<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------
COMMISSION FILE NUMBER 000-22043
----------
NEW ERA OF NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 84-1234845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE GREENWOOD PLAZA
6550 GREENWOOD PLAZA BOULEVARD
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)
Registrant's Telephone Number, including area code: (303) 694-3933
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past (90) days. Yes [X] No [ ]
The number of shares of the issuer's Common Stock outstanding as of July
31, 2000 was 35,896,804.
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INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements .............................................. 3
Consolidated Balance Sheets ....................................... 3
Consolidated Statements of Operations ............................. 4
Consolidated Statements of Cash Flows ............................. 5
Notes to Consolidated Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................... 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ....................................................... 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 24
Item 2. Changes in Securities ............................................. 24
Item 3. Defaults Upon Senior Securities ................................... 24
Item 4. Submission of Matters to a Vote of Security Holders ............... 24
Item 5. Other Information ................................................. 25
Item 6. Exhibits and Reports on Form 8-K .................................. 25
Signatures ................................................................ 26
</TABLE>
2
<PAGE> 3
NEW ERA OF NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 24,437,011 $ 49,796,989
Restricted cash .......................................... 1,265,000 --
Short-term investments in marketable securities .......... 13,777,854 7,682,786
Accounts receivable, net of allowance for uncollectible
accounts of $4,024,000 and $1,885,000, respectively ... 51,831,168 38,492,822
Unbilled revenue ......................................... 2,272,834 3,251,144
Prepaid expenses and other ............................... 6,971,385 6,131,194
Note receivable--related party ........................... -- 19,666,135
------------- -------------
Total current assets ............................. 100,555,252 125,021,070
------------- -------------
Property and equipment:
Computer equipment and software .......................... 23,327,602 17,023,054
Furniture, fixtures and equipment ........................ 5,085,699 4,345,324
Leasehold improvements ................................... 5,030,704 3,273,280
------------- -------------
33,444,005 24,641,658
Less--accumulated depreciation ........................... (10,559,843) (7,126,379)
------------- -------------
Property and equipment, net .............................. 22,884,162 17,515,279
Long-term investments in marketable securities ............. 35,365,194 37,335,205
Restricted long-term investments in marketable securities .. 7,000,000 --
Intangible assets, net ..................................... 207,508,964 170,565,822
Deferred income taxes, net ................................. 10,646,510 7,700,765
Other assets, net .......................................... 1,052,941 1,382,354
------------- -------------
Total assets ..................................... $ 385,013,023 $ 359,520,495
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 6,569,796 $ 6,118,010
Accrued liabilities ...................................... 17,528,769 19,111,975
Current portion of deferred revenue ...................... 19,030,897 13,570,715
------------- -------------
Total current liabilities ........................ 43,129,462 38,800,700
Deferred revenue ........................................... 78,437 78,437
------------- -------------
Total liabilities ................................ 43,207,899 38,879,137
------------- -------------
Stockholders' equity:
Common stock, $.0001 par value, 200,000,000 shares
authorized; 35,898,556 and 34,051,573 shares issued
and outstanding, respectively ......................... 3,586 3,405
Additional paid-in capital ............................... 424,866,764 389,199,732
Accumulated deficit ...................................... (78,562,061) (66,329,148)
Accumulated other comprehensive loss ..................... (2,824,996) (1,885,256)
Treasury stock, 60,000 and 20,000 shares of common
stock, at cost, respectively .......................... (1,506,085) (347,375)
Deferred stock-based compensation ........................ (172,084) --
------------- -------------
Total stockholders' equity ....................... 341,805,124 320,641,358
------------- -------------
Total liabilities and stockholders' equity ....... $ 385,013,023 $ 359,520,495
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software licenses ...................... $ 28,359,481 $ 8,866,086 $ 52,433,395 $ 26,232,421
Software maintenance ................... 5,585,398 3,702,207 10,849,654 6,798,726
Professional services .................. 16,973,591 13,572,927 29,727,237 22,720,804
------------ ------------ ------------ ------------
Total revenues ................. 50,918,470 26,141,220 93,010,286 55,751,951
------------ ------------ ------------ ------------
Cost of revenues:
Cost of software licenses .............. 530,495 261,446 1,085,212 407,114
Cost of software maintenance and
professional services ................ 13,435,594 10,319,242 23,504,869 16,518,028
------------ ------------ ------------ ------------
Total cost of revenues ......... 13,966,089 10,580,688 24,590,081 16,925,142
------------ ------------ ------------ ------------
Gross profit ............................. 36,952,381 15,560,532 68,420,205 38,826,809
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing .................... 19,420,327 13,420,959 36,896,858 23,245,915
Research and development ............... 11,011,122 9,322,615 20,378,345 16,210,437
General and administrative ............. 4,110,553 3,889,954 8,081,132 6,955,579
Stock-based compensation
and related payroll taxes ............. 51,223 -- 612,219 --
Amortization of intangibles and
other acquisition-related charges .... 9,499,307 3,352,531 16,939,212 5,052,297
------------ ------------ ------------ ------------
Total operating expenses ....... 44,092,532 29,986,059 82,907,766 51,464,228
------------ ------------ ------------ ------------
Loss from operations ..................... (7,140,151) (14,425,527) (14,487,561) (12,637,419)
Other income, net ........................ 1,019,357 1,758,849 2,659,649 3,943,212
------------ ------------ ------------ ------------
Loss before income taxes ................. (6,120,794) (12,666,678) (11,827,912) (8,694,207)
Benefit (provision) from income taxes .... (204,252) 3,844,015 (405,001) 2,453,650
------------ ------------ ------------ ------------
Net loss ................................. $ (6,325,046) $ (8,822,663) $(12,232,913) $ (6,240,557)
============ ============ ============ ============
Net loss per common share, basic
and diluted ............................ $ (0.18) $ (0.28) $ (0.35) $ (0.20)
============ ============ ============ ============
Weighted average shares of common
stock outstanding, basic and diluted ... 35,614,364 31,488,578 35,163,335 31,060,294
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (12,232,913) $ (6,240,557)
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization ......................... 20,070,059 6,949,685
Minority interest share of losses ..................... -- (12,720)
Amortization of deferred stock-based compensation
and option remeasurement ............................ 271,619 --
Benefit for deferred income taxes, net ................ (2,869,669) (3,051,646)
