<PAGE> 1
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 SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___
---------------
Commission File Number 0-25457
NEON SYSTEMS, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 76-0345839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14100 SOUTHWEST FREEWAY, SUITE 500, SUGAR LAND, TEXAS 77478
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (281) 491-4200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's common stock outstanding as of November
10, 1999 was 8,948,467.
<PAGE> 2
NEON SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1999 and March 31, 1999..... 3
Consolidated Statements of Operations for the Three and Six Months
Ended September 30, 1999 and 1998........................................ 4
Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1999 and 1998.............................................. 5
Condensed 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............... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 20
Item 2. Changes in Securities and Use of Proceeds................................ 20
Item 3. Defaults Upon Senior Securities.......................................... 20
Item 4. Submission of Matters to a Vote of Security Holders...................... 20
Item 5. Other Information........................................................ 20
Item 6. Exhibits and Reports on Form 8-K......................................... 20
SIGNATURES........................................................................ 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 14,511,999 $ 45,400,015
Short-term investments 21,002,216 --
Accounts receivable-trade 8,514,683 5,438,319
Accounts receivable-related party 60,976 278,817
Deferred income taxes 544,093 571,990
Other current assets 896,433 410,620
------------ ------------
Total current assets 45,530,400 52,099,761
------------ ------------
Furniture & equipment 1,177,817 895,970
Purchased software 153,681 78,774
Less: accumulated depreciation and amortization (595,446) (487,670)
------------ ------------
Property & equipment, net 736,052 487,074
Marketable securities 5,682,034 --
Goodwill, net 2,385,294 --
Other assets, net 79,386 47,916
------------ ------------
Total assets $ 54,413,166 $ 52,634,751
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses $ 996,459 $ 1,222,154
Accounts payable 1,017,818 1,474,763
Taxes payable 425,958 371,844
Deferred income taxes -- 27,897
Deferred maintenance revenue 4,153,457 3,707,997
------------ ------------
Total current liabilities 6,593,692 6,804,655
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value. Authorized 10,000,000
shares; no shares issued and outstanding -- --
Common stock, $.01 par value. Authorized 30,000,000
shares; 8,929,245 and 8,848,251 shares issued at
September 30, 1999 and March 31, 1999, respectively;
8,924,171 and 8,848,251 shares outstanding at
September 30, 1999 and March 31, 1999, respectively 89,292 88,483
Additional paid-in capital 46,216,723 46,174,124
Accumulated other comprehensive income (loss) (38,233) 57,849
Unearned portion of deferred compensation (1,437,694) (1,710,371)
Retained earnings 3,130,569 1,220,011
Less treasury shares, at cost; 5,074 and -0- shares at
September 30, 1999 and March 31, 1999, respectively (141,183) --
------------ ------------
Total stockholders' equity 47,819,474 45,830,096
Commitments and contingencies (Note 4)
------------ ------------
Total liabilities and stockholders' equity $ 54,413,166 $ 52,634,751
============ ============
</TABLE>
SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
NEON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
License $ 4,351,484 $ 3,074,346 $ 8,801,154 $ 5,997,762
Maintenance 1,707,985 1,061,311 3,343,977 1,987,128
------------ ------------ ------------ ------------
Total revenues 6,059,469 4,135,657 12,145,131 7,984,890
Cost of revenues:
Cost of licenses 315,909 250,531 410,252 527,134
Cost of maintenance 351,190 206,989 623,442 407,715
------------ ------------ ------------ ------------
Total cost of revenues 667,099 457,520 1,033,694 934,849
------------ ------------ ------------ ------------
Gross profit 5,392,370 3,678,137 11,111,437 7,050,041
Operating expenses:
Sales and marketing 2,357,173 1,829,337 4,811,354 3,246,378
Research and development 1,187,571 894,428 2,384,434 1,659,733
General and administrative 960,133 524,492 1,674,467 1,036,490
Non-cash compensation 136,339 81,723 272,677 494,607
------------ ------------ ------------ ------------
Total operating expenses 4,641,216 3,329,980 9,142,932 6,437,208
------------ ------------ ------------ ------------
Operating income 751,154 348,157 1,968,505 612,833
Interest income 596,033 18,917 1,139,530 32,621
Interest expense (829) (21,611) (1,401) (42,704)
Other, net 26,890 52,817 (25,088) 25,164
------------ ------------ ------------ ------------
Income before provision for
income taxes 1,373,248 398,280 3,081,546 627,914
Provision for income taxes 521,834 147,364 1,170,987 232,329
------------ ------------ ------------ ------------
Net income 851,414 250,916 1,910,559 395,585
Dividends on series A redeemable,
convertible preferred stock -- (25,000) -- (50,000)
------------ ------------ ------------ ------------
Net income applicable to common
stockholders $ 851,414 $ 225,916 $ 1,910,559 $ 345,585
============ ============ ============ ============
Earnings per share:
Basic $ 0.10 $ 0.09 $ 0.22 $ 0.13
============ ============ ============ ============
Diluted $ 0.08 $ 0.04 $ 0.18 $ 0.06
============ ============ ============ ============
Shares used in computing earnings
per share:
Basic 8,871,957 2,611,079 8,860,987 2,612,595
Diluted 10,410,427 7,052,250 10,399,682 7,086,137
</TABLE>
SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
NEON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,910,559 $ 395,585
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 107,776 81,028
Deferred tax expense 27,897 (132,615)
Non-cash compensation expense 272,677 494,607
Increase (decrease) in cash resulting
from changes in operating assets and
liabilities:
Accounts receivable (2,796,103) (1,063,028)
Other current assets (485,813) 104,921
Other assets (31,470) (117)
Accrued expenses (814,229) (243,296)
Accounts payable (562,192) 199,214
Taxes payable 54,114 (365,056)
Deferred maintenance revenue 328,470 721,424
------------ ------------
Net cash provided by (used in) operating
activities (1,988,314) 192,667
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (26,717,953) --
Acquisition (1,870,000) --
Purchases of furniture and equipment (76,688) (58,568)
Purchases of computer software (74,907) --
------------ ------------
Net cash used in investing activities (28,739,548) (58,568)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of stock options 43,408 100,823
Shares purchased for treasury (141,183) --
------------ ------------
Net cash provided by (used in) financing
activities (97,775) 100,823
------------ ------------
Net increase (decrease) in cash and cash
equivalents (30,825,637) 234,922
Effect of exchange rates on cash (62,379) 5,317
Cash and cash equivalents at beginning of period 45,400,015 2,804,073
------------ ------------
Cash and cash equivalents at end of period $ 14,511,999 $ 3,044,312
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for income taxes $ 1,111,138 $ 734,542
============ ============
</TABLE>
SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
NEON SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
NEON Systems, Inc. and subsidiaries (collectively, "NEON") are comprised of
the parent company, NEON Systems, Inc., its wholly-owned subsidiary NEON Beyond
Acquisition Corporation, and the parent company's wholly-owned international
subsidiaries, NEON Systems (UK) Ltd. and NEON Systems (GmbH). NEON develops,
markets and supports Enterprise Access and Integration software. NEON's primary
product family, Shadow, helps organizations access and integrate data,
transactions and applications from the Internet and mainframe and client/server
systems.
