<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1999
REGISTRATION NO. 333-69651
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------
NEON SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 76-0345839
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
14100 SOUTHWEST FREEWAY
SUITE 500
SUGAR LAND, TEXAS 77478
(281) 491-4200
(Address, including zip code, telephone number,
including area code, of registrant's principal executive office)
JOE BACKER
NEON SYSTEMS, INC.
14100 SOUTHWEST FREEWAY
SUITE 500
SUGAR LAND, TEXAS 77478
(281) 491-4200
(Name, address, including zip code, telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
ROBERT P. TAYLOR, III RONALD G. SKLOSS
KENT JAMISON Brobeck, Phleger & Harrison LLP
Locke Liddell & Sapp LLP 301 Congress Avenue, Suite 1200
2200 Ross Avenue, Suite 2200 Austin, Texas 78701
Dallas, Texas 75201 (512) 477-5495
(214) 740-8000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value per share.... 2,875,000 (a) $14.00 $40,250,000 $11,190 (b)
</TABLE>
(a) Includes 375,000 shares as to which the Registrant has granted the
Underwriters an option to cover over-allotments.
(b) $10,391 was previously paid on December 23, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
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SUBJECT TO COMPLETION - FEBRUARY 9, 1999
PROSPECTUS
, 1999
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
[LOGO]
2,500,000 SHARES OF COMMON STOCK
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<TABLE>
<S> <C>
NEON SYSTEMS, INC.:
- - We develop and sell
software products that
help organizations access
and integrate data,
transactions and
applications from the
Internet and mainframe and
client/server systems.
- - NEON Systems, Inc.
14100 Southwest Freeway
Suite 500
Sugar Land, Texas 77478
(281) 491-4200
PROPOSED SYMBOL & MARKET:
- - NESY/NASDAQ
THE OFFERING:
- - We are offering 2,436,000
of the shares and an
existing stockholder is
offering 64,000 of the
shares.
- - The underwriters have an
option to purchase an
additional 375,000 shares
from NEON to cover over-
allotments.
- - This is our initial public
offering, and no public
market currently exists
for our shares. We
anticipate that the
initial public offering
price will be between
$12.00 and $14.00 per
share.
- - We plan to use the
proceeds from this
offering for working
capital and other general
corporate purposes as well
as the retirement of
existing indebtedness. We
will not receive any
proceeds from the shares
sold by the selling
stockholder.
- - Closing: , 1999.
</TABLE>
<TABLE>
<CAPTION>
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<S> <C> <C>
Per Share Total
- ----------------------------------------------------------------------------
Public offering price: $ $
Underwriting fees:
Proceeds to NEON:
Proceeds to selling stockholder:
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</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
CIBC OPPENHEIMER
THE UNDERSIGNED IS FACILITATING INTERNET DISTRIBUTION.
DLJDIRECT INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
Prospectus Summary................................................................... 3
Risk Factors......................................................................... 6
Forward-Looking Statements........................................................... 13
Use of Proceeds...................................................................... 13
Dividend Policy...................................................................... 13
Corporate Information................................................................ 13
Capitalization....................................................................... 14
Dilution............................................................................. 15
Selected Consolidated Financial Data................................................. 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 17
Business............................................................................. 27
Management........................................................................... 40
Certain Transactions................................................................. 47
Principal and Selling Stockholders................................................... 49
Description of Capital Stock......................................................... 51
Shares Eligible for Future Sale...................................................... 53
Underwriting......................................................................... 55
Legal Matters........................................................................ 57
Experts.............................................................................. 57
Available Information................................................................ 57
Index to Consolidated Financial Statements........................................... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED BY MORE DETAILED INFORMATION APPEARING IN OTHER
SECTIONS OF THIS PROSPECTUS. THE OTHER INFORMATION IS IMPORTANT, SO PLEASE READ
THIS ENTIRE PROSPECTUS CAREFULLY. UNLESS STATED OTHERWISE, THE INFORMATION
CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION TO PURCHASE 375,000 SHARES IS NOT EXERCISED.
OUR BUSINESS
We develop and sell software products that provide a way to integrate
applications and information residing on different computer systems. In
particular, our products provide a way for new applications on the Internet and
client/server computer systems to use data and transactions stored on mainframe
computer systems. By doing so, our products allow organizations to take
advantage of the ubiquity of the Internet and the flexibility of client/server
systems while preserving their investment in mainframes. Importantly, our
products provide a more timely, cost-effective way to deploy new Internet
applications or extend existing applications to the Internet to allow
organizations to participate in electronic commerce opportunities or new ways of
doing business using the Internet. We refer to our products as "Enterprise
Access and Integration" software.
We believe that many organizations have new strategic initiatives that
depend on effectively delivering information where it is needed, when it is
needed. One of the greatest challenges to implementing these new strategies is
exploiting powerful new technologies within the existing systems infrastructure
of an enterprise. Specifically, mainframes--computers with high processing
power-- provide proven reliability, scalability, security and control as well as
time-tested applications. Client/ server systems--newer, less powerful but more
flexible computing systems--enable many users and applications to share data
from a central computer resource known as a server. Client/server systems also
enable applications to be developed and deployed more rapidly than mainframe
applications. The Internet--a low-cost, global infrastructure of computer
networks--enables an organization to easily communicate with customers,
suppliers and partners and to extend employee access to key applications and
information.
