief endorsements, on all of its
personal property, including removable trade fixtures located in the Leased
Premises and on additions, improvements and fixtures made or installed by Lessee
to or in the Leased Premises to the extent of at least ninety percent (90%) of
their full replacement value.
15.02 GENERAL LIABILITY AND PROPERTY. Lessee shall, during the term of
this lease, maintain at its expense a policy of commercial general liability
insurance insuring Lessee against liability arising out of the use occupancy or
maintenance of the Leased Premises with liability limits of not less than
$2,000,000 per occurrence, combined single limit for bodily injury and property
damage. In addition, Lessor shall maintain a policy of insurance with premiums
paid in advance, issued by and binding upon an insurance company with a Best
rating of A-9 or better, insuring the Building against all risk of direct
physical loss in an amount to at lease ninety percent (90%) of the full
replacement cost of the Building and its improvements as of the date of the
losses. The policy shall name Lessor as an additional insured.
15.03 ENDORSEMENTS. All insurance to be maintained by Lessee shall (a)
contain an endorsement requiring a minimum of thirty (30) days written notice
from the insurance company to Lessor before termination, cancellation of or
change in the policy; (b) be primary and non-contributing with respect to any
insurance maintained by Lessor; and (c) be issued by an insurance company
satisfactory to Lessor. Prior to the Commencement Date and at all times during
the term hereof, Lessee shall provide Lessor with satisfactory evidence that
Lessee has obtained the required insurance. Lessee shall increase the protection
afforded by the public liability and property damage insurance at Lessor's
reasonable request
ONE / TWO Greenwood Plaza Net Rent
7
<PAGE> 11
ARTICLE 16.00 MISCELLANEOUS
16.01 WAIVER. Failure of either party to declare an event of default
immediately upon its occurrence, or delay in taking any action in connection
with an event of default, shall not constitute a waiver of such default, but
either party shall have the right to declare the default at any time and take
such action as is lawful or authorized under this Lease. Pursuit of any one (1)
or more of the remedies set forth in Article 11.00 shall not preclude pursuit of
any one (1) or more of the other remedies provided elsewhere in this Lease or
provided by law, nor shall pursuit of any remedy constitute forfeiture or waiver
of any base rent or additional rent or damages accruing to Lessor by reason of
the violation of any of the terms, provisions or covenants of this Lease.
Failure by Lessor to enforce one or more of the remedies provided upon an event
of default by Lessee shall not be deemed or construed to constitute a waiver of
the default or of any other violation or breach of any of the terms, provisions
and covenants contained in this Lease.
16.02 ACT OF GOD. Neither party shall be required to perform any covenant
or obligation in this Lease, or be liable in damages to the other, so long as
the performance or non-performance of the covenant or obligation is delayed,
caused or prevented by an Act or God, Force Majeure or by the other party.
16.03 ATTORNEY'S FEES. In the event either party defaults in the
performance of any of the terms, covenants, agreements, or conditions contained
in this Lease, following a non-appealable judgement, the prevailing party shall
be entitled to recover from the losing party reasonable attorney's fees and cost
of suit.
16.04 SUCCESSORS. This Lease shall be binding upon and inure to the benefit
of Lessor and Lessee and their respective heirs, personal representatives,
successors and assigns. It is hereby covenanted and agreed that should Lessor's
interest in the Leased Premises cease to exist for any reason during the term
of this Lease, then notwithstanding the happening of such event, this Lease
nevertheless shall remain unimpaired and in full force and effect, and Lessee
hereunder agrees to attorn to the then owner of the Leased Premises.
16.05 RENT TAX. If applicable in the jurisdiction where the Leased Premises
is situated, Lessee shall pay and be liable for all rental, sales and use taxes
or other similar taxes, if any, levied or imposed by any city, state, county or
other governmental body having authority, such payments to be in addition to all
other payments required to be paid to Lessor by Lessee under the terms of this
Lease. Any such payment shall be paid concurrently with the payment of the base
rent, additional rent, or any other charge upon which the tax is based as set
forth above.