The condensed consolidated financial statements included herein have been
prepared by NEON without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all normal
and recurring adjustments which in the opinion of management are necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. The results of operations for the
periods presented are not necessarily indicative of the results to be expected
for the full year. The accompanying unaudited condensed financial statements
should be read in conjunction with the financial statements and notes included
in NEON's Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
NOTE 2--PER SHARE INFORMATION
Per share information is based on the weighted average number of common
shares outstanding during each period for the basic computation and, if
dilutive, the weighted-average number of potential common shares resulting from
the assumed conversion of outstanding stock options and convertible preferred
stock for the diluted computation.
A reconciliation of the numerators and denominators of the basic and diluted
per share computation is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 851,414 $ 250,916 $ 1,910,559 $ 395,585
Dividends on series A redeemable,
convertible preferred stock -- (25,000) -- (50,000)
------------ ------------ ------------ ------------
Net income applicable to common stockholders $ 851,414 $ 225,916 $ 1,910,559 $ 345,585
============ ============ ============ ============
Weighted average number of common
shares outstanding during the period:
Basic 8,871,957 2,611,079 8,860,987 2,612,595
Dilutive stock options 1,538,470 1,316,171 1,538,695 1,348,542
Series A redeemable, convertible preferred stock -- 3,125,000 -- 3,125,000
------------ ------------ ------------ ------------
Diluted 10,410,427 7,052,250 10,399,682 7,086,137
============ ============ ============ ============
Income per common share:
Basic $ 0.10 $ 0.09 $ 0.22 $ 0.13
============ ============ ============ ============
Diluted $ 0.08 $ 0.04 $ 0.18 $ 0.06
============ ============ ============ ============
</TABLE>
6
<PAGE> 7
NEON SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--PER SHARE INFORMATION (CONTINUED)
During the fiscal year ended March 31, 1999 NEON granted stock options at
prices considered to be below the then fair value of the underlying stock. The
cumulative differential between the fair value of the underlying stock and the
exercise price of the granted options was $2.5 million. This amount is being
recognized as an expense over the vesting period of the granted options. During
the three months and six months ended September 30, 1999, $136,000 and $273,000,
respectively, was recognized as non-cash compensation expense. The remaining
differential of $1,438,000 will be recognized over the remaining vesting period,
approximately three years, of the granted options.
For the three months ended September 30, 1999 and 1998, 44,259 and -0-
stock options, respectively, were not included in the computation of diluted net
income per share because the effect would be antidilutive. For the six-month
periods ended September 30, 1999 and 1998, all stock options were included in
the computation of diluted net income per share.
NOTE 3--COMPREHENSIVE INCOME
During fiscal year 1999 NEON adopted Financial Accounting Standards Board
Statement No. 130 ("FASB 130"), "Reporting Comprehensive Income." FASB 130
establishes new rules for reporting and displaying comprehensive income and its
components; however, the adoption has no impact on NEON's net income or
stockholders' equity. "Comprehensive Income" includes foreign translation
adjustments and unrealized gains or losses on NEON's available-for-sale
securities which, prior to adoption of FASB 130, were reported separately in
stockholders' equity. The components of comprehensive income, net of applicable
tax, for the six-month periods ended September 30, 1999 and 1998, are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
----------- ---------
<S> <C> <C>
Net income $ 1,910,559 $ 395,585
Foreign currency translation gains (losses) (62,379) 5,317
Unrealized loss on debt securities (33,703) --
----------- ---------
Total comprehensive income $ 1,814,477 $ 400,902
=========== =========
</TABLE>
7
<PAGE> 8
NOTE 4--CONTINGENCIES
A number of organizations, including New Era of Networks, are utilizing the
name "Neon," alone and in combination with other words, as a trademark, a
tradename or both. New Era of Networks is also a developer and distributor of
middleware and other software products. New Era of Networks has used the acronym
"NEON" in its business, is listed on the Nasdaq National Market under the symbol
"NEON" and has sought to obtain federal trademarks for products and services
whose names include the word "NEON." NEON is currently opposing in the U.S.
Patent and Trademark Office New Era of Networks' application to trademark
"NEONET." On December 24, 1998, New Era of Networks filed a complaint against
NEON in the United States District Court for the District of Colorado seeking
(1) a declaratory judgment that New Era of Networks' use of certain trademarks,
including "NEONET," does not infringe NEON's rights or constitute unfair
competition and (2) cancellation of NEON's federal trademark registration for
NEON. NEON has filed an Answer denying the material allegations of that
complaint, and the parties are currently engaged in discovery.