Charge in lieu of income taxes ........................ 2,867,107 --
Loss on asset disposition ............................. 40,910 --
Changes in assets and liabilities--
Accounts receivable, net .............................. (11,249,466) (3,459,543)
Unbilled revenue ...................................... 16,575 (1,071,800)
Prepaid expenses and other ............................ (771,574) (3,140,620)
Other assets, net ..................................... 516,279 748,645
Accounts payable ...................................... (1,998,012) 55,435
Accrued liabilities ................................... (1,487,050) (3,664,869)
Accrued restructuring charges ......................... (1,524,731) --
Deferred revenue, current and long-term ............... 5,460,182 (1,257,639)
------------- -------------
Net cash used in operating activities ............ (2,890,684) (14,145,629)
------------- -------------
Cash flows from investing activities:
Purchases of short-term investments in marketable
securities ............................................ (19,950,644) (15,350,805)
Proceeds from sale of short-term investments in
marketable securities ................................. 12,840,949 14,030,521
Purchases of long-term investments in marketable
securities ............................................ (11,142,946) (33,507,645)
Proceeds from sale of long-term investments in
marketable securities ................................. 6,029,492 3,037,212
Purchases of developed software and other intangibles ... (7,518) (4,248,583)
Business combinations, net of cash acquired ............. (29,110,126) (37,303,959)
Purchases of property and equipment ..................... (8,454,936) (6,189,091)
Collection of note receivable--related party ............ 25,409,244 --
Advances on note receivable--related party .............. (5,743,600) (7,899,412)
------------- -------------
Net cash used in investing activities ............ (30,130,085) (87,431,762)
------------- -------------
Cash flows from financing activities:
Proceeds from issuances of common stock ................. 9,165,060 3,660,461
Purchases of treasury stock ............................. (1,158,710) --
------------- -------------
Net cash provided by financing activities ........ 8,006,350 3,660,461
Effect of exchange rate changes on cash ................... (345,559) (93,673)
------------- -------------
Net decrease in cash and cash equivalents ................. (25,359,978) (98,010,603)
Cash and cash equivalents, beginning of period ............ 49,796,989 174,173,008
------------- -------------
Cash and cash equivalents, end of period .................. $ 24,437,011 $ 76,162,405
============= =============
Supplemental cash flow information:
Cash paid during the period for--
Interest .............................................. $ 13,116 $ 22,352
============= =============
Taxes ................................................. $ 441,194 $ 805,175
============= =============
Supplemental disclosures of noncash transactions:
Common stock issued for business combinations ........... $ 22,995,900 $ 74,615,000
============= =============
Accrued business combination costs ...................... $ 706,995 $ 3,443,908
============= =============
Increase to additional paid-in capital for option
remeasurement, noncash employee severance charges ..... $ 148,703 $ --
============= =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated interim financial statements have been
prepared by New Era of Networks, Inc. (the "Company" or "NEON"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999. The consolidated results
of operations for the three and six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for any subsequent period
or for the entire fiscal year ending December 31, 2000.
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments that are of a normal and
recurring nature and that are necessary for a fair presentation of the financial
position and results of operations for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Certain reclassifications have been made to prior period
financial statements to conform to the June 30, 2000 presentation.
2. BUSINESS COMBINATIONS
Software-Engineering, Computing and Consulting GmbH
In April 2000, the Company acquired all of the outstanding capital stock of
Software-Engineering, Computing and Consulting GmbH ("Secco"), a German
corporation. Secco is a provider of enterprise application integration (EAI) and
e-Business professional services in Germany.
The aggregate consideration paid by the Company was approximately
$15,000,000, of which $12,000,000 was paid in cash and approximately $3,000,000
was paid through the issuance of 86,925 shares of common stock of the Company.
The fees and expenses related to the acquisition are estimated to be
approximately $445,000. Pursuant to the Reorganization Agreement in August 2000,
13,000 additional shares of our common stock and approximately $182,000 in cash
was paid to the former shareholders of Secco based on the market price of our
stock at a certain measurement date. Additional shares of the Company's common
stock and/or cash may be issued to the sellers based on the market price of the
Company's common stock at a final measurement date. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
assets, liabilities and operating results of Secco have been included in the
accompanying consolidated financial statements from April 1, 2000.
Upon the finalization of the purchase price allocation, we anticipate
recording a deferred tax liability and corresponding increase to goodwill as
values assigned to the software products and other intangibles are not
amortizable for tax purposes.
PaperFree Systems, Inc.
In March 2000, the Company acquired all of the outstanding capital stock of
PaperFree Systems, Inc. ("PaperFree"), a Delaware corporation. PaperFree is a
provider of integration solutions concentrating on the payor-side of the
healthcare market.
The aggregate consideration paid by the Company was approximately
$40,000,000, of which $20,000,000 was paid in cash and approximately $20,000,000
was paid through the issuance of 283,881 shares of common stock of the Company.
The fees and expenses related to the acquisition are estimated to be
approximately $245,000. Pursuant to the Reorganization Agreement in June 2000,
295,662 additional shares of our common stock were issued to the former
shareholders of PaperFree based on the market price of our common stock at a
certain measurement date. Additional shares of our common stock may be issued to
the sellers based on the market
6
<PAGE> 7
price of the Company's common stock at a final measurement date. The acquisition
was accounted for under the purchase method of accounting and, accordingly, the
assets, liabilities and operating results of PaperFree have been included in the
accompanying consolidated financial statements from March 24, 2000.
An independent valuation of PaperFree's net assets will be performed to
assist in the allocation of the purchase price. Upon the finalization of the
purchase price allocation, we anticipate recording a deferred tax liability and
corresponding increase to goodwill as values assigned to the software products
and other intangibles are not amortizable for tax purposes.
3. NET LOSS PER COMMON SHARE
Under Statement of Financial Accounting Standards No. 128 "Earnings Per
Share", basic loss per common share is determined by dividing net income from
continuing operations available to common shareholders by the weighted average
number of common shares outstanding during each period. Diluted earnings per
common share includes the effects of potentially issuable common stock, but only
if dilutive. The treasury stock method, using the average price of the Company's
common stock for the period, is applied to determine dilution from options and
warrants.