Our main product family, Shadow, consists of three software applications:
- SHADOW DIRECT enables client/server applications to access and integrate
with mainframe data and applications
- SHADOW WEB SERVER enables Internet applications to access and integrate
with mainframe data and applications
- SHADOW ENTERPRISE DIRECT provides integration between client/server
systems
We believe our customers select our products for three main reasons. First,
Shadow accesses information directly from the mainframe to the client/server or
Internet application. Most competing products cannot do this and instead require
a separate computer server or application to take the information from the
mainframe and then send it to that application. Second, Shadow is very cost
effective. It is easy-to-use, can be installed quickly and has extensive
administrative capabilities. Third, Shadow can meet demanding application
requirements, such as a large number of users, and provide information from the
mainframe very quickly. In addition to our Shadow products, we market and sell a
suite of Enterprise Subsystem Management software products that support the
growing demands on the mainframe as it supports new users and applications.
Our goal is to be the leading provider of Enterprise Access and Integration
software. The following are key elements of our strategy:
- Maintain and enhance our technological leadership
- Capitalize on the market for Internet applications and e-business
solutions
- Leverage our installed base of customers
- Exploit our product development strength
- Maximize the benefits of our direct telesales model
Through December 31, 1998, we have shipped our products to over 200
organizations worldwide, including approximately one-fourth of the Fortune 100
companies. Representative domestic and international customers include American
Express, BASF, Dayton Hudson, Deutsche Bank, Exxon, Merrill Lynch, Motorola,
Sears, Skandia, Texaco and the U.S. Postal Service.
3
<PAGE>
THE OFFERING
The following information regarding shares outstanding is as of January 31,
1999. It includes 3,125,000 shares of common stock to be issued on conversion of
outstanding shares of our preferred stock and excludes 3,729,077 shares of
common stock reserved for issuance under our stock plans, of which 1,629,077
shares are subject to outstanding options.
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<S> <C>
Common Stock offered:
By NEON..................................... 2,436,000 shares
By the selling stockholder.................. 64,000 shares
Total................................... 2,500,000 shares
Common Stock to be outstanding
after this offering........................... 8,243,251 shares
Use of proceeds................................. We intend to use the estimated net
proceeds of $29.0 million that we will
receive from this offering for working
capital and other general corporate
purposes as well as the retirement of
existing indebtedness. We will not
receive any proceeds from the shares sold
by the selling stockholder.
Proposed Nasdaq National Market symbol.......... NESY
</TABLE>
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should read the following summary consolidated financial data together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and Notes thereto included
elsewhere in this prospectus. The pro forma as adjusted balance sheet data
reflects the following assumptions:
- The conversion of all outstanding shares of preferred stock into shares of
common stock
- The sale of 2,436,000 shares of our common stock in this offering at an
assumed offering price of $13.00 per share after deducting the estimated
underwriting discounts and commissions and estimated offering expenses and
the application of the net proceeds therefrom. See "Capitalization" and
"Use of Proceeds."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------- ------------------------
STATEMENT OF OPERATIONS DATA: 1996 1997 1998 1998
--------- --------- --------- ---------
1997
-------------
(UNAUDITED)
Revenues:
<S> <C> <C> <C> <C> <C>
License.......................................... $ 2,108 $ 6,101 $ 9,697 $ 6,307 $ 10,487
Maintenance...................................... 220 924 2,318 1,711 3,182
--------- --------- --------- ------ ---------
Total revenues................................. 2,328 7,025 12,015 8,018 13,669
Gross profit....................................... 2,152 6,421 10,720 7,343 12,335
Operating income (loss)............................ (532) 891 1,443 1,089 2,145
Net income (loss).................................. $ (598) $ 816 $ 1,161 $ 875 $ 1,364
--------- --------- --------- ------ ---------
--------- --------- --------- ------ ---------
Net income (loss) applicable to common
stockholders...................................... $ (678) $ 736 $ 1,061 $ 800 $ 1,289
--------- --------- --------- ------ ---------
--------- --------- --------- ------ ---------
Earnings (loss) per common share:
Basic............................................ $ (1.62) $ 0.35 $ 0.45 $ 0.34 $ 0.49
--------- --------- --------- ------ ---------
--------- --------- --------- ------ ---------
Diluted.......................................... $ (1.62) $ 0.14 $ 0.19 $ 0.14 $ 0.20
--------- --------- --------- ------ ---------
--------- --------- --------- ------ ---------
Shares used in computing earnings (loss) per common
share:
Basic............................................ 417 2,094 2,371 2,341 2,608
Diluted.......................................... 417 5,671 6,268 6,238 6,934
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
--------------------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 4,511 $ 32,413
Working capital........................................... 3,004 31,955
Total assets.............................................. 9,902 37,804
Secured notes payable..................................... 1,049 --
Series A redeemable, convertible preferred stock.......... 1,738 --
Total stockholders' equity................................ 1,840 32,529
</TABLE>
5
<PAGE>
RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF VARIOUS RISKS,
INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE RISK
FACTORS, TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS,
BEFORE YOU DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK. THE RISKS SET
OUT BELOW MAY NOT BE EXHAUSTIVE.