On June 23, 1999, NEON sued New Era of Networks in Fort Bend County, Texas,
alleging that New Era of Networks' use of "NEON" was in violation of Texas law
concerning tradenames and trademarks. In this litigation, NEON seeks to enjoin
New Era of Networks from using "NEON" as its "nickname," its Nasdaq trading
symbol, or in any other manner that is likely to result in confusion in the
marketplace, or to dilute the meaning or value of NEON's name. NEON's claims are
based upon its prior and continuous use of "NEON" as its corporate name. NEON
believes that it has superior rights to use "NEON" and that New Era of Networks'
use of NEON is causing confusion in the marketplace. This and any other
litigation to enforce NEON's right to use the NEON name in NEON's business or to
prevent others from using the NEON name may be expensive and time-consuming, may
divert management resources and may not be adequate to protect NEON's business.
If NEON should lose any such litigation, it may have to change its name, which
also would be expensive and time-consuming and could adversely affect NEON's
business.
NEON is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of any of these matters will not have a material adverse effect on
NEON's consolidated financial position, results of operations or liquidity.
NOTE 5--OPERATIONS BY GEOGRAPHIC LOCATION
The table below summarizes selected financial information with respect to
NEON's operations by geographic locations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues:
North America $ 5,073,823 $3,295,717 $ 9,554,483 $6,304,913
Europe 985,646 839,940 2,590,648 1,679,977
------------ ---------- ------------ ----------
$ 6,059,469 $4,135,657 $ 12,145,131 $7,984,890
============ ========== ============ ==========
Operating income (loss):
North America $ 1,037,406 $ 735,134 $ 2,917,362 $1,193,671
Europe (286,252) (386,977) (948,857) (580,838)
------------ ---------- ------------ ----------
$ 751,154 $ 348,157 $ 1,968,505 $ 612,833
============ ========== ============ ==========
Identifiable assets:
North America $ 51,549,162 $5,602,156 $ 51,549,162 $5,602,156
Europe 2,864,004 2,058,632 2,864,004 2,058,632
------------ ---------- ------------ ----------
$ 54,413,166 $7,660,788 $ 54,413,166 $7,660,788
============ ========== ============ ==========
</TABLE>
8
<PAGE> 9
NEON SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--MARKETABLE SECURITIES
NEON considers all highly liquid investments with a maturity of three months
or less to be cash equivalents.
NEON has evaluated its investment policies consistent with Financial
Accounting Standards Board Statement No. 115 ("FASB 115"), "Accounting for
Certain Investments in Debt and Equity Securities", and determined that its
investment securities are to be classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported in stockholders' equity under the caption "Accumulated
other comprehensive income (loss)." The cost of securities sold is based on the
specific identification method. Interest and dividends on securities classified
as available-for-sale are included in interest income.
The following is a summary of marketable securities classified as
"available-for-sale" securities as required by FASB 115:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1999 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
Debt Securities:
Cost $ 26,717,953 $ --
Gross unrealized losses (33,703) --
------------- -----------
Estimated fair value $ 26,684,250 --
============= ===========
</TABLE>
The amortized cost and estimated fair value based on published closing
prices of securities at September 30, 1999, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to repay obligations without
prepayment penalties.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------------------
ESTIMATED FAIR
COST VALUE
------------- --------------
<S> <C> <C>
Available-for-sale:
Due in one year or less $ 21,019,006 $ 21,002,216
Due after one year through five years 5,698,947 5,682,034
</TABLE>
9
<PAGE> 10
NOTE 7--ACQUISITIONS
On September 29, 1999, NEON completed its acquisition of Beyond Software
Inc. The business, headquartered in Santa Clara, California, was acquired for
$1,870,000 in cash, plus the assumption of certain liabilities. The transaction
was accounted for under the purchase method of accounting, and accordingly,
results of operations of Beyond Software Inc. since September 29, 1999 have been
included in the consolidated statements of operations. The acquisition resulted
in goodwill of $2,385,294, which will be amortized on a straight-line basis over
five years.
The preliminary net purchase price allocation is as follows:
<TABLE>
<S> <C>
Current assets, other than cash $ 62,421
Property, plant and equipment 205,159
Goodwill 2,385,294
Current liabilities (769,404)
Long-term liabilities (13,470)
-------------
Total purchase price $ 1,870,000
=============
</TABLE>
NOTE 8--SUBSEQUENT EVENTS
On October 29, 1999, NEON entered into an agreed settlement with BMC
Software of its lawsuit with BMC Software. BMC Software originally filed the
lawsuit in August 1995 in the District Court of Travis County, Texas, 200th
Judicial District, against Peregrine/Bridge Transfer Corporation, John J. Moores
and a group of employees of Peregrine/Bridge Transfer Corporation who were also
former employees of BMC Software. In the lawsuit, BMC Software had alleged
misappropriation and infringement of certain trade secrets, confidential
information and corporate opportunity, as well as breach of contract and
fiduciary relations by the named individuals. NEON, which is the exclusive
distributor of software products developed by Peregrine/Bridge Transfer
Corporation, had been named as a co-defendant in this lawsuit in December 1996.
The October 1999 settlement resolves claims by BMC Software relating to NEON's
and Peregrine/Bridge Transfer Corporations's title in and right to market the
products of Peregrine/Bridge Transfer Corporation that were the subject of the
lawsuit. Under the terms of the settlement, BMC Software paid $30 million to
parties other than NEON. In addition, the settlement does not obligate NEON or
any other co-defendant to make any present or future cash payment or
disgorgement or impose any restriction on the marketing and sale by NEON of its
or Peregrine/Bridge Transfer Corporation's products. NEON has been indemnified
against its costs and expenses in this lawsuit by Peregrine/Bridge Transfer
Corporation under the terms of its distributor agreement with Peregrine/Bridge
Transfer Corporation.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements that
involve risks and uncertainties. NEON's actual results and the timing of certain
events could differ materially from those discussed in the forward-looking
statements as a result of certain factors, including those set forth under the
heading "Risk Factors" in NEON's filings with the Securities and Exchange
Commission, including its Form 10-K for the fiscal year ended March 31, 1999.
Additional information concerning factors that could cause results to differ
materially from those forward-looking statements is contained under Item 5.
"Other Information." All forward-looking statements in this discussion are
expressly qualified in their entirety by the cautionary statements set forth
below under Item 5 and in NEON's Form 10-K.