4. COMPREHENSIVE LOSS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). The purpose of SFAS 130 is to report a measure of all changes in equity
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The only items
of other comprehensive income reported by the Company are the cumulative
translation adjustment and unrealized loss on marketable securities available
for sale. The Company's comprehensive income for the three and six months ended
June 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss for the period ............... $ (6,325,046) $ (8,822,663) $(12,232,913) $ (6,240,557)
Change in cumulative translation
adjustment .......................... (326,006) (141,145) (1,106,647) (379,313)
Unrealized gains (losses) on
marketable securities:
Change in unrealized loss on
marketable securities ............. 281,909 (466,740) 241,077 (466,740)
Reclassification adjustment for
realized losses included in net
loss for the period .............. (74,169) -- (74,169) --
------------ ------------ ------------ ------------
Comprehensive loss .................. $ (6,443,312) $ (9,430,548) $(13,172,652) $ (7,086,610)
============ ============ ============ ============
</TABLE>
5. RESTRICTED CASH AND RESTRICTED INVESTMENTS IN MARKETABLE SECURITIES
The Company has leased two buildings and a parking structure in Englewood,
Colorado from Greenwood Plaza Partners, LLP ("GPP") for use as its principal
corporate headquarters and intends to sublease unused excess capacity. GPP is
principally owned by the Company's Chief Executive Officer and Chairman of the
Board.
Through April 2000, the Company had funded approximately $25.4 million
toward a short-term loan to GPP for construction of the leased facilities. In
May 2000, GPP obtained interim (five-year) financing from a third-party lender
and paid the loan from the Company in full. Terms of the interim financing
require the Company to maintain up to $8.3 million of cash or investments with
the lender, including $1.3 million restricted for the purpose of paying tenant
improvement expenses and leasing commissions. The restricted cash represents one
source of collateral to the lender in recognition that the Company has a
long-term master lease for the entire facility.
The Company leased and occupied completed portions of the facilities from
August 1999 through April 2000. The lease for the entire completed facility
commenced May 1, 2000. The facilities include approximately 200,000 rentable
square feet of space and 720 parking spaces in the garage. Rent paid GPP for the
three and six month periods ended June 30, 2000, ignoring sublease income, was
approximately $875,000 and $1,214,000 , respectively. The Company is also
responsible for all taxes, insurance, utilities, repairs and maintenance of the
facilities during the lease term. The initial term is ten years from May 1,
2000, and is renewable at the Company's option for two successive five-year
periods at then prevailing market rental rates.
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<PAGE> 8
6. STOCKHOLDERS' EQUITY
In August 1999, the NEON Board of Directors authorized the repurchase of up
to 10% of NEON's outstanding shares of common stock over a 12-month period.
<TABLE>
<CAPTION>
NUMBER OF AVERAGE COST TOTAL
QUARTER OF PURCHASE SHARES PER SHARE COST
------------------- ---------- ------------ ----------
<S> <C> <C> <C>
Third quarter 1999 .............. 20,000 $ 17.37 $ 347,375
Second quarter 2000 ............. 40,000 28.97 1,158,710
---------- ---------- ----------
Total treasury shares ........... 60,000 $ 25.10 $1,506,085
========== ========== ==========
</TABLE>
During July 2000, the Company repurchased 100,000 shares of the Company's
common stock at an average cost of $27.04 per share.
7. RESTRUCTURING CHARGES
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 redundant facilities, and reduce
overhead. Total accrued restructuring costs of $7,450,000 were recorded in the
third quarter of 1999 related to these initiatives. With the exception of one
facility relocation, all restructuring efforts were finalized by March 2000.
Management expects the remaining restructuring efforts to be completed by
December 31, 2000.
In the third quarter of 1999 the Company accrued approximately $3,301,000
related to the cost of involuntary employee separation benefits related to
approximately 150 employees worldwide. Employee separation benefits include
severance, medical and other benefits. Employee separations affected the
majority of business functions, job classes and geographies, with a majority of
the reductions in North America and Europe. The third quarter 1999 accrual also
provided for approximately $4,149,000 associated with the closure and
consolidation of office space, principally in North America and Europe.
The accrued restructuring costs and amounts charged against the provision
as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
ACCRUAL AT APPROXIMATE ACCRUAL AT
DECEMBER 31, YEAR-TO-DATE JUNE 30,
1999 SPENDING 2000
------------ ------------ ----------
<S> <C> <C> <C>
Employee separations .................... $ 660,000 $ 132,000 $ 528,000
Facility closure costs .................. 2,628,000 1,392,000 1,236,000
---------- ---------- ----------
Total accrued restructuring costs ... $3,288,000 $1,524,000 $1,764,000
========== ========== ==========
</TABLE>
8. SEGMENT INFORMATION
In the fourth quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
components of an enterprise for which separate financial information is
available and is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and assess
performance of the segments of an enterprise. The operating segments are managed
separately because each operating segment represents a strategic business unit
that offers products and services in different markets.
The Company classifies its business activities into three operating
segments: The Americas; Europe and Asia Pacific; and Corporate and Other.
Information regarding the Company's operations in these three operating
segments, which are managed separately, is set forth below. The accounting
policies of the operating segments are the same as those described in the
summary of significant accounting policies included in the Company's Annual
Report on Form 10-K for consolidated results. There are no significant
intersegment sales or transfers between the segments for the periods presented.