OUR FINANCIAL RESULTS MAY BE AFFECTED BY FACTORS OUTSIDE OF OUR CONTROL
Our future operating results may vary significantly from quarter to quarter
due to a variety of factors, many of which are outside our control. Our expense
levels are based primarily on our estimates of future revenues and are largely
fixed. We may be unable to adjust spending rapidly enough to compensate for any
unexpected revenue shortfall. Accordingly, any significant shortfall in revenues
in relation to our planned expenditures would materially adversely affect our
business, operating results and financial condition.
The amount of revenues associated with particular software sales can vary
significantly. In various quarters in the past, we have derived a significant
portion of our software license revenues from a small number of relatively large
sales. An inability to close one or more large sales that we had targeted to
close in a particular period could materially adversely affect our operating
results for that period. Moreover, we typically realize a majority of our
software license revenues in the last month of a quarter. As a result, minor
delays in the timing of customer orders can cause significant variability in our
operating results for any particular period.
Due to the foregoing factors, we cannot predict with certainty our quarterly
revenues and operating results. Further, we believe that period-to-period
comparisons of our operating results are not necessarily a meaningful indication
of future performance. It is likely that in one or more future quarters our
results may fall below the expectations of securities analysts and investors. If
this occurs, the trading price of our common stock would likely decline.
OUR OPERATING RESULTS MAY VARY DUE TO SEASONALITY
Historically, our revenues have tended to be strongest in the third and
fourth quarters of our fiscal year and to decrease slightly in our first fiscal
quarter. We believe that our seasonality is due in part to the calendar year
budgeting cycles of many of our customers, our employee recognition policies
which tend to reward our sales personnel for achieving fiscal year-end rather
than quarterly revenue quotas, and the timing of our hiring of sales force
personnel. In future periods, we expect that this seasonal trend will continue
to cause first fiscal quarter license revenues to decrease from the level
achieved in the preceding quarter.
WE MAY NOT REMAIN COMPETITIVE
We compete in markets that are intensely competitive and rapidly changing.
Our Shadow products compete principally with middleware software products from
established vendors such as IBM, Oracle and Information Builders, and to a
lesser extent with BEA Systems, IONA Technologies, New Era of Networks and TSI
International Software. Our Enterprise Subsystem Management products face
significant competition from BMC Software. We may also face competition from (1)
other business application software vendors who may internally develop, or
attain through acquisitions and partnerships, middleware and enterprise
subsystem management solutions, (2) internal development efforts by corporate
information technology departments and (3) new entrants to the middleware or
enterprise subsystem management markets. We expect to experience increased
competition from current and potential competitors, many of which have
significantly greater financial, technical, marketing and other resources than
we do.
6
<PAGE>
Our competitors may be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. Competitive
pressures could reduce our market share or require us to reduce the price of our
products, either of which could have a material adverse effect on our business,
operating results and financial condition.
WE ARE SUBSTANTIALLY DEPENDENT UPON OUR SHADOW PRODUCT LINE
Over 90% of our revenues in fiscal 1997 and 1998 and the nine months ended
December 31, 1998 was derived from Shadow Direct and Shadow Web Server. We
anticipate that these products will account for a substantial amount of our
revenues for the foreseeable future. Consequently, our future success will
depend on continued market acceptance of Shadow Direct and Shadow Web Server and
enhancements to these products. Competition, technological change or other
factors could reduce demand for, or market acceptance of, these products and
could have a material adverse effect on our business, operating results and
financial condition.
WE MAY NOT SUCCESSFULLY MANAGE ADDITIONAL GROWTH
Our recent growth has placed significant demands on management as well as on
our administrative, operational and financial resources. To manage any
additional growth, we must:
- Expand our sales, marketing and customer support organizations
- Invest in the development of enhancements to existing products and new
products that meet changing customer needs
- Further develop our technical expertise so that we can influence and
respond to emerging industry standards
- Improve our operational processes and management controls
Our inability to sustain or manage any additional growth could have a material
adverse effect on our business, operating results and financial condition.
WE RELY ON CONTINUED USE OF MAINFRAME COMPUTERS
We are dependent upon the continued use and acceptance of mainframe
computers in a computing environment increasingly based on distributed
platforms, including client/server and Internet-based computing networks. We
derive our revenues primarily from our Shadow products, which enable businesses
to access data and transactions residing on the mainframe from Web-based and
client/server applications, and, to a lesser extent, from our Enterprise
Subsystem Management products for mainframes. Although demand for mainframe
access and management solutions has grown in recent years, it may not continue
to grow. Our continued success depends on a number of factors, including:
- Continued use of the mainframe as a central repository of mission-critical
data and transactions
- Growth in business demands for access to the data, applications and
transactions residing on mainframe computers from Web-based and
client/server applications
Decreased use of the mainframe or in the growth of demand for Web-based and
client/server applications accessing mainframe data and transactions could have
a material adverse effect on our business, operating results and financial
condition.
LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS
Our success is dependent upon the continued service and skills of our
executive officers and our product authors, none of whom is bound by an
employment agreement. If we lose the services of any of these key personnel, it
could have a negative impact on our business because of their unique skills,
7
<PAGE>
years of industry experience and the difficulty of promptly finding qualified
replacement personnel. Particularly, the services of Peter Schaeffer, our
founder and Chief Technology Officer, would be difficult to replace. We do not
maintain "key-man" life insurance policies covering any of our employees.
Significant competition exists for employees with the skills required to author
the products and perform the maintenance services offered by us, and we may not
be able to continue to retain sufficient numbers of highly skilled employees.
RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR PRODUCTS OBSOLETE
Our markets are characterized by rapid technological change, frequent new
product introductions and enhancements, uncertain product life cycles, changes
in customer requirements and evolving industry standards. The introduction of
new products embodying new technologies and the emergence of new industry
standards could render our existing products obsolete. Our future success will
depend upon our ability to continue to develop and introduce a variety of new
products and product enhancements to address the increasingly sophisticated
needs of our customers. We may experience delays in releasing new products and
product enhancements in the future. Material delays in introducing new products
or product enhancements may cause customers to forego purchases of our products
and purchase those of our competitors.
INTERNATIONAL SALES AND OPERATIONS PRESENT SPECIAL RISKS
We market and sell our products domestically and internationally. We have
established direct telesales subsidiary offices in Germany and the United
Kingdom to market and sell our products in Europe. We have distributors in
Europe, Latin America and the Pacific Rim to market and sell our products in
those regions. We plan to expand our current international operations and to
establish additional facilities and marketing relationships in additional
regions. The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources. Our investments in establishing facilities in other
countries may not produce desired levels of revenue. We currently have limited
experience in developing local versions of our products and marketing and
distributing our products internationally. In addition, international operations
are subject to certain inherent risks, including:
- Impact of recessions in economies outside the United States
- Difficulty in accounts receivable collection and longer collection periods
- Cost of enforcement of contractual obligations
- Difficulties and costs of managing foreign operations
- Limited protection for intellectual property rights in some countries
- Currency exchange rate fluctuations
- Political and economic instability
- Potentially adverse tax consequences
Our international revenues are generally denominated in local currencies. We do
not currently engage in currency hedging activities; however, we may implement a
program to mitigate foreign currency transaction risk in the future. Future
fluctuations in currency exchange rates may adversely affect our revenues from
international sales.
WE MAY BE UNABLE TO ENFORCE OR DEFEND OUR OWNERSHIP AND USE OF PROPRIETARY
TECHNOLOGY
Our success depends to a significant degree upon our proprietary technology.
Companies in the software industry have experienced substantial litigation
regarding intellectual property. We rely on a
8
<PAGE>
combination of trademark, trade secret and copyright law, and contractual
restrictions and passwords to protect our proprietary technology. However, these
measures provide only limited protection, and we may not be able to detect
unauthorized use or take appropriate steps to enforce our intellectual property
rights, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States. Any litigation to enforce
our intellectual property rights would be expensive and time-consuming, would
divert management resources and may not be adequate to protect our business.
We could be subject to claims that we have infringed the intellectual
property rights of others. In addition, we may be required to indemnify our
distribution partners and end-users for similar claims made against them. Any
claims against us could require us to spend significant time and money in
litigation, pay damages, develop new intellectual property or acquire licenses
to intellectual property that is the subject of the infringement claims. These
licenses, if required, may not be available on acceptable terms. As a result,
intellectual property claims against us could have a material adverse effect on
our business, operating results and financial condition.
WE MAY LOSE RIGHTS TO IMPORTANT THIRD-PARTY TECHNOLOGY
We have code-sharing arrangements with third parties under which we have
obtained and used some source code in the development of some of our software
products. If any of these agreements are terminated, we could be required to
discontinue our use of the acquired code, and we would have to spend time and
software development resources to replace that code. Any diversion of these
resources could delay our development of new products or product enhancements.
In addition, we license several of our Enterprise Subsystem Management products
from Peregrine/Bridge Transfer Corporation pursuant to a distributor agreement
with an initial term through March 31, 2004. The license may be terminated by
either party in the event of default. The termination of these arrangements
could have a material adverse effect on our business, operating results and
financial condition.