RECENT EVENTS
On October 29, 1999, NEON entered into an agreed settlement with BMC
Software of its lawsuit with BMC Software. BMC Software originally filed the
lawsuit in August 1995 in the District Court of Travis County, Texas, 200th
Judicial District, against Peregrine/Bridge Transfer Corporation, John J. Moores
and a group of employees of Peregrine/Bridge Transfer Corporation who were also
former employees of BMC Software. In the lawsuit, BMC Software had alleged
misappropriation and infringement of certain trade secrets, confidential
information and corporate opportunity, as well as breach of contract and
fiduciary relations by the named individuals. NEON, which is the exclusive
distributor of software products developed by Peregrine/Bridge Transfer
Corporation, had been named as a co-defendant in this lawsuit in December 1996.
The October 1999 settlement resolves claims by BMC Software relating to NEON's
and Peregrine/Bridge Transfer Corporations's title in and right to market the
products of Peregrine/Bridge Transfer Corporation that were the subject of the
lawsuit. Under the terms of the settlement, BMC Software paid $30 million to
parties other than NEON. In addition, the settlement does not obligate NEON or
any other co-defendant to make any present or future cash payment or
disgorgement or impose any restriction on the marketing and sale by NEON of its
or Peregrine/Bridge Transfer Corporation's products. NEON has been indemnified
against its costs and expenses in this lawsuit by Peregrine/Bridge Transfer
Corporation under the terms of its distributor agreement with Peregrine/Bridge
Transfer Corporation.
OVERVIEW
NEON develops, markets and supports Enterprise Access and Integration,
Security, and Subsystem Management software for all industries. NEON was
incorporated in May 1993 and is a successor by merger to NEON Systems, Inc., an
Illinois corporation which was incorporated in June 1991. NEON introduced its
first generally available products, Shadow Direct and Shadow Web Server, in
November 1994 and January 1995, respectively. NEON introduced the third member
of the Shadow product line, Shadow Enterprise Direct, in February 1996. NEON's
Shadow products provide rapid and cost-effective access to and connectivity
between enterprise data, transactions and applications. Shadow Direct enables
client/server applications to access and integrate with mainframe data and
applications. Shadow Enterprise Direct provides access and integration between
client/server systems. In addition, through its distributor agreement with
Peregrine/Bridge Transfer Corporation, NEON launched the first of its Enterprise
Subsystem Management products in January 1997. This product line, which
currently consists of seven products, improves the availability and performance
of mainframe subsystems to support the growing demands placed on the mainframe.
NEON announced the release on May 3, 1999 of its new enterprise security
management product, Halo SSO(TM). On September 29, 1999 NEON closed its
acquisition of the principal assets of Beyond Software Inc., a privately-held
company based in Santa Clara, California, that provided Enterprise Access and
Integration software for IBM OS/390(R) -MVS(R) and VM/ESA(R) mainframe
platforms. The assets, including rights to Beyond Software's VM/ESA(R) software
products, were acquired for $1.87 million, plus the assumption of certain
liabilities.
11
<PAGE> 12
NEON has devoted significant resources to building its sales and marketing
functions, resulting in revenue increases. NEON has been profitable in every
quarter since the quarter ended September 30, 1996. However, there can be no
assurance that NEON will remain profitable on a quarterly or annual basis.
Management expects to continue to devote substantial resources to its sales and
marketing functions in the future.
NEON derives revenues exclusively from software licenses and maintenance
services. Historically, NEON's Shadow products have generated substantially all
of its revenues. License fees, which are based upon the number and capacity of
servers as well as the number of client users, are generally due upon license
grant and include a one-year maintenance period. The license sales process
typically takes three to six months. After the initial year of license, NEON
provides ongoing maintenance services, which include technical support and
product enhancements, for an annual fee based upon the current price of the
products. Since NEON's inception, over 95% of customers have elected to continue
maintenance service after the first year. Maintenance revenues are expected to
continue to increase as a percentage of total revenues as NEON's customer base
continues to grow.
NEON recognizes revenues in accordance with the American Institute of
Certified Public Accountants Statement of Position 97-2. NEON sells its products
under perpetual license and recognizes license revenues when all of the
following conditions are met: a non-cancellable license agreement has been
signed; the product has been delivered; there are no material uncertainties
regarding customer acceptance; collection of the receivable is probable; and no
other significant vendor obligation exists. Maintenance revenues are recognized
ratably over the maintenance service period, which is typically one year. The
portion of maintenance revenues that has not yet been recognized as revenue is
reported as deferred revenue on NEON's balance sheet.
NEON conducts its business in the United Kingdom and Germany through two
wholly-owned consolidated subsidiaries. Revenues from these subsidiaries are
denominated in local currencies. Pursuant to these foreign operations, NEON is
exposed to foreign currency fluctuations for its net working capital positions.
At September 30, 1999, NEON had unhedged net current assets denominated in
British pounds aggregating 985,259 British pounds and unhedged net current
liabilities denominated in deutschemarks aggregating 630,433 deutschemarks. At
that date, NEON had no material commitments that would be satisfied in
currencies other than U.S. dollars. In other international markets, NEON
conducts substantially all of its business through independent third-party
distributors. Revenues derived from third-party distributors are denominated in
U.S. dollars. Revenues recognized from sales to customers outside North America,
primarily in Europe, represented approximately 27% and 26% of total revenues in
the three months ended September 30, 1998 and 1999, respectively. In the six
months ended September 30, 1998 and 1999, revenues recognized from sales to
customers outside North America, primarily in Europe, represented approximately
26% and 30%, respectively of total revenues. The British pound and the German
mark have been relatively stable against the U.S. dollar for the past several
years. As a result, foreign currency fluctuations have not had a significant
impact on NEON's revenues or operating results. Management does not currently
have an active foreign exchange hedging program; however, NEON may implement a
program to mitigate foreign currency transaction risk in the future. Although
NEON's international operations and sales levels are subject to economic, fiscal
and monetary policy of foreign governments, to date these factors have not had a
material effect on NEON's results of operations or liquidity. NEON expects that
fiscal 2000 revenues from international operations should not vary substantially
as a percentage of total revenue and from the level experienced in fiscal 1999.