8
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<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000 THREE MONTHS ENDED JUNE 30, 1999
--------------------------------------------- ----------------------------------------------
EUROPE EUROPE
THE AND ASIA CORPORATE THE AND ASIA CORPORATE
AMERICAS PACIFIC AND OTHER TOTAL AMERICAS PACIFIC AND OTHER TOTAL
-------- ------- --------- ----- -------- ------- --------- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.................... $ 25,903 $ 12,042 $ 12,973 $ 50,918 $ 16,749 $ 9,392 $ -- $ 26,141
Total cost of revenues............ 5,234 3,650 5,082 13,966 4,549 6,032 -- 10,581
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit...................... 20,669 8,392 7,891 36,952 12,200 3,360 -- 15,560
Selling and marketing............. 8,410 4,892 6,118 19,420 7,296 3,230 2,895 13,421
Research and development.......... -- -- 11,011 11,011 -- -- 9,322 9,322
General and administrative........ -- -- 4,111 4,111 -- -- 3,890 3,890
-------- -------- -------- -------- -------- -------- -------- --------
Operating profit (loss) before
acquisition-related charges
and stock-based compensation
and related payroll taxes ...... 12,259 3,500 (13,349) 2,410 4,904 130 (16,107) (11,073)
Amortization of intangibles ...... -- -- 9,499 9,499 -- -- 3,353 3,353
Stock-based compensation and
related taxes .................. -- -- 51 51 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating profit (loss)........... 12,259 3,500 (22,899) (7,140) 4,904 130 (19,460) (14,426)
Other income, net................. -- -- 1,019 1,019 -- -- 1,759 1,759
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) before taxes ... 12,259 3,500 (21,880) (6,121) 4,904 130 (17,701) (12,667)
Benefit (provision) for
income taxes.................... -- -- (204) (204) -- -- 3,844 3,844
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) after taxes .... $ 12,259 $ 3,500 $(22,084) $ (6,325) $ 4,904 $ 130 $(13,857) $ (8,823)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------- ----------------------------------------------
EUROPE EUROPE
THE AND ASIA CORPORATE THE AND ASIA CORPORATE
AMERICAS PACIFIC AND OTHER TOTAL AMERICAS PACIFIC AND OTHER TOTAL
-------- ------- --------- ----- -------- ------- --------- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.................... $ 46,454 $ 21,498 $ 25,058 $ 93,010 $ 34,124 $ 17,598 $ 4,030 $ 55,752
Total cost of revenues............ 9,458 6,466 8,666 24,590 8,212 7,568 1,145 16,925
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit...................... 36,996 15,032 16,392 68,420 25,912 10,030 2,885 38,827
Selling and marketing............. 16,485 9,638 10,774 36,897 13,064 5,694 4,488 23,246
Research and development.......... -- -- 20,378 20,378 -- -- 16,210 16,210
General and administrative........ -- -- 8,081 8,081 -- -- 6,956 6,956
-------- -------- -------- -------- -------- -------- -------- --------
Operating profit (loss) before
acquisition-related charges
and stock-based compensation
and related payroll taxes ...... 20,511 5,394 (22,841) 3,064 12,848 4,336 (24,769) (7,585)
Amortization of intangibles ...... -- -- 16,939 16,939 -- -- 5,053 5,053
Stock-based compensation and
related taxes .................. -- -- 612 612 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating profit (loss)........... 20,511 5,394 (40,392) (14,487) 12,848 4,336 (29,822) (12,638)
Other income, net................. -- -- 2,659 2,659 -- -- 3,943 3,943
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) before taxes ... 20,511 5,394 (37,733) (11,828) 12,848 4,336 (25,879) (8,695)
Benefit (provision) for
income taxes.................... -- -- (405) (405) -- -- 2,454 2,454
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) after taxes .... $ 20,511 $ 5,394 $(38,138) $(12,233) $ 12,848 $ 4,336 $(23,425) $ (6,241)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
9. LITIGATION
The Company and certain of its executive officers are defendants in a
consolidated class action lawsuit alleging violation of the federal securities
laws. This action was filed in federal court in Colorado in July 1999. The
complaint asserts claims on behalf of purchasers of the Company's securities
from April 21, 1999 through July 6, 1999. The complaint alleges 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 complaint does not specify the amount of damages
sought. 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 this action 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.
9
<PAGE> 10
In January 2000, the Company and VIE Systems, Inc. were named as defendants
in a lawsuit filed by New Paradigm Software Corp. ("New Paradigm") in U.S.
District Court for the Southern District of New York. The complaint alleges
breach of contract, interference with contract and unjust enrichment, and seeks
compensatory and punitive damages as well as rescission. In July 2000, the Court
granted the Company's motion to dismiss the Plaintiff's claims of unjust
enrichment and for rescission. The Company believes the lawsuit is without
merit. The Company intends to deny all material allegations and to defend itself
vigorously. An adverse judgment or settlement in the lawsuit could have a
material adverse effect on the Company's financial condition or results of
operations. The ultimate outcome of the action 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.
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<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this Report on Form 10-Q contains certain trend analysis
and other forward-looking statements. Words such as "anticipate," "believe,"
"plan," "estimate," "expect," "seek," and "intend," and words of similar import
are intended to identify such forward-looking statements. These statements are
not guarantees of future performance and are subject to business and economic
risks and uncertainties which are difficult to predict. Therefore, our actual
results of operations may differ materially from those expressed or forecasted
in the forward-looking statements as a result of a number of factors, including,
but not limited to, those set forth in this discussion under "Factors That May
Affect Future Results" and other risks detailed from time to time in reports
filed with the SEC. In addition, the discussion of our results of operations
should be read in conjunction with matters described in detail in our 1999 Form
10-K Report.
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 that time, a substantial portion of our revenues has been
attributable to licenses of NEONet and follow-on products such as MQIntegrator
and e-Biz Integrator and related services. 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.
RECENT ACQUISITIONS
In April 2000, we acquired all of the outstanding capital stock of
Software-Engineering, Computer and Consulting GmbH ("Secco"). Secco is a
provider of enterprise application integration ("EAI") and e-Business
professional services in Germany. The aggregate purchase price of Secco was $15
million, of which $12 million was paid in cash and $3 million was paid through
the issuance of 86,925 shares of our common stock. Pursuant to the
Reorganization Agreement in August 2000, 13,000 additional shares of our common
stock and approximately $182,000 in cash was paid to the former shareholders of
Secco based on the market price of our stock at a certain measurement date.
Additional shares of our common stock or cash may be issued to the former
shareholders of Secco based on the market price of our common stock at a final
measurement date. The acquisition was accounted for under the purchase method of
accounting.
In March 2000, we acquired all of the outstanding capital stock of PaperFree
Systems, Inc. ("PaperFree"). PaperFree is a provider of integration solutions
concentrating on the payor-side of the healthcare market. The aggregate purchase
price of PaperFree was $40 million, of which, approximately $20 million was paid
in cash and $20 million was paid through the issuance of 283,881 shares of
common stock. Pursuant to the Reorganization Agreement in June 2000, 295,662
additional shares of our common stock were issued to the former shareholders of
PaperFree based on the market price of our common stock at a certain measurement
date. Additional shares of our common stock may be issued based on the market
price of our common stock at a final measurement date. The acquisition was
accounted for under the purchase method of accounting.