16.06 CAPTIONS. The captions appearing in this Lease are inserted only as a
matter of convenience and in no way define, limit, construe or describe the
scope or intent of any section.
16.07 NOTICE. All rent and other payments required to be made by Lessee
shall be payable to Lessor at the address set forth in section 1.05. All
payments required to be made by Lessor to Lessee shall be payable to Lessee at
the address set forth in this Section 16.07, or at any other address within the
United States as Lessee may specify from time to time by written notice. Any
notice or document required or permitted to be delivered by the terms of this
Lease shall be deemed to be delivered (whether or not actually received) when
deposited in the United States Mail, postage prepaid, certified mail, return
receipt requested, addressed to the parties at the respective addresses set
forth below:
<TABLE>
<CAPTION>
Lessor: Lessee:
------- -------
<S> <C>
Greenwood Plaza Partners, LLC New Era of Networks, Inc.
5000 South Quebec Street, Suite 605 6550 South Greenwood Plaza Blvd., Suite 100
Denver, Colorado 80237 Englewood, Colorado 80111
</TABLE>
16.08 SUBMISSION OF LEASE. Submission of this Lease to Lessee for signature
does not constitute a reservation of space or an option to lease. This Lease is
not effective until execution by, and delivery to, both Lessor and Lessee.
16.09 CORPORATE AUTHORITY. If Lessee executes this Lease as a corporation,
each of the persons executing this Lease on behalf of Lessee does hereby
personally represent and warrant that Lessee is a duly authorized and existing
corporation, that Lessee is qualified to do business in the state in which the
Leased Premises are located, that Lessee, as a corporation, has full right and
authority to enter into this Lease, and that each person signing on behalf of
Lessee, as a corporation, is authorized to do so. At Lessor request, Lessee
shall provide a Letter of Authorization or Corporate Resolution to execute the
lease.
16.10 SEVERABILITY. If any provision of this Lease or the application
thereof to any person or circumstances shall be invalid or unenforceable to any
extent, then the remainder of this Lease and the application of such provisions
to other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
16.11 LESSOR'S LIABILITY. If Lessor shall be in default under this Lease
and, if as a consequence of such default, Lessee shall recover a money judgment
against Lessor, such judgment shall be satisfied only out of the right, title
and interest of Lessor in the Building as the same may then be encumbered and
neither Lessor nor any person or entity comprising Lessor shall be liable for
any deficiency. In no event shall Lessee have the right to levy execution
against any property of Lessor nor any person or entity comprising Lessor, other
than Lessor's interest in the Building as herein expressly provided.
16.12 INDEMNITY. Except as disclosed in this Section 16.12, each party
hereto represents and warrants to the other that it has neither used or
consulted with any broker or similar person or entity in connection with this
Lease, and each party (the "Indemnitors") agrees to indemnify and hold harmless
the other party from and against any liability or claim, whether meritorious or
not, arising with respect to any broker or similar person from and against any
claims by such broker or entity for brokerage or similar commissions or fees
arising by reason of actions taken by the Indemnity. Lessor has engaged the
services of Mile High Properties, LLC ("Mile High") in connection with this
Lease and shall pay a commission to Mile High in accordance with the listing
agreement between Greenwood Plaza Partners, LLC and Mile High.
16.13 AMENDMENT. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED
EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LESSOR AND LESSEE.
16.14 LIMITATION OF WARRANTIES. LESSOR AND LESSEE EXPRESSLY AGREE THAT
THERE ARE AND SHALL BE NO IMPLIED
ONE / TWO Greenwood Plaza Net Rent
8
<PAGE> 12
WARRANTIES OF MERCHANTABILITY, HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
OF ANY OTHER KIND ARISING OUT OF THIS LEASE, AND THERE ARE NO WARRANTIES WHICH
EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS LEASE.
16.15 GOVERNING LAW. This Lease will be governed by the internal laws of
the State of Colorado.