12
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth, for the periods illustrated, certain
statement of operations data expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
License 72% 74% 72% 75%
Maintenance 28 26 28 25
--- --- --- ---
Total revenues 100 100 100 100
Cost of revenues:
Cost of licenses 5 6 4 7
Cost of maintenance 6 5 5 5
--- --- --- ---
Total cost of revenues 11 11 9 12
--- --- --- ---
Gross profit 89 89 91 88
Operating expenses:
Sales and marketing 39 44 39 41
Research and development 19 21 20 21
General and administrative 16 13 14 13
Non-cash compensation 2 2 2 6
--- --- --- ---
Total operating expenses 76 80 75 80
--- --- --- ---
Operating income 13 9 16 8
Interest and other, net 10 1 9 -
--- --- --- ---
Income before provision for income 23 10 25 8
taxes
Provision for income taxes 9 4 9 3
--- --- --- ---
Net income 14% 6% 16% 5%
=== === === ===
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES
Total revenues. NEON's revenues increased $2.0 million or 47% from $4.1
million for the three months ended September 30, 1998 to $6.1 million for the
three months ended September 30, 1999. No customer accounted for more than 10%
of total revenues in the three months ended September 30, 1998; one customer
accounted for 17% of total revenues in the three months ended September 30,
1999.
License. License revenues increased $1.3 million or 42% from $3.1 million
for the three months ended September 30, 1998 to $4.4 million for the three
months ended September 30, 1999. Approximately $900,000 of this increase
resulted from increased license sales of NEON's Shadow products, with an
additional $360,000 increase in sales of Enterprise Subsystem Management
products.
Maintenance. Maintenance revenues increased $647,000 or 61% from $1.1
million for the three months ended September 30, 1998 to $1.7 million for the
three months ended September 30, 1999. This increase resulted primarily from the
increase in NEON's cumulative installed base of customers.
COST OF REVENUES
Cost of licenses. Cost of license revenues includes costs of product
licenses, such as product manuals, distribution and media costs for NEON's
software products, as well as royalty payments to third parties related to
license revenues primarily resulting from NEON's sales of Enterprise Subsystem
Management products. Cost of license revenues increased $65,000 or 26% from
$251,000, or 8% of license revenues, for the three months ended September 30,
1998 to $316,000, or 7% of license revenues, for the three months ended
September 30, 1999. The increase in the cost of license revenues was
13
<PAGE> 14
attributable to additional royalties on increased shipments of Enterprise
Subsystem Management products sold by NEON under the terms of its distributor
agreement with Peregrine/Bridge Transfer Corporation.
Cost of maintenance. Cost of maintenance revenues includes personnel and
other costs related to NEON's customer support department. Cost of maintenance
revenues increased $144,000 or 70% from $207,000, or 20% of maintenance
revenues, for the three months ended September 30, 1998 to $351,000, or 21% of
maintenance revenues, for the three months ended September 30, 1999. The dollar
increase was due principally to increased customer support costs in providing
maintenance services to NEON's growing installed customer base.
OPERATING EXPENSES
Sales and marketing. Sales and marketing expenses include salaries,
commissions, bonuses, benefits and travel expenses of sales, presales support
and marketing personnel, together with trade show participation and other
promotional expenses. These expenses increased $528,000 or 29% from $1.8
million, or 44% of total revenues, for the three months ended September 30, 1998
to $2.4 million, or 39% of total revenues, for the three months ended September
30, 1999. The dollar increase includes a $39,000 increase in expenses related to
NEON's sales offices in Germany and the United Kingdom. This dollar increase
also includes a $219,000 increase in compensation expenses incurred in the
hiring of additional North American sales personnel and the payment of increased
sales commissions as a result of NEON's revenue growth. In addition, the dollar
increase includes approximately $137,000 of increased agent commissions and
$133,000 of marketing and selling expenses.
Research and development. Research and development expenses include
salaries, bonuses and benefits to product authors, product developers and
product documentation personnel and the computer hardware, software and
telecommunication expenses associated with these personnel. NEON compensates
product authors based on a percentage of product license revenues generated by
products for which they are responsible. Research and development expenses
increased $293,000 or 33% from $894,000, or 21% of total revenues, for the three
months ended September 30, 1998 to $1.2 million, or 19% of total revenues, for
the three months ended September 30, 1999. The dollar increase results primarily
from a $287,000 increase in recruitment and compensation costs due to increased
staffing and, to a lesser extent, from increased product commissions paid to
product authors. Research and development expenses are expected to increase in
absolute dollar amounts but not vary substantially as a percentage of total
revenues from the level experienced in the three months ended September 30,
1999. NEON has followed Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" for the past several years. Research and development expenditures in
general have been charged to operations as incurred and any amounts which were
capitalizable have been immaterial.
General and administrative. General and administrative expenses include
salaries, personnel and related costs for NEON's executive, financial, legal and
administrative staff. General and administrative expenses increased $436,000 or
83% from $524,000, or 13% of total revenues, for the three months ended
September 30, 1998 to $960,000, or 16% of total revenues, for the three months
ended September 30, 1999. This dollar increase resulted primarily from a
$298,000 increase in legal expenses, primarily associated with the litigation
with New Era of Networks (See Note 4 to the Financial Statements) and $53,000 in
costs associated with SEC reporting and stockholder services incurred by NEON in
satisfaction of its obligations as a public company in fiscal 2000 that were not
applicable as a private company in fiscal 1999. Additionally, insurance costs
increased $34,000, principally due to increased coverage. NEON anticipates that
general and administrative expenses will continue to increase in absolute
dollars but should not vary substantially as a percentage of total revenues from
the level experienced in the three months ended September 30, 1999.
14
<PAGE> 15
<PAGE> 16
Non-cash compensation. During the twelve months prior to NEON's initial
public offering on March 5, 1999 NEON granted stock options at prices
subsequently considered to be below the then-fair value of the underlying stock.