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<PAGE> 12
RESULTS OF OPERATIONS FOR THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to total revenues:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Software licenses .............................................. 56% 34% 56% 47%
Software maintenance ........................................... 11 14 12 12
Professional services .......................................... 33 52 32 41
---- ---- ---- ----
Total revenues ................................. 100 100 100 100
Cost of revenues:
Cost of software licenses(1) ................................... 2 3 2 2
Cost of software maintenance and professional services(2)....... 60 60 58 56
---- ---- ---- ----
Total cost of revenues ........................ 28 40 26 30
---- ---- ---- ----
Gross profit .................................. 73 60 74 70
Operating expenses:
Sales and marketing ............................................ 38 51 40 42
Research and development ....................................... 22 36 22 29
General and administrative ..................................... 8 15 9 13
Stock-based compensation and related payroll taxes ............. -- -- 1 --
Amortization of intangibles and other
acquisition-related charges .................................. 19 13 18 9
---- ---- ---- ----
Total operating expenses ...................... 87 115 90 93
---- ---- ---- ----
Loss from operations ............................................. (14) (55) (16) (23)
Other income, net ................................................ 2 7 3 7
---- ---- ---- ----
Loss before income taxes ......................................... (12) (48) (13) (16)
Benefit (provision) from income taxes ............................ -- 15 -- 5
---- ---- ---- ----
Net loss ......................................................... (12)% (33)% (13)% (11)%
==== ==== ==== ====
Excluding stock-based compensation and
acquisition-related
charges:
Operating profit (loss) ........................................ 5% (42)% 3% (14)%
==== ==== ==== ====
Net income (loss) before taxes ................................. 7% (36)% 6% (7)%
==== ==== ==== ====
Net income (loss) if taxed at a 35% rate ....................... 4% (23)% 4% (4)%
==== ==== ==== ====
</TABLE>
(1) As a percentage of software licenses revenue.
(2) As a percentage of software maintenance and professional services
revenue.
REVENUES
Our total revenues grew by 95% to $50.9 million for the quarter ended June
30, 2000 from $26.1 million for the quarter ended June 30, 1999. The revenue mix
between software licenses, software maintenance, and professional services was
56%, 11% and 33%, respectively, for the second quarter of 2000 compared to 34%,
14% and 52%, respectively, for the same quarter last year. For the first six
months of 2000, total revenues grew by 67% to $93.0 million from $55.8 million
for the same period in 1999. The revenue mix between software licenses, software
maintenance, and professional services was 56%, 12% and 32%, respectively, for
the first six months of 2000 compared to 47%, 12% and 41%, respectively, for the
corresponding period last year. The increase in total revenues for the second
quarter and six-month period ended June 30, 2000 compared to the corresponding
periods last year was primarily from growth in software license revenues
resulting from increases to our direct sales force and our expanded product
offerings.
Software license revenues increased 220% to $28.4 million for the quarter
ended June 30, 2000 from $8.9 million for the quarter ended June 30, 1999.
Software license revenues increased 100% to $52.4 million for the six-month
period ended June 30, 2000 from $26.2 million for the six-month period ended
June 30, 1999. The increase in software license revenue reflected growth in our
revenues, in particular, growth from indirect channels including IBM royalty
income. A new arrangement with IBM, which provides for a fixed minimum royalty,
is payable in each quarter of 2000 and followed by a variable royalty which is
payable on a one quarter lag basis. In the second quarter of 1999, we began
selling the MQSeries Integrator product through an IBM reseller arrangement
known as Passport Advantage. Based on our interpretation of Staff Accounting
Bulletin No. 101, we record only the net reseller margin we realize as license
revenue. The growth in license revenue is also due to sales of new products such
as e-Biz Integrator and e-Biz 2000 sold by our direct sales force. We expect
that future software license revenue will reflect continued strength in the
direct and indirect channels, as well as include an increasing amount of
software license revenue from the sale of the NEON e-Biz platforms, adapters and
applications.
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<PAGE> 13
Software maintenance revenues increased 51% to $5.6 million for the quarter
ended June 30, 2000 from $3.7 million for the quarter ended June 30, 1999.
Software maintenance revenues increased 60% to $10.8 million for the six-month
period ended June 30, 2000 from $6.8 million for the six-month period ended June
30, 1999. The increase during both the quarter and six-month period compared to
the corresponding period last year was primarily as a result of our growing
installed base of customers and the growing installed base of indirect IBM
MQSeries Integrator customers.
Professional services revenue grew 25% to $17.0 million for the quarter
ended June 30, 2000 from $13.6 million for the quarter ended June 30, 1999.
Professional services revenue grew 31% to $29.7 million for the six-month period
ended June 30, 2000 from $22.7 million for the six-month period ended June 30,
1999. We continued to experience increased demand for services in both the
second quarter and the first six months of 2000 compared to the same periods
last year. The increase was primarily due to higher revenue from consulting,
which is the largest component of services, although training revenue also
increased during the quarter and six-month period. The increase in consulting
revenue was primarily due to prior periods' license fee revenue growth, which
resulted in more demand for implementation services.
Professional services revenue as a percentage of total revenues decreased
during the second quarter and first six months of 2000 compared to the same
periods in the prior year. This was due to the strong license fee growth in the
second quarter of 2000. Continued demand for professional services also resulted
from our ongoing emphasis on providing consulting and training services that
complement our software products. In any quarter, total services revenue is
dependent upon license transactions closed during the current and preceding
quarters, the amount and size of consulting engagements, the number of
consultants available to staff engagements, billing rates for consulting
services and training courses, and the number of customers attending training
courses.
COST OF REVENUES
Cost of revenues consists of costs of software licenses and costs of
software maintenance and professional services. As a percentage of total
revenues, total cost of revenues decreased to 28% and 26% in the three and six
months ended June 30, 2000, respectively, from 40% and 30% in the three and six
months ended June 30, 1999, respectively.
Cost of software licenses includes royalty payments to third parties for
jointly developed products, software purchased from third parties for resale,
documentation and software replication and delivery expenses. The total dollar
amount incurred for the cost of license fees increased 103% to $530,000 for the
quarter ended June 30, 2000 from $261,000 for the quarter ended June 30, 1999.
For the six-month period, the total dollar amount for the cost of software
licenses increased 167% to $1.1 million from $407,000 for the same period last
year. Although it increased in absolute dollars, cost of licenses remain
consistent as a percentage of software license revenue.
Cost of software maintenance and professional services includes the
personnel and related overhead costs for services, including consulting,
training and customer support, as well as fees paid to third parties for
subcontracted services. Cost of software maintenance and professional services
increased 30% to $13.4 million for the quarter ended June 30, 2000 from $10.3
million for the quarter ended June 30, 1999. For the six-month period ended June
30, 2000, cost of software maintenance and professional services increased 42%
to $23.5 million from $16.5 million for the same period last year. The increase
in both absolute dollars and as a percentage of software maintenance and
professional services revenue is due to an increase in revenue generated through
subcontracted labor.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expense consists of personnel, commissions and related
overhead costs for the sales and marketing activities. Sales and marketing
expense increased to $19.4 million for the quarter ended June 30, 2000 from
$13.4 million for the quarter ended June 30, 1999, representing 38% and 51% of
total revenues, respectively. Sales and marketing expense increased to $36.9
million for the six-month period ended June 30, 2000 from $23.2 million for the
corresponding period last year, representing 40% and 42% of total revenues,
respectively. The increase in absolute dollars for both the quarter and
six-month period was primarily the result of expanded advertising, promotional
and branding activities. 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.