16.16 PARKING. Lessor will provide Lessee with 45 unreserved surface
parking spaces on the Commencement Date of this Lease for the Lease term, and
720 unreserved parking spaces in the Parking Garage at the Completion Date for
the Second Floor of ONE Greenwood for the Lease term. Lessor shall provide and
Lessee shall pay a Monthly Parking Fee of $50.00 per month per space for 180
spaces in the Parking Garage, starting on October 8, 1999. An additional 90
unreserved parking spaces in the Parking Garage will be provided and added to
the Monthly Parking Fee on November 19, 1999 and the balance (450) of the
parking spaces the Parking Garage will be added to the Monthly Parking Fee on
May 1, 2000, The Monthly Parking Fee will increase at the same rate as the Base
Rent as defined in Section 1.04 and the Rent Schedule - Exhibit E. Lessor will
provide 50 parking spaces offsite from the Commencement Date until October 7,
1999.
Years 1-5 $50.00 per month per space
Years 6-8 $57.50 per month per space
Years 9-10 $62.70 per month per space
16.17 ENTIRE AGREEMENT. IT IS EXPRESSLY AGREED BY LESSEE, AS A MATERIAL
CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE
SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF
THE PARTIES; THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES,
UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE OR
TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN
WRITING IN THIS LEASE.
16.18 RENEWAL OPTION. Lessee is granted TWO (2) successive options to
extend the term of this Lease. Each option shall be for a term of five (5) years
(the Extension Terms), provided (a) there is no event of default at the time of
exercise of an option; and (b) Lessee gives written notice of its exercise of an
option at least one hundred eighty (180) days prior to the expiration of the
original lease term or first Extension Term. The Extension Term shall be upon
the same terms and conditions, except (i) Lessee shall have no further right of
renewal after the second Extension Term prescribed above; and (ii) the base rent
will be at the prevailing market rate.
16.19 INTENTIONALLY DELETED.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of
the day and year first above written.
LESSOR:
GREENWOOD PLAZA PARTNERS, LLC
By: /s/ [ILLEGIBLE]
---------------------------------------
Its:
---------------------------------------
LESSEE:
NEW ERA OF NETWORKS, INC.
By: /s/ LEONARD [ILLEGIBLE]
---------------------------------------
Its: Sr V.P. Counsel
---------------------------------------
9
<PAGE> 13
EXHIBIT A
THE LEASED PREMISES
ONE Greenwood Plaza
FIRST FLOOR, CONTAINING 21,819 RENTABLE SQUARE FEET.
SECOND FLOOR, CONTAINING 20,853 RENTABLE SQUARE FEET.
THIRD FLOOR, CONTAINING 21,771 RENTABLE SQUARE FEET.
TOTAL = 64,443
TWO GREENWOOD PLAZA
BASEMENT, CONTAINING 19,920 RENTABLE SQUARE FEET
FIRST FLOOR, CONTAINING 21,443 RENTABLE SQUARE FEET
SECOND FLOOR, CONTAINING 21,403 RENTABLE SQUARE FEET
THIRD FLOOR, CONTAINING 21,628 RENTABLE SQUARE FEET
FORTH FLOOR, CONTAINING 21,628 RENTABLE SQUARE FEET
FIFTH FLOOR, CONTAINING 21,628 RENTABLE SQUARE FEET
ATRIUM, CONTAINING 6,984 RENTABLE SQUARE FEET
TOTAL 134,634
ONE / TWO Greenwood Plaza Net Rent
10
<PAGE> 14
EXHIBIT - A-1
LEASED PREMISES FLOOR PLANS
ONE / TWO Greenwood Plaza Net Rent
11
<PAGE> 15
ONE GREENWOOD PLAZA
[FIRST FLOOR PLAN]
12
<PAGE> 16
ONE GREENWOOD PLAZA
[SECOND FLOOR PLAN]
13
<PAGE> 17
ONE GREENWOOD PLAZA
[THIRD FLOOR PLAN]
14
<PAGE> 18
TWO GREENWOOD PLAZA
[LOWER LEVEL LEASING PLAN]
15
<PAGE> 19
TWO GREENWOOD PLAZA
[FIRST LEVEL LEASING PLAN]
16
<PAGE> 20
TWO GREENWOOD PLAZA
[SECOND LEVEL LEASING PLAN]
17
<PAGE> 21
TWO GREENWOOD PLAZA
[THIRD - FIFTH LEVELS LEASING PLAN]
18
<PAGE> 22
TWO GREENWOOD PLAZA
[ATRIUM LEVEL LEASING PLAN]
19
<PAGE> 23
EXHIBIT "B"
RULES AND REGULATIONS
1. Lessor shall furnish Lessee four (4) keys to the Leased Premises without
charge. Additional keys shall be furnished at the Lessee expense, Lessee shall
not change locks on exterior doors or install additional locks on exterior doors
to the Leased Premises and the Building without the prior written consent of
Lessor and will provide Lessor with a Grand Master Key to the Leased Premises.