USE OF OUR NAME BY OTHERS MAY CAUSE CONFUSION IN THE MARKET
A number of organizations, including New Era of Networks, Inc., are
utilizing the name "Neon," both 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
System under the symbol "NEON" and has sought to obtain federal trademarks for
products and services whose names include the word "NEON." We are currently
opposing in the U.S. Patent and Trademark Office New Era of Networks's
application to register "NEONet." New Era of Networks has 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 our rights or constitute
unfair competition and (2) cancellation of our federal trademark registration
for "NEON." This or any other litigation to enforce our right to use the NEON
name in our business or to prevent others from using the NEON name would be
expensive and time-consuming, would divert management resources and may not be
adequate to protect our business. If we should lose any such litigation, we may
have to change our name, which also would be expensive and time-consuming and
could adversely affect our business. In addition, New Era of Network's use of
the "NEON" symbol on the Nasdaq National Market System may create confusion in
the marketplace and result in variations in our stock price that are
attributable to facts or circumstances relating to New Era of Networks.
WE ARE EXPOSED TO MATERIAL LITIGATION
We license several of our Enterprise Subsystem Management products from
Peregrine/Bridge Transfer Corporation. Peregrine/Bridge Transfer Corporation,
NEON and other parties have been sued
9
<PAGE>
by BMC Software alleging misappropriation and infringement of certain trade
secrets, confidential information and corporate opportunity. BMC Software is
seeking damages based upon the disgorgement of all revenues derived from the
sale or license of certain of our Enterprise Subsystem Management products.
Peregrine/Bridge Transfer Corporation has agreed to indemnify us against damages
arising from third-party intellectual property infringement claims related to
products that we license from it, including the products subject to this
lawsuit. However, Peregrine/Bridge Transfer Corporation may not have sufficient
resources to continue to fund the costs and expenses of the lawsuit or to
indemnify us against an adverse judgment. We believe that BMC Software's claims
are without merit and Peregrine/Bridge Transfer Corporation is defending this
action vigorously on our behalf. However, we may not be successful in defending
this lawsuit. An adverse judgment in the lawsuit or a failure by
Peregrine/Bridge Transfer Corporation to honor its indemnity obligations to us
could have a material adverse impact on our business, operating results and
financial condition.
OUR PRODUCTS MAY CONTAIN UNDETECTED SOFTWARE ERRORS
Our software products and the software products that we sell for others are
complex and may contain undetected errors. We have previously discovered
software errors in certain of the products that we have developed or sold.
Despite testing, we cannot be certain that errors will not be found in current
versions, new versions or enhancements of our products after commencement of
commercial shipments. These undetected errors could result in adverse publicity,
loss of revenues, delay in market acceptance or claims against us by customers,
all of which could seriously damage our business, operating results and
financial condition.
WE MAY BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS
Because our products provide critical database access, integration and
management functions, we may receive significant liability claims if our
customers believe that our products have failed to perform their intended
functions. Our agreements with customers typically contain provisions intended
to limit our exposure to liability claims. These contract provisions may not
preclude all potential claims. Liability claims could require us to spend
significant time and money in litigation or to pay significant damages. As a
result, any such claims, whether or not successful, could have a material
adverse effect on our reputation and business, operating results and financial
condition.
YEAR 2000 ISSUES MAY EXPOSE US TO LIABILITY
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."
The Year 2000 Problem presents us with several potential risks including,
but not limited to, the following:
- SOFTWARE SOLD TO CUSTOMERS. We believe that it is not possible to
determine with complete accuracy that all Year 2000 Problems affecting our
software products and the software products that we sell for others have
been identified or corrected due to the complexity of these products.
- INTERNAL INFRASTRUCTURE. The Year 2000 Problem could affect computers,
software and other equipment that we use internally as well as divert
management's attention from ordinary business activities. In addition to
computers and related systems, the operation of our office and facilities
equipment, such as fax machines, photocopiers, telephone switches,
security systems, elevators and other common devices may be affected by
the Year 2000 Problem.
10
<PAGE>
- SUPPLIERS/THIRD-PARTY RELATIONSHIPS. There can be no assurance that our
suppliers or other third parties that we rely upon will resolve any or all
Year 2000 Problems with their systems on a timely basis.
- STRAIN ON INFORMATION TECHNOLOGY RESOURCES. The Year 2000 Problem is
currently placing a strain on organizations' information technology
budgets and resources. Some organizations may lack sufficient resources to
undertake the type of integration projects that the NEON Shadow product
line enables at the same time that they are addressing the Year 2000
Problem.
We are reasonably certain that we have identified and are in the process of
resolving all Year 2000 Problems that could materially adversely affect our
business, financial condition or results of operations. We are currently
developing contingency plans to be implemented as part of our efforts to
identify and correct Year 2000 Problems affecting our internal systems and
expect to complete our contingency plans by March 31, 1999. However, we believe
that it is not possible to determine with complete certainty that all Year 2000
Problems affecting us will be identified or corrected in a timely manner. If we
fail to identify and correct all Year 2000 Problems affecting our internal
systems, or if we are forced to implement our contingency plans, our business,
financial condition or results of operations could be materially adversely
affected. For additional information, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year 2000 Issues."