The cumulative differential between the fair value of the underlying stock and
the exercise price of the granted options was $2.5 million. This amount will be
recognized as expense over the vesting period of the granted options. During the
three months ended September 30, 1999, $136,000 was recognized as a non-cash
compensation expense. The remaining differential of $1.4 million will be
recognized over the remaining vesting period, approximately three years, of the
granted options.
Interest income. Interest income increased $577,000 from $19,000 for the
three months ended September 30, 1998 to $596,000 for the three months ended
September 30, 1999. This increase reflects the increase in NEON's cash and cash
equivalents and investments balances resulting primarily from the $41.2 million
of net proceeds received from NEON's March 1999 initial public offering.
Provision for income taxes. NEON fully utilized its net operating loss
carryforward for U.S. income tax purposes in fiscal 1998. The effective income
tax rate was 37% and 38% for the three months ended September 30, 1998 and 1999,
respectively.
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1998
REVENUES
Total revenues. NEON's revenues increased $4.1 million or 52% from $8.0
million for the six months ended September 30, 1998 to $12.1 million for the six
months ended September 30, 1999. No customer accounted for more than 10% of
total revenues in the six months ended September 30, 1998; one customer
accounted for 29% and a second customer 18% of total revenues in the six months
ended September 30, 1999.
License. License revenues increased $2.8 million or 47% from $6.0 million
for the six months ended September 30, 1998 to $8.8 million for the six months
ended September 30, 1999. Substantially all of this increase resulted from
increased license sales of NEON's Shadow products.
Maintenance. Maintenance revenues increased $1.4 million or 68% from $2.0
million for the six months ended September 30, 1998 to $3.3 million for the six
months ended September 30, 1999. This increase resulted primarily from increases
in NEON's cumulative installed base of customers.
COST OF REVENUES
Cost of licenses. Cost of license revenues includes costs of product
licenses, such as product manuals, distribution and media costs for NEON's
software products, as well as royalty payments to third parties related to
license revenues primarily resulting from NEON's sales of Enterprise Subsystem
Management products. Cost of license revenues decreased $117,000 or 22% from
$527,000, or 9% of license revenues, for the six months ended September 30, 1998
to $411,000, or 5% of license revenues, for the six months ended September 30,
1999. The decrease in the cost of license revenues was attributable to reduced
royalties on decreased shipments of Enterprise Subsystem Management products
sold by NEON under the terms of its distributor agreement with Peregrine/Bridge
Transfer Corporation.
Cost of maintenance. Cost of maintenance revenues includes personnel and
other costs related to NEON's customer support department. Cost of maintenance
revenues increased $216,000, or 53% from $408,000, or 21% of maintenance
revenues, for the six months ended September 30, 1998 to $623,000, or 19% of
maintenance revenues, for the six months ended September 30, 1999. The dollar
increase was due principally to increased customer support costs in providing
maintenance services to NEON's growing installed customer base. The percentage
decrease resulted primarily from maintenance revenues outpacing NEON's need for
additional support staff.
15
<PAGE> 17
OPERATING EXPENSES
Sales and marketing. Sales and marketing expenses include salaries,
commissions, bonuses, benefits and travel expenses of sales, presales support
and marketing personnel, together with trade show participation and other
promotional expenses. These expenses increased $1.6 million or 48% from $3.2
million, or 41% of total revenues, for the six months ended September 30, 1998
to $4.8 million, or 40% of total revenues, for the six months ended September
30, 1999. The dollar increase includes a $290,000 increase in expenses related
to NEON's sales offices in Germany and the United Kingdom, a $707,000 increase
in additional compensation expenses incurred in the hiring of additional North
American sales personnel, and the payment of increased sales commissions as a
result of NEON's revenue growth. Additionally, the dollar increase includes
approximately $568,000 of increased North American marketing and selling
expenses.
Research and development. Research and development expenses include
salaries, bonuses and benefits to product authors, product developers and
product documentation personnel and the computer hardware, software and
telecommunication expenses associated with these personnel. NEON compensates
product authors based on a percentage of product license revenues generated by
products for which they are responsible. Research and development expenses
increased $725,000, or 44% from $1.7 million, or 21% of total revenues, for the
six months ended September 30, 1998 to $2.4 million, or 20% of total revenues,
for the six months ended September 30, 1999.
The dollar increase includes a $632,000 increase in recruitment and compensation
costs due to increased staffing, partially offset by decreased product
commissions paid to product authors. The dollar increase also includes $83,000
of increased operating expenses, principally due to office and computer
facilities required by a larger number of research and development staff. NEON
anticipates that it will continue to devote substantial resources to product
research and development for the foreseeable future. Research and development
expenses are expected to increase in absolute dollar amounts but not vary
substantially as a percentage of total revenues from the level experienced in
the six months ended September 30, 1999. NEON has followed Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" for the past several years.
Research and development expenditures in general have been charged to operations
as incurred and any capitalizable amounts have been immaterial.
General and administrative. General and administrative expenses include
salaries, personnel and related costs for NEON's executive, financial, legal and
administrative staff. General and administrative expenses increased $638,000 or
62% from $1.0 million, or 13% of total revenues, for the six months ended
September 30, 1998 to $1.7 million, or 14% of total revenues, for the six months
ended September 30, 1999. This dollar increase resulted primarily from a
$366,000 increase in legal costs associated with the litigation with New Era of
Networks and $56,000 in costs associated with SEC reporting and stockholder
services incurred by NEON in satisfaction of its obligations as a public company
in fiscal 2000 that were not applicable as a private company in fiscal 1999.
Additionally, NEON experienced a $62,000 increase in insurance costs,
principally due to increased coverage. NEON anticipates that general and
administrative expenses will continue to increase in absolute dollars but should
not vary substantially as a percentage of total revenues from the level
experienced in the six months ended September 30, 1999.
Non-cash compensation. During the twelve months prior to NEON's initial
public offering on March 5, 1999 NEON granted stock options at prices
subsequently considered to be below the then-fair value of the underlying stock.