All keys to the Leased Premises and the Building shall be surrendered to Lessor
upon the Expiration Date or sooner termination of this Lease.
2. Intentionally Deleted.
3. Lessee shall not at any time occupy any part of the Leased Premises or
Building as sleeping or lodging quarters.
4. Lessee shall not place, install or operate on the Leased Premises or in
any part of the Building any engine, or machinery, or conduct mechanical
operations or cook thereon or therein, or place or use in or about the Leased
Premises or Building any explosives, gasoline, kerosene oil, acids, caustics, or
any flammable, explosive or hazardous material without written consent of
Lessor.
5. Lessor shall not be responsible for lost or stolen personal property,
equipment, money or jewelry from the Leased Premises or the Building regardless
of whether such loss occurs when the Leased Premises or the Building is locked
against entry or not.
6. No dogs (except working dogs), cats, fowl, or other animals shall be
brought into or kept in or about the Leased Premises or Building.
7. Intentionally Deleted.
8. None of the parking, plaza, recreation or lawn areas, entries, passages,
doors, elevators, hallways or stairways shall be blocked or obstructed or any
rubbish, litter, trash, or material of any nature placed, emptied or thrown into
these areas or such area used by Lessee's agents, employees or invitees at any
time for purposes inconsistent with their designation by Lessor.
9. The water closets and other water fixtures in the Building shall not be
used for any purpose other than those for which they were constructed, and any
damage resulting to them from misuse or by the defacing or injury of any part of
the Building shall be borne by the person who shall occasion it. No person
shall waste water by interfering with the faucets or otherwise.
10. Intentionally Deleted.
11. Nothing shall be thrown out of the windows of the Building or down the
stairways or other passages to the Building.
12. Intentionally Deleted.
13. Intentionally Deleted.
14. Intentionally Deleted.
15. Lessor shall not be liable for any damages from the stoppage of
elevators for necessary or desirable repairs or improvements or delays of any
sort or duration in connection with the elevator service.
16. Lessee shall not install floor covering within the Leased Premises
without the prior written approval of Lessor. The use of cement or other similar
adhesive materials not easily removed with water is expressly prohibited.
17. Lessee agrees to cooperate with and assist Lessor in the prevention of
canvassing, soliciting and peddling within the Building.
18. Intentionally Deleted.
19. It is Lessor's desire to maintain the Building with the highest
standard of dignity and good taste consistent with comfort and convenience for
Lessee.
20. Lessor reserves the right to make such other and further reasonable
rules and regulations as in Lessor's judgment may from time to time be necessary
for the safety, care and cleanliness of the Building, and for the preservation
of good order therein.
ONE / TWO Greenwood Plaza Net Rent
20
<PAGE> 24
EXHIBIT "C"
LESSOR IMPROVEMENTS
Lessor will provide Lessee with a tenant finish allowance $23.00 per rentable
square foot for slab to slab tenant finish costs. This finish allowance will
include all costs associated with the Lessee's Work including, but not limited
to, space planning, construction drawings, construction costs (including all
fees and permits), architectural and engineering fees and reasonable
construction management fees. In the event the cost of the remodel exceeds this
allowance, any additional amounts will be paid by Lessee.