A PUBLIC MARKET FOR OUR COMMON STOCK MAY BE UNCERTAIN
Prior to this offering, there has been no public market for our common
stock, and an active public market for our common stock may not develop or
continue after this offering. The initial public offering price for our common
stock will be determined by negotiation between NEON and the representatives of
the underwriters, and you may be unable to resell your shares of common stock at
or above that initial offering price. After this offering, the market price of
our common stock may be subject to significant fluctuations in response to
numerous factors, including:
- Variations in our annual or quarterly financial results or those of our
competitors
- Changes by financial research analysts in their estimates of our earnings
or our failure to meet such estimates
- Conditions in the economy in general or in the software and other
technology industries
- Announcements of key developments by competitors
- Loss of key personnel
- Unfavorable publicity affecting our industry or us
- Adverse legal events affecting us
- Sales of NEON common stock by existing stockholders
From time to time, the stock market experiences significant price and volume
fluctuations, which may affect the market price of our common stock for reasons
unrelated to our performance. Recently, such volatility has particularly
impacted the stock prices of publicly-traded technology companies. In the past,
securities class action litigation has been instituted against a company
following periods of volatility in the market price of a company's securities.
If similar litigation were instituted against us, it could result in substantial
costs and a diversion of our management's attention and resources, which could
have an adverse effect on our business.
11
<PAGE>
OUR OFFICERS AND DIRECTORS CONTROL NEON
Our executive officers and directors and entities affiliated with them will,
in the aggregate, beneficially own approximately 62.3% of our outstanding common
stock following this offering. As a result, these stockholders, if they act
together, could control all matters submitted to our stockholders for a vote,
including the election of directors and the approval of mergers and other
business combination transactions.
AVAILABILITY OF SIGNIFICANT AMOUNTS OF COMMON STOCK FOR SALE COULD ADVERSELY
AFFECT ITS MARKET PRICE
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. A substantial number of sales, or the perception that such sales
might occur, also might make it more difficult for us to sell equity or equity-
related securities in the future at a time and price that we deem appropriate.
We have granted registration rights to two of our stockholders, Peter Schaeffer
and JMI Equity Fund, L.P. Those rights enable these stockholders to require that
we register, at our expense, resales of their shares of common stock. Mr.
Schaeffer and JMI Equity Fund, L.P. own in the aggregate 4,795,000 shares of our
common stock. If they sell a large portion of their shares on the open market
and at one time, our market price per share may decline. You should read "Shares
Eligible for Future Sale" for a more detailed discussion of when and how many
shares of our common stock may be sold after this offering.
OUR USE OF OFFERING PROCEEDS MAY NOT PROVE BENEFICIAL TO STOCKHOLDERS
Approximately 96% of the anticipated net proceeds of this offering has not
been designated for specific uses. We expect to use the net proceeds for working
capital and other general corporate purposes and for the retirement of existing
indebtedness. However, our Board of Directors will have broad discretion with
respect to the use of the net proceeds of this offering and could use the
proceeds for other purposes which may not prove to be beneficial to our
stockholders.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price of the common stock will be substantially
higher than the pro forma net tangible book value per share of the outstanding
common stock. As a result, we currently expect that you will incur immediate and
substantial dilution of $8.92 per share based upon an assumed initial public
offering price of $13.00 per share. In the event we issue additional shares of
common stock in the future, you may experience further dilution. Furthermore, we
have issued options to purchase common stock at prices significantly below the
assumed initial public offering price. To the extent such options are exercised,
you will experience further dilution.
PROVISIONS OF OUR CHARTER AND BYLAWS AND DELAWARE LAW COULD DETER TAKEOVER
ATTEMPTS
Provisions of our Certificate of Incorporation and Bylaws as well as
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders. We are subject to the
provisions of Delaware law which restrict certain business combinations with
interested stockholders, which may have the effect of inhibiting a
non-negotiated merger or other business combinations.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "may," "will," "expect," "anticipate," "believe," "estimate" and
"continue" or similar words. You should read statements that contain these words
carefully because they discuss our future expectations, contain projections of
our future results of operations or of our financial condition or state other
"forward-looking" information. We believe that it is important to communicate
our future expectations to our investors. However, there may be events in the
future that we are not able to accurately predict or control. The factors listed
above in the section captioned "Risk Factors," as well as any cautionary
language in this prospectus, provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. Before you invest in our common
stock, you should be aware that the occurrence of the events described in these
risk factors and elsewhere in this prospectus could have a material adverse
effect on our business, operating results and financial condition.
USE OF PROCEEDS
Assuming an initial public offering price of $13.00 per share, NEON will
receive approximately $29.0 million from its sale of 2,436,000 shares of common
stock. If the underwriters exercise their over-allotment option in full, NEON
will receive an additional $4.5 million in net proceeds.
NEON expects to use the net proceeds for working capital and other general
corporate purposes and to retire approximately $1.0 million of existing
indebtedness. The existing indebtedness matures March 31, 1999 and bears
interest at eight percent per annum. Pending these uses, NEON intends to invest
the net proceeds of this offering in short-term, interest-bearing,
investment-grade securities.