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<PAGE> 14
Research and Development
Research and development expense includes personnel and related overhead
costs for product development, enhancements, upgrades, quality assurance and
testing. Research and development expense increased to $11.0 million for the
quarter ended June 30, 2000 from $9.3 million for the quarter ended June 30,
1999, representing 22% and 36% of total revenues, respectively. Research and
development expense increased to $20.4 million for the six-month period ended
June 30, 2000 from $16.2 million for the six-month period ended June 30, 1999,
representing 22% and 29% of total revenues, respectively. The increase was
primarily due to the use of contract services in a number of research and
development projects. We anticipate that future research and development
expenses will continue to increase in the second half of 2000 as we are
continuing our ongoing product enhancements in e-Business and Portal products.
General and Administrative
General and administrative expense includes personnel and related overhead
costs for the support and administrative functions. General and administrative
expense increased to $4.1 million for the quarter ended June 30, 2000 from $3.9
million for the quarter ended June 30, 1999, representing 8% and 15% of total
revenues, respectively. General and administrative expense increased to $8.1
million for the six-month period ended June 30, 2000 from $7.0 million for the
six-month period ended June 30, 1999, representing 9% and 13% of total revenues,
respectively. The total dollar amount of expense increased primarily due to an
increase in personnel to facilitate expansion of our operations. General and
administrative expenses as a percentage of total revenues decreased primarily
due to elimination of redundant personnel and facility costs in the third
quarter of 1999.
Stock-based Compensation and Related Payroll Taxes
Stock-based compensation and related payroll taxes reflect both the
amortization of noncash compensation expense associated with the issuance of a
restricted stock grant and payroll taxes associated with the exercise of taxable
employee option grants.
Amortization of Intangibles and Other Acquisition-related Charges
For the three and six-month periods ended June 30, 2000 and 1999,
amortization of intangibles and other acquisition related charges included
primarily amortization of goodwill and other intangible assets related to our
acquisition activities. The allocation of purchase price has been determined by
independent appraisals of net assets acquired. These assets are being amortized
over estimated useful lives which range from three to 10 years.
OTHER INCOME, NET
Other income, net includes interest income earned on cash, cash
equivalents, short-term and long-term marketable securities, interest expense,
foreign currency gains and losses, and other nonoperating income and expenses.
Other income, net decreased to $1.0 million for the quarter ended June 30, 2000
from $1.8 million for the quarter ended June 30, 1999. Other income, net
decreased to $2.7 million for the six-month period ended June 30, 2000 from $3.9
million for the six-month period ended June 30, 1999. The decrease was primarily
due to the reduction in invested cash balances resulting from cash used for
acquisitions.
BENEFIT (PROVISION) FROM INCOME TAXES
The provision for income taxes for the six months ended June 30, 2000
consists of state and foreign taxes projected to be payable with respect to
income for the period attributable to those jurisdictions. We presently expect
to pay no federal income taxes for year 2000 based on projected taxable income,
including deductions related to stock options exercised during the first and
second quarters of 2000. We estimate our effective tax rate for the year,
exclusive of state and foreign taxes currently payable, will be zero. We
currently expect to increase the valuation allowance during 2000 to offset any
projected increases in our net deferred tax assets that exceed the current tax
provision computed on income exclusive of deductions from the exercise of stock
options. The tax benefit of such stock option deductions is recorded as an
increase to shareholders' equity.
The valuation allowance against our deferred tax assets increased to
approximately $11.9 million at December 31, 1999. 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 prior 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
14
<PAGE> 15
tax expense. The same treatment will apply to any portion of our net operating
loss attributable to our stock option deductions generated during the year 2000.
NET LOSS
We reported a net loss of $6.3 million, or $0.18 per share and $12.2
million, or $0.35 per share for the three and six months ended June 30, 2000,
respectively. The loss includes acquisition-related charges and stock-based
compensation and related payroll taxes of approximately $9.6 million and $17.6
million for the three and six months ended June 30, 2000. Excluding these
charges and assuming a 35% tax rate, we generated a net income of approximately
$2.2 million, or $0.06 per diluted share for the three months ended June 30,
2000 and $3.7 million, or $0.10 per diluted share for the six months ended June
30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, our principal sources of liquidity consisted of $73.6
million of unrestricted cash, cash equivalents and short-term and long-term
investments in marketable securities compared with $94.8 million at December 31,
1999. No amounts were outstanding under the line of credit during the six-month
periods ended June 30, 2000 or 1999. The Company had working capital of $57.4
million at June 30, 2000 compared with $86.2 million at December 31, 1999.
Included in determining such amounts are short-term deferred revenue and
customer deposits of $19.0 million at June 30, 2000 and $13.6 million at
December 31, 1999. The majority of short-term deferred revenue represents annual
support payments billed to customers, which is recognized ratably as revenue
over the support service period. Without the short-term deferred revenue and
customer deposits, working capital would have been $76.4 million at June 30,
2000 and $99.8 million at December 31, 1999.
We used $2.9 million in cash for operating activities during the six-month
period ended June 30, 2000 compared to $14.1 million during the six-month period
ended June 30, 1999. The improvement in operating cash flow was due mainly to
improved operating results, exclusive of noncash charges, in the second quarter
of 2000. As a result of the significant growth in revenues, our accounts
receivable, net increased to $51.8 million at June 30, 2000 compared to $38.5
million at December 31, 1999. However, cash provided from a $5.5 million
increase in deferred revenue significantly reduced the effect on operating cash
flows from the increase in receivables.
We used $30.1 million in cash for investing activities for the six-month
period ended June 30, 2000 compared to $87.4 million for the six-month period
ended June 30, 1999. In the six months ended June 30, 2000, we continued to
invest cash in business combinations. The most significant cash outlays for
acquisitions in the first six months of 2000 resulted from the PaperFree and
Secco acquisitions with net cash investments of approximately $29.1 million.