ONE / TWO Greenwood Plaza Net Rent
21
<PAGE> 25
EXHIBIT "D"
ACCEPTANCE OF LEASED PREMISES/TENANT ESTOPPEL CERTIFICATE
This acceptance of Leased Premises/Tenant Estoppel Certificate (this
"Agreement") is entered into as of this _____________ day of ________________,
_______, by and between _____________________ ("Lessor") and
____________________ ("Lessee") and forms an integral and inseparable part of
the Standard Commercial Lease dated __________________, 19__ by and between the
parties (the "Lease"). Notwithstanding anything to the contrary contained within
the Lease, the parties hereto confirm and agree as follows:
1. Lessor delivered and Lessee accepted possession of the ______ floor(s)
of ONE / TWO Greenwood Plaza on ____________________, ____.
2. The Commencement Date and the Completion Date for the first floor of ONE
Greenwood Plaza are/have been hereby established as _____________________, 19__,
and the Expiration Date is hereby established as __________________, _____.
3. The Completion Date for the portion of the Leased Premises described in
Section 1 above is hereby established as _____________________, ____________.
4. The improvements to the portion of the Leased Premises described in
Section 1 above to be constructed by Lessor have been satisfactorily completed
and accepted by Lessee.
5. Lessee hereby acknowledges that it has received ____________ (_____)
keys for the Leased Premises and the Building from Lessor as of
________________, 19_____.
LESSOR:
GREENWOOD PLAZA PARTNERS, LLC
By:
----------------------------
Its:
----------------------------
LESSEE:
NEW ERA OF NETWORKS, INC.
By:
----------------------------
Its:
----------------------------
ONE / TWO Greenwood Plaza Net Rent
22
<PAGE> 26
EXHIBIT "E"
RENT SCHEDULE
ONE / TWO Greenwood Plaza Net Rent
23
<PAGE> 27
GREENWOOD PLAZA PARTNERS, LLC.
500 SOUTH QUEBEC STREET, SUITE 650
DENVER, COLORADO 80237
NEON RENT SCHEDULE
ONE & TWO GREENWOOD PLAZA
6550 & 6560 SOUTH GREENWOOD PLAZA BLVD.
ENGLEWOOD, COLORADO 80111
<TABLE>
<CAPTION>
BASE NET PARKING RATE NUMBER OF TOTAL
TERM FLOORS RENTABLE AREA RENT (RSF) MONTHLY RENT PER SPACE SPACES PARKING RENT MONTHLY RENT
- ---- ------- ------------- ---------- ------------ ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
8/13/99 to 8/31/99 1 21,819 $18.50 $ 33,637.63 $50.00 0 $0.00 $ 20,616.61
9/1/99 to 9/30/99 1 21,819 $18.50 $ 33,637.63 $50.00 0 $0.00 $ 33,637.63
10/1/99 to 10/31/99 1 21,819 $18.50 $ 33,637.63 $50.00 0 $0.00 $ 33,637.63
10/8/99 to 10/31/99 2 20,853 $18.50 $ 32,148.38 $50.00 180 $9,000.00 $ 31,856.81
Sub-Total 10/31/99 $ 65,494.43
11/1/99 to 11/30/99 1&2 42,672 $18.50 $ 65,786.00 $50.00 180 $9,000.00 $ 74,786.00
11/19/99 to 11/30/99 3 21,771 $18.50 $ 33,563.63 $50.00 90 $4,500.00 $ 15,225.45
Sub-Total 11/30/99 $ 90,011.45
12/1/99 to 12/31/99 1&2&3 64,443 $18.50 $ 99,349.63 $50.00 270 $13,500.00 $112,849.63
1/1/00 to 4/30/00 1&2&3 64,443 $18.50 $ 99,349.63 $50.00 270 $13,500.00 $112,849.63
5/1/00 to 4/30/05 1-3&1-5 199,077 $18.50 $306,910.38 $50.00 720 $36,000.00 $342,910.38
5/1/05 to 4/30/08 1-3&1-5 199,077 $21.75 $360,827.06 $57.50 720 $41,400.00 $402,227.06
5/1/08 to 4/30/10 1-3&1-5 199,077 $23.80 $394,836.05 $62.70 720 $45,144.00 $439,980.05
</TABLE>
GENERAL NOTES
1. Property Taxes will be escrowed on a monthly basis in the form of
Additional Rent. Attached to this Rental Schedule is the Estimated Property
Taxes for 1999 - ONE Greenwood Plaza.