The Company will not receive any proceeds from the sale of common stock by
the selling stockholder. See "Principal and Selling Stockholders."
DIVIDEND POLICY
NEON has never paid cash dividends on its common stock. NEON intends to
retain future earnings to finance the expansion of its business and does not
anticipate paying any cash dividends for the foreseeable future. Any future
determination as to the payment of dividends will be at the discretion of the
Board of Directors.
CORPORATE INFORMATION
NEON's World Wide Web address is www.neonsys.com. Information contained in
NEON's Web site does not constitute part of this prospectus.
NEON and SHADOW are registered trademarks of NEON. NEON is in the process of
registering SHADOWDIRECT, SHADOW WEB SERVER, ENTERPRISE DIRECT, AFFINITY SERVER,
SPEED UNLOAD, SPEED LOAD and PDF as trademarks. Each trademark, trade name or
service mark of any other company appearing in this prospectus belongs to its
holder.
13
<PAGE>
CAPITALIZATION
The following table sets forth NEON's cash position and total capitalization
at December 31, 1998:
- On an actual basis
- On a pro forma basis to give effect to (a) the conversion of all
outstanding shares of preferred stock into shares of common stock in this
offering and (b) the amendments to NEON's Certificate of Incorporation
which are to be effective immediately prior to the offering increasing the
number of authorized shares of preferred stock and common stock
- On a pro forma as adjusted basis to reflect the sale of 2,436,000 shares
of common stock by NEON in this offering at an assumed initial public
offering price of $13.00 per share and the application of the estimated
net proceeds in the manner described in "Use of Proceeds"
Read the following information in conjunction with NEON's Consolidated
Financial Statements and the Notes thereto beginning on page F-1 of this
prospectus. The following information regarding shares outstanding is as of
December 31, 1998. It includes 3,125,000 shares of common stock to be issued on
conversion of outstanding shares of our preferred stock and excludes 3,729,077
shares of common stock reserved for issuance under our stock plans, of which
1,629,077 shares are subject to outstanding options.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents....................................... $ 4,511 $ 4,511 $ 32,413
--------- ----------- -------------
--------- ----------- -------------
Secured notes payable........................................... $ 1,049 $ 1,049 $ --
Series A Redeemable, Convertible Preferred Stock, $0.01 par
value, 650,000 shares authorized; 625,000 shares issued and
outstanding (actual); none authorized (pro forma or pro forma
as adjusted)................................................... 1,738 -- --
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; none outstanding (pro forma and pro forma as
adjusted)................................................... -- -- --
Common stock, $0.01 par value, 10,000,000 shares authorized;
2,682,251 shares outstanding (actual); 30,000,000 shares
authorized; 5,807,251 shares outstanding (pro forma);
8,243,251 shares outstanding (pro forma as adjusted)........ 27 58 82
Additional paid-in capital.................................... 1,481 3,188 32,114
Retained earnings............................................. 332 332 332
--------- ----------- -------------
Total stockholders' equity.................................. 1,840 3,578 32,529
--------- ----------- -------------
Total capitalization.................................... $ 4,627 $ 4,627 $ 32,529
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
14
<PAGE>
DILUTION
The pro forma net tangible book value of NEON as of December 31, 1998, after
giving effect to the conversion of all outstanding shares of its preferred stock
into common stock prior to this offering, was $2.9 million, or $0.50 per share
of common stock. Pro forma net tangible book value per share represents the
amount of NEON's total tangible assets less total liabilities, divided by the
total number of shares of common stock outstanding on a pro forma basis. The pro
forma net tangible book value of NEON as of December 31, 1998 would have been
$33.6 million, or $4.08 per share after giving effect to the sale of 2,436,000
shares of common stock offered by NEON (at an assumed initial public offering
price of $13.00 per share) and after deduction of the estimated underwriting
discounts and commissions and estimated offering expenses payable by NEON and
the application of the estimated net proceeds from this offering. This
represents an immediate increase in pro forma net tangible book value of $3.58
per share to existing stockholders and an immediate dilution of $8.92 per share
to new investors purchasing shares of common stock in this offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 13.00
Pro forma net tangible book value per share at December 31,
1998....................................................... $ 0.50
Increase in pro forma net tangible book value per share
attributable to new stockholders........................... 3.58
---------
Pro forma net tangible book value per share after offering... 4.08
---------
Dilution per share to new stockholders....................... $ 8.92
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of December 31, 1998,
the number of shares of common stock purchased from NEON, the total
consideration paid to NEON and the average price per share paid to NEON by
existing stockholders and by the investors purchasing shares of common stock in
this offering, before deducting estimated underwriting discounts and commissions
and estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ----------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 5,807,251 70.0% $3,488,869 9.9% $ 0.60
New stockholders................. 2,436,000 30.0 31,668,000 90.1 13.00
--------- ----- ---------- -----
Total.......................... 8,243,251 100.0% $35,156,869 100.0%
--------- ----- ---------- -----
--------- ----- ---------- -----
</TABLE>
In the event that NEON issues additional shares of common stock in the
future, purchasers of common stock in this offering may experience further
dilution.