During the first six months of 2000 and 1999, we purchased furniture, fixtures
and equipment necessary to support our expanding operations. During 1999 and the
first quarter of 2000, we funded approximately $25 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. We have leased the buildings
from GPP for use as our principal corporate headquarters. In May 2000, GPP
obtained interim financing from a third-party lender and repaid the related
party note receivable. Terms of the new financing require the Company to
maintain a restricted cash balance of up to $8.3 million with the lender as one
source of collateral for the loan, as the Company is the sole tenant. The amount
of the restricted cash balance may be reduced to $5 million, in accordance with
the terms of the agreement, upon completion of tenant improvements and
subleasing.
Financing activities provided $8.0 million in cash during the first six
months of 2000 compared to $3.7 million for the same period last year. For both
periods, this cash was primarily from exercises of common stock options and the
Employee Stock Purchase Plan. The 2000 amount was net of approximately $1.2
million used to repurchase 40,000 shares of our common stock held as treasury
shares. In the third quarter of 2000, we have purchased an additional 100,000 of
our shares at an average cost of $27.04 per share.
We believe that our existing balances of cash, cash equivalents and
long-term investments in marketable securities will be sufficient to meet our
anticipated working capital and capital expenditure needs at least for the next
12 months. Thereafter, we may require additional sources of funds to continue to
support our business. There can be no assurance that such capital, if needed,
will be available or will be available on terms acceptable to us.
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<PAGE> 16
IN-PROCESS RESEARCH AND DEVELOPMENT
During fiscal year 1998, we acquired Century Analysis, Inc. ("CAI"), and
MSB Consultants ("MSB"). In-process research and development ("IPR&D") projects
acquired from MSB were completed during fiscal year 1999. Information regarding
the completion of the MSB IPR&D projects is included in the Form 10-K for the
year ended 1999. Detailed descriptions of these projects were included in our
10-K for the year ended 1998. As of the end of Q2 2000 all of the CAI IPR&D
projects are finished and have been fully incorporated into NEON's product
development. The timeline and expectations for the completion of these projects
did not differ materially from what was anticipated at the time of the purchase
and these projects were released as planned. Further, the revenue and costs
associated with these projects did not materially differ from the initial
valuation.
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 3, "Quantitative and Qualitative Disclosures about Market Risk."
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), and amended it in
March 2000. NEON is required to adopt the provisions of SAB 101 in the fourth
quarter of 2000. We are currently reviewing the provisions of SAB 101 and have
not fully assessed the impact of its adoption; however, we do not currently
expect that the adoption of SAB 101 will have a material impact on our financial
position or results of operations.
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.
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.
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<PAGE> 17
o the continued growth of the e-Business Integration and Enterprise
Application Integration ("EAI") software markets;
o the size of the orders for our products, and the timing of such
orders;
o potential delays in our implementations at customer sites;
o continued development of indirect distribution channels;
o increased demand for our products;
o the timing of our product releases;
o competition;
o 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 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 1999 and in the first six months of 2000 reflected
strong sales of MQIntegrator and MQSeries Integrator through IBM's distribution
and reseller channel. Revenue from indirect channel partners, including IBM,
accounted for approximately 22% and 31% of software license revenues in the
second quarters of 1999 and 2000, respectively. We expect that IBM and our other
partners will account for a material percentage of our software license revenue
for the remainder of 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
June 30, 2000, our Company had an accumulated deficit of approximately $78.6
million (which includes acquisition-related charges and stock-based compensation
and related taxes). To address these risks and uncertainties, we must do the
following.
17
<PAGE> 18
o successfully implement our sales and marketing strategy;
o expand our direct sales channels;
o further develop our indirect distribution channels;
o respond to competition;
o continue to attract and retain qualified personnel;
o continue to develop and upgrade our products and technology more
rapidly than competitors;
o commercialize our products and services with future technologies.
We may not successfully implement any of our strategies or successfully
address these risks and uncertainties. Even if we accomplish these objectives we
may not be profitable in the future.
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 May 2000, we acquired ten companies. These
acquisitions will expose us to increased risks and costs, including the
following:
o assimilating new operations, systems, technology and personnel;
o 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 June 30, 2000 we had a
total of 1,112 employees. We may further expand domestically or internationally
through internal growth or through acquisitions of related companies and
technologies. This growth will continue to place a significant strain on our
management systems and resources.
For us to effectively manage our growth, we must continue to enact the
following measures:
o improve our operational, financial and management controls;
o improve our reporting systems and procedures;
o install new management and information control systems;
o expand, train and motivate our workforce.
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<PAGE> 19
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.
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. In the three months ended June 30, 2000 and 1999, excluding
royalties from IBM and other indirect channel partners, our top ten customers
accounted for 28% and 39% of total revenues, respectively. In the three months
ended June 30, 2000 and 1999, our largest customer, excluding royalties from IBM
and other indirect channel partners, accounted for approximately 5% and 14% of
our total revenues, respectively. Historically, our revenues have been derived
primarily from sales to large banks and financial institutions. Sales to large
banks and financial institutions accounted for 25% of total revenues in the
three months ended June 30, 2000 and approximately 38% of total revenues in the
three months ended June 30, 1999. Recently a growing portion of our total
revenues has been derived from sales of our products and services to commercial
customers seeking further e-Business enabling of their information systems and
operations. 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.
Our sales are derived from both our direct sales force as well as our
indirect sales channels. 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.
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<PAGE> 20
THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We continue to expand our international operations, and these efforts
require significant management attention and financial resources. Each version
of our product also has to be localized within each country. We have committed
resources to the opening and integration of additional international sales
offices and the expansion of international sales and support channels. Our
efforts to develop and expand international sales and support channels may not
be successful. International sales are subject to a number of risks, including
the following:
o longer payment cycles;
o unexpected changes in regulatory requirements;
o difficulties and expenses associated with complying with a variety of
foreign laws;
o import and export restrictions and tariffs;
o difficulties in staffing and managing foreign operations;
o difficulty in accounts receivable collection and potentially adverse
tax consequences;
o currency fluctuations;
o currency exchange or price controls;
o political and economic instability abroad.
Additionally, intellectual property may be more difficult to protect
outside of the United States. International sales can also be affected to a
greater extent by seasonal fluctuations resulting from the lower sales that
typically occur during the summer months in Europe and other parts of the world.
In addition, the market for our products is not as developed outside of North
America. We may not be able to successfully penetrate international markets or
if we do, there can be no assurance that we will grow these markets at the same
rate as in North America.
WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changes in customer demands
and evolving industry standards. Our existing products could be rendered
obsolete if we fail to keep up in any of these ways. We have also found that the
technological life cycles of our products are difficult to estimate, partially
because they may vary according to the particular application or vertical market
segment. We believe that our future success will depend upon our ability to
continue to enhance our current product line while we concurrently develop and
introduce new products that keep pace with competitive and technological
developments. These developments require us to continue to make substantial
product development investments.