NEON RENT SCHEDULE THE WELLS PARTNERSHIP RUN DATE 7/15/99
24
<PAGE> 28
THE WELLS PARTNERSHIP, INC.
511 SIXTEENTH STREET SUITE 210
DENVER, COLORADO 80202
GREENWOOD PLAZA PARTNERS, LLC
ESTIMATED PROPERTY TAXES - ONE GREENWOOD PLAZA - 1999
<TABLE>
<CAPTION>
MONTH OPP NEON TOTAL
--------- ---------- ---------- ----------
<S> <C> <C> <C>
01-Jan-99 $ 7,158.33 $ 0.00 $ 7,158.33
01-Feb-99 $ 7,158.33 $ 0.00 $ 7,158.33
01-Mar-99 $ 7,158.33 $ 0.00 $ 7,158.33
01-Apr-99 $ 7,158.33 $ 0.00 $ 7,158.33
01-May-99 $ 7,158.33 $ 0.00 $ 7,158.33
01-Jun-99 $ 7.158.33 $ 0.00 $ 7,158.33
01-Jul-99 $ 7,158.33 $ 0.00 $ 7,158.33
01-Aug-99 $ 5,700.52 $ 1,457.81 $ 7,158.33
01-Sep-99 $ 4,772.02 $ 2,386.31 $ 7,158.33
01-Oct-99 $ 2,911.78 $ 4,246.55 $ 7,158.33
01-Nov-99 $ 1,417.34 $ 5,740.99 $ 7,158.33
01-Dec-99 $ 0.00 $ 7,158.33 $ 7,158.33
---------- ---------- ----------
Total $64.909.97 $20,989.99 $85,899.96
========== ========== ==========
</TABLE>
PROPERTY TAX - 1999 RUN DATE 7/15/99
25
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our Report dated January 26, 2000 included in this Form 10-K
into the Registration Statements on Form S-8 (Nos. 333-33573, 333-64013 and
333-68173) of New Era of Networks, Inc.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 27, 2000.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S DECEMBER 31, 1999 AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 49,796,989
<SECURITIES> 45,017,991
<RECEIVABLES> 38,796,513
<ALLOWANCES> 1,885,000
<INVENTORY> 0
<CURRENT-ASSETS> 125,021,070
<PP&E> 24,641,658
<DEPRECIATION> 7,126,379
<TOTAL-ASSETS> 359,520,495
<CURRENT-LIABILITIES> 38,800,700
<BONDS> 0
0
0
<COMMON> 3,405
<OTHER-SE> 320,637,953
<TOTAL-LIABILITY-AND-EQUITY> 359,520,495
<SALES> 126,224,152
<TOTAL-REVENUES> 126,224,152
<CGS> 40,301,097
<TOTAL-COSTS> 40,301,097
<OTHER-EXPENSES> 157,349,140
<LOSS-PROVISION> (71,426,085)
<INTEREST-EXPENSE> 62,173
<INCOME-PRETAX> 0
<INCOME-TAX> 17,981,380
<INCOME-CONTINUING> (46,312,358)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46,312,358)
<EPS-BASIC> ($1.44)
<EPS-DILUTED> ($1.44)
</TABLE>