The cumulative differential between the fair value of the underlying stock and
the exercise price of the granted options was $2.5 million. This amount will be
recognized as expense over the vesting period of the granted options. During the
six months ended September 30, 1999, $273,000 was recognized as a non-cash
compensation expense. The remaining differential of $1.4 million will be
recognized over the remaining vesting period, approximately three years, of the
granted options.
16
<PAGE> 18
<PAGE> 19
Interest income. Interest income increased $1.1 million from $32,000 for the
six months ended September 30, 1998 to $1,140,000 for the six months ended
September 30, 1999. This increase reflects the increase in NEON's cash and cash
equivalents and investments balances resulting primarily from the $41.2 million
of net proceeds received from NEON's March 1999 initial public offering.
Provision for income taxes. NEON fully utilized its net operating loss
carryforward for U.S. income tax purposes in fiscal 1998. The effective income
tax rate was 37% and 38% for the six months ended September 30, 1998 and 1999,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
NEON's cash and cash equivalent balance decreased to $14.5 million at
September 30, 1999 from $45.4 million at March 31, 1999. This decrease was due
primarily to the investment of $26.7 million in marketable securities.
Additional cash requirements included the acquisition of Beyond Software Inc.
in September 1999 and quarterly estimated tax payments totaling $1.1 million.
Increased accounts receivable-trade balances further contributed to the decrease
in cash and cash equivalents during this six-month period. These uses of cash
were offset partially by interest earned on the aforementioned investments of
the net proceeds received from NEON's March 1999 initial public offering.
Net cash provided by operating activities was $193,000 in the six months
ended September 30, 1998, while the net cash used in operating activities was
$2.0 million in the six months ended September 30, 1999. The additional net cash
used by operating activities during the six months ended September 30, 1999 was
primarily the result of increased balances in NEON's accounts receivable-trade.
A majority of NEON's revenues are recorded in the latter half of each
quarter. Accordingly, as NEON's quarterly revenues have increased, the aggregate
balance of accounts receivable-trade has also increased. Future increases in
NEON's accounts receivable-trade balance will reduce cash flows otherwise
available from NEON's operating results.
Net cash used by NEON in investing activities was $59,000 and $28.7 million
in the six months ended September 30, 1998 and 1999, respectively. The principal
investing use in the six months ended September 30, 1998 was purchases of
property and equipment, including computer hardware and software to support
NEON's growing employee base. Purchases of both short-term and long-term
marketable securities, the acquisition of Beyond Software Inc., and purchases of
property and equipment, including computer hardware, were the principal uses of
investing funds in the six months ended September 30, 1999. As of September 30,
1999, NEON had no material commitment for capital expenditures.
NEON's net cash provided by (used in) financing activities was $101,000 and
($98,000) in the six months ended September 30, 1998 and 1999, respectively. Net
cash provided by financing activities in the period ending September 30, 1998
was from amounts received from the exercise of employee stock options. For the
three months ended September 30, 1999, amounts received from the exercise of
employee stock options were more than offset by the cost of shares repurchased
by NEON in settlement of payroll tax obligations of employees related to the
exercises of these stock options.
NEON believes that its current balances of cash and investments in
highly-liquid marketable investment securities as well as cash provided by
future operations will be sufficient to meet its working capital and anticipated
capital expenditure requirements for at least the next 12 months. Thereafter,
NEON may require additional funds to support its working capital requirements or
for other purposes and may seek to raise such additional funds through public or
private equity financing or from other sources. There can be no assurance that
additional financing will be available at all, or if available, that such
financing will be obtainable on terms acceptable to NEON or that any additional
financing will not be dilutive.
17
<PAGE> 20
YEAR 2000 ISSUES
Background and assessment. Some computers, software and other equipment
include programming code in which calendar year data is abbreviated to only two
digits. As a result of this design decision, some of these systems could fail to
operate or fail to produce correct results if "00" is interpreted to mean 1900,
rather than 2000. These problems are widely expected to increase in frequency
and severity as the Year 2000 approaches and are commonly referred to as the
Year 2000 Problem.
In assessing the effect of the Year 2000 Problem on NEON, management
determined that there existed three general areas that needed to be evaluated:
o Software products sold to customers
o Internal infrastructure
o Supplier/third party relationships
A discussion of the various activities related to assessment and actions
resulting from those evaluations is set forth below.
Software products sold to customers. Several years ago, NEON initiated and
completed a recoding of its software products that made them Year 2000
compliant. All earlier versions of the software products previously delivered to
customers have been replaced with those recoded products. Subsequently developed
products have been tested for Year 2000 compliance and NEON believes that these
products are Year 2000 compliant. All of NEON's products have been tested for
Year 2000 compliance. The ongoing product development activities of NEON
continually consider and address the Year 2000 Problem in their development.
However, once licensed, NEON's products interact with other non-Neon developed
products and operate on computer systems that are not under NEON's control.
These factors could affect the performance of NEON's products if a Year 2000
Problem existed in a different facet of a customer's information technology
infrastructure. NEON has not and will not assess the existence of these
potential problems in its customers' various environments. NEON does not believe
that the development of Year 2000 compliant products has created or will create
a significant increase in the development costs of its software products.
Internal Infrastructure. NEON has completed examining and verifying that all
of its personal computers, servers and software are Year 2000 compliant. This
examination revealed that a small number of personal computers were not
compliant. NEON has completed the process of replacing or upgrading all items
noted that were not Year 2000 compliant. NEON has researched and found that the
vendors of all of its critical applications have represented that their products
are Year 2000 compliant. NEON has completed upgrading its financial and
accounting software. This upgrade involved purchasing an upgraded version of its
existing financial and accounting software package that the vendor certifies to
be free of Year 2000 Problems. The costs related to these efforts have not been
and are not expected to be material to NEON's business, financial condition or
results of operations.
NEON has assessed potential problems associated with embedded technology.
These assessments indicate that, due to the nature of NEON's operations, the
non-information technology systems (i.e., embedded technology such as
microcontrollers) do not represent a significant area of risk relative to Year
2000 readiness. NEON's operations do not include capital-intensive equipment
with embedded microcontrollers.