Existing Products. We currently serve a customer base with a wide variety
of hardware, software, database, and networking platforms. To gain broad market
acceptance, we believe that we will have to support our products on a variety of
platforms. Our success will depend, among others, on the following factors:
o our ability to integrate our products with multiple platforms,
especially relative to our competition;
o the portability of our products, particularly the number of hardware
platforms, operating systems and databases that our products can
source or target;
o the integration of additional software modules under development with
existing products;
o our management of software development being performed by third-party
developers.
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<PAGE> 21
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
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
21
<PAGE> 22
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 industry factors, including global economic
difficulties and uncertainty, reductions in capital expenditures by large
customers, and increasing competition. These factors could in turn give rise to
longer sales cycles, deferral or delay of customer purchasing decisions, and
increased price competition. The presence of such factors in the 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 3. 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 non-financial
or non-quantifiable, such as political, economic, tax, other regulatory or
credit risks are not included in the following assessment of our market risks.
FOREIGN CURRENCY EXCHANGE RATES
Operations outside of the U.S. expose us to foreign currency exchange rate
changes and could impact translations of foreign denominated assets and
liabilities into U.S. dollars and future earnings and cash flows from
transactions denominated in different currencies. During the first six months of
2000, 35% of our total revenue was generated from our international operations,
and the net assets of our foreign subsidiaries totaled 13% of consolidated net
assets as of June 30, 2000. 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 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
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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. 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.
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<PAGE> 24
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 2000, the Company and VIE Systems, Inc. were named as defendants
in a lawsuit filed by New Paradigm Software Corp. ("New Paradigm") in U.S.
District Court for the Southern District of New York. The Company acquired 100%
of the outstanding stock of VIE Systems, Inc. ("VIE") in April 1999. VIE's
assets included a formatting software product call Copernicus(TM). VIE had
previously acquired the Copernicus product from New Paradigm in July 1997, at
which time New Paradigm had retained a 5% royalty interest in the product. The
Company holds a contractual right to purchase the retained 5% royalty interest
from New Paradigm through July 2001 for $1,000,000. The complaint alleges breach
of contract, interference with contract and unjust enrichment, and seeks
compensatory and punitive damages as well as rescission of the July 1997 sale to
VIE based upon allegations that the Company is not using reasonable efforts to
sell the Copernicus product and that certain of the Company's other products are
unfairly similar to the Copernicus product. In July 2000, the Court granted the
Company's motion to dismiss the Plaintiff's claims of unjust enrichment and for
rescission. The Company believes the lawsuit is without merit. The Company
intends to deny all material allegations and to defend itself vigorously. An
adverse judgment or settlement in the lawsuit could have a material adverse
effect on the Company's financial condition or results of operations. The
ultimate outcome of the action cannot be presently determined. Accordingly, no
provision for any liability or loss that may result from adjudication or
settlement thereof has been made in the accompanying consolidated financial
statements.
The Company is also currently involved in other civil litigation relating
to the conduct of its business, some of which are addressed elsewhere in this
report or in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, as filed with the SEC. While the outcome of any particular
lawsuit cannot be predicted with certainty, the Company believes that these
matters will not have a material adverse effect on its consolidated financial
statements.
ITEM 2. CHANGES IN SECURITIES
In August 1999, the NEON Board of Directors authorized the repurchase of up
to 10% of NEON's outstanding shares of common stock over a 12-month period.
During the second quarter of 2000, we repurchased an additional 40,000 treasury
shares.
In April 2000, the Company issued 86,925 shares of common stock in
connection with its acquisition of Software-Engineering, Computing and
Consulting GmbH, a German corporation. In June 2000, the Company issued 295,662
shares of common stock to the former shareholders of PaperFree pursuant to the
Plan and Agreement of Reorganization dated March 27, 2000 between New Era of
Networks and PaperFree Systems, Inc. The Company relied upon the exemptions from
registration provided by Rule 506 of Regulation D, and/or Section 4(2) under the
Securities Act of 1933, as amended, in the foregoing acquisitions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company (the "Annual
Meeting") was held on May 23, 2000.
(b) The following Class I directors were re-elected at the Annual Meeting
for three-year terms ending on the date of the annual stockholders'
meeting in 2003:
George F. (Rick) Adam, Jr.
Steven Lazarus
The Company's Board of Directors is currently comprised of seven members
who are divided into three classes with overlapping three-year terms. A director
serves in office until his or her respective successor is duly elected and
qualified or until his or her earlier death or resignation. The term for Class
III directors (Patrick J. Fortune, Mark L. Gordon and Elisabeth W. Ireland) will
expire at the annual meeting of stockholders to be held in 2001, and the term
for Class II directors (Joseph E. Kasputys, Robert Theis and Melvyn E.
Bergstein) will expire at the annual meeting of stockholders to be held in 2002.
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<PAGE> 25
(c) The stockholders approved an amendment to the Company's 1997 Director
Option Plan.
(d) The stockholders also ratified the appointment of Arthur Andersen LLP
as the independent auditors for the year ended December 31, 2000.
(e) The results of the vote on the matters voted upon at the Annual
Meeting were, respectively:
<TABLE>
<CAPTION>
(i) ELECTION OF DIRECTORS FOR WITHHELD
--------------------- --- --------
<S> <C> <C>
George F. (Rick) Adam, Jr .... 29,928,018 603,318
Steven Lazarus ............... 30,482,611 48,725
</TABLE>
(ii) Approval of the amendment to the Company's 1997 Director Option
Plan.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
17,499,873 5,415,923 55,145
</TABLE>
(iii) Ratification of Arthur Andersen LLP as independent auditors for
the Company for fiscal year 2000.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
30,412,925 109,518 8,893
</TABLE>
The foregoing matters are described in more detail in the Company's
definitive proxy statement dated April 17, 2000.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
EXHIBIT NO. DESCRIPTION
10.11 - First Amendment to Standard Commercial
Lease with ancillary agreements dated May
2000.
27.1 - Financial Data Schedule.
(b) Reports on Form 8-K
(1) None.
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<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ERA OF NETWORKS, INC.
(Registrant)
By: /s/ STEPHEN E. WEBB
--------------------------
Stephen E. Webb,
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2000
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<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C> <C>
10.11 - First Amendment to Standard Commercial Lease with ancillary
agreements dated May 2000.
27.1 - Financial Data Schedule.
</TABLE>