NEON has not utilized the resources of third parties to assess and/or
validate the reliability of its Year 2000 Problem. Additionally, NEON does not
expect to do so in the future. To date the assessment and corrections of the
Year 2000 Problem have not led to the deferment of information
technology-related projects.
18
<PAGE> 21
Suppliers/third party relationships. NEON has been gathering information
from vendor Websites and available compliance statements and has initiated
communications with third-party suppliers of the major computers, software and
other equipment used, operated or maintained by NEON to identify and, to the
extent possible, resolve issues involving the Year 2000 Problem. NEON relies on
outside vendors for water, electrical and telecommunications services as well as
climate control, building access and other infrastructure services. NEON is not
capable of independently evaluating the Year 2000 compliance of the systems
utilized to supply these services. NEON has received no assurance of compliance
from the providers of these services. There can be no assurance that these
suppliers will resolve any or all Year 2000 Problems with these systems before
the occurrence of a material disruption to the business of NEON or any of its
suppliers. Any failure of these third parties to resolve Year 2000 problems with
their systems in a timely manner could have a material adverse effect on NEON's
business, financial condition or results of operations.
Strain on customers' information technology resources. Some organizations'
systems may be seriously disrupted as a result of the Year 2000 Problem. As a
result, their attention and capital expenditures could shift away from the need
for applications addressed by NEON's products to capital expenditures required
to resolve their Year 2000 Problems.
Contingency Plans. NEON has developed contingency plans to be implemented as
part of its efforts to identify and correct Year 2000 Problems affecting its
internal systems. Depending on the systems affected, these plans could include:
o Accelerated replacement of affected equipment or software
o Short to medium-term use of back-up equipment and software
o Increased work hours for NEON personnel or use of contract personnel to
correct, on an accelerated schedule, any Year 2000 Problems which arise
or to provide manual workarounds for information systems
o Other similar approaches
If NEON is required to implement any of these contingency plans, such plans
could have a material adverse effect on NEON's business, financial conditions or
results of operations.
To date, NEON has incurred less than $50,000 in expenses relating to
identification and correction of Year 2000 Problems, and NEON does not expect to
incur any material additional expenses for such activities in fiscal year 2000.
Based on the actions taken to date as discussed above, NEON believes that it
has identified and resolved all Year 2000 Problems that could materially
adversely affect its business and operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NEON is exposed to a variety of risks, including foreign currency exchange
rate fluctuations and changes in the market value of its investments. In seeking
to minimize the risks and/or costs associated with such activities, NEON manages
exposure to change in interest rates and foreign currency exchange rates.
The majority of NEON's foreign currency transactions are denominated in the
British pound sterling, which is the functional currency of NEON Systems (UK)
Ltd. As sales contracts are denominated and settled in the functional currency,
risks associated with currency fluctuations are minimized to foreign currency
translation adjustments. NEON does not currently hedge against foreign currency
translation risks and believes that foreign currency exchange risk is not
significant to its operations.
NEON adheres to a conservative investment policy, whereby its principal
concern is the preservation of liquid funds while maximizing its yield on such
assets. Cash and cash equivalents approximated $14.5 million at September 30,
1999, and were invested
19
<PAGE> 22
in different types of money market securities. An additional $21.0 million was
invested in short-term available-for-sale marketable securities with maturity
dates from three months to one year in term, and $5.7 million was invested in
available-for-sale marketable securities with maturity dates beyond one year.
NEON believes that a near-term change in interest rates would not materially
affect its financial position, results of operations or net cash flows for
fiscal year 2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Please see the discussion in Part I, Item 2.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the caption "Recent Events."
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - In March 1999, NEON
completed the initial public offering of its common stock (the "IPO").
The Securities and Exchange Commission declared the Registration
Statement (File No. 333-69651) relating to the IPO effective on March
4, 1999. In the IPO, NEON issued and sold 3,041,000 shares for an
aggregate price to the public of $45,615,000, and a sole selling
stockholder sold 64,000 shares of common stock for an aggregate
offering price of $960,000. The IPO was a firm commitment underwriting,
and the managing underwriters of the IPO were Donaldson, Lufkin &
Jenrette Securities Corporation, Hambrecht & Quist LLC and CIBC
Oppenheimer Corp. The underwriting discount incurred by NEON relating
to the IPO was $3,193,050. Net offering proceeds received by NEON from
the IPO were approximately $41.2 million. Approximately $1.0 million of
the proceeds received by NEON from the IPO was used to repay existing
indebtedness and $1.9 million was used in connection with the
acquisition of the assets of Beyond Software Inc. The remainder of the
proceeds from the IPO (other than the proceeds used to repay the
existing indebtedness and other uses described in Part I, Item 2.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the caption "Liquidity and Capital
Resources" ) has been invested in interesting-bearing, investment-grade
securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS- Not Applicable
ITEM 5. OTHER INFORMATION - RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS -
This filing contains certain forward-looking statements such as NEON's
or management's intentions, hopes, beliefs, expectations, strategies,
predictions or any other variations thereof or comparable phraseologies
of NEON's future activities or other future events or conditions within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. Investors are cautioned
that all forward-looking statements involve risks and uncertainty.
Although NEON presently believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and, therefore, there can be no
assurance that the forward-looking statements included in this filing
will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a
representation by NEON or any other person that the objectives and
plans of NEON will be achieved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K - NEON did not file any reports on Form 8-K
during the second quarter of its fiscal year 2000, which was the
quarter for which this report is filed.
20
<PAGE> 23
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.
NEON SYSTEMS, INC.
November 15, 1999 /s/ JOE BACKER
---------------------------------------
Joe Backer
President and Chief Executive Officer
(Principal executive officer)
November 15, 1999 /s/ JOHN REILAND
---------------------------------------
John S. Reiland
Chief Financial Officer
(Chief accounting officer)
21
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 14,511,999
<SECURITIES> 21,002,216
<RECEIVABLES> 8,514,683
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,530,400
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0
0
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</TABLE>