The foregoing tables assume (1) the issuance of 3,125,000 shares of common
stock upon conversion of outstanding preferred stock prior to this offering and
(2) no exercise of stock options outstanding as of December 31, 1998. Options to
purchase 1,629,077 shares of common stock held by certain of NEON's employees
were outstanding as of December 31, 1998 at a weighted average exercise price of
$2.26 per share. To the extent these options are exercised, new investors will
experience further dilution. See "Management--Stock Plans."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical consolidated financial data for each of the three
years in the three-year period ended March 31, 1998, and the nine months ended
December 31, 1998 and as of March 31, 1996, 1997 and 1998 and December 31, 1998,
have been derived from the Consolidated Financial Statements of NEON, which have
been audited by KPMG LLP, independent certified public accountants. The selected
historical consolidated financial data for NEON set forth below for the year
ended March 31, 1995 and the nine months ended December 31, 1997, and as of
March 31, 1995 have been derived from unaudited consolidated financial
statements, which include, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, that NEON considers necessary
for a fair presentation of financial position and results of operations for
those periods and at that date. The results of operations for the nine months
ended December 31, 1998 are not necessarily indicative of results to be expected
for any future period. The information set forth below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------------------------------------------ -------------
1995 1996 1997 1998 1997
--------------- --------------- --------------- --------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License................................. $ 205 $ 2,108 $ 6,101 $ 9,697 $ 6,307
Maintenance............................. 3 220 924 2,318 1,711
------- ------- ------- ------- -------------
Total revenues........................ 208 2,328 7,025 12,015 8,018
Cost of revenues:
Cost of licenses........................ 4 18 212 552 183
Cost of maintenance..................... -- 159 392 743 493
------- ------- ------- ------- -------------
Total cost of revenues................ 4 177 604 1,295 676
------- ------- ------- ------- -------------
Gross profit.............................. 204 2,152 6,421 10,720 7,342
Operating expenses:
Sales and marketing..................... 310 1,307 3,469 5,713 3,735
Research and development................ 626 1,067 1,364 2,070 1,470
General and administrative.............. 60 310 696 1,494 1,048
Non-cash compensation................... -- -- -- -- --
------- ------- ------- ------- -------------
Total operating expenses.............. 996 2,684 5,530 9,277 6,253
------- ------- ------- ------- -------------
Operating income (loss)................... (792) (532) 891 1,443 1,089
Interest and other, net................... (4) (66) (67) 28 19
------- ------- ------- ------- -------------
Income (loss) before provision for income
taxes................................... (796) (598) 823 1,471 1,108
Provision for income taxes................ -- -- 7 310 233
------- ------- ------- ------- -------------
Net income (loss)......................... (796) (598) 816 1,161 875
------- ------- ------- ------- -------------
Dividends on series A redeemable,
convertible preferred stock............. (80) (80) (80) (100) (75)
------- ------- ------- ------- -------------
Net income (loss) applicable to common
stockholders............................ $ (876) $ (678) $ 736 $ 1,061 $ 800
------- ------- ------- ------- -------------
------- ------- ------- ------- -------------
Earnings (loss) per common share (a):
Basic................................... $ (2.10) $ (1.62) $ 0.35 $ 0.45 $ 0.34
------- ------- ------- ------- -------------
------- ------- ------- ------- -------------
Diluted................................. $ (2.10) $ (1.62) $ 0.14 $ 0.19 $ 0.14
------- ------- ------- ------- -------------
------- ------- ------- ------- -------------
Shares used in computing earnings (loss)
per common share (a):
Basic................................... 417 417 2,094 2,371 2,341
Diluted................................. 417 417 5,671 6,268 6,238
<CAPTION>
1998
-------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License................................. $ 10,487
Maintenance............................. 3,182
-------------
Total revenues........................ 13,669
Cost of revenues:
Cost of licenses........................ 661
Cost of maintenance..................... 672
-------------
Total cost of revenues................ 1,334
-------------
Gross profit.............................. 12,335
Operating expenses:
Sales and marketing..................... 5,318
Research and development................ 2,540
General and administrative.............. 1,701
Non-cash compensation................... 631
-------------
Total operating expenses.............. 10,190
-------------
Operating income (loss)................... 2,145
Interest and other, net................... 44
-------------
Income (loss) before provision for income
taxes................................... 2,189
Provision for income taxes................ 825
-------------
Net income (loss)......................... 1,364
-------------
Dividends on series A redeemable,
convertible preferred stock............. (75)
-------------
Net income (loss) applicable to common
stockholders............................ $ 1,289
-------------
-------------
Earnings (loss) per common share (a):
Basic................................... $ 0.49
-------------
-------------
Diluted................................. $ 0.20
-------------
-------------
Shares used in computing earnings (loss)
per common share (a):
Basic................................... 2,608
Diluted................................. 6,934
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------------------------------------------------
1995 1996 1997 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 291 $ 131 $ 1,705 $ 2,804
Working capital (deficit)................. (530) 47 876 973
Total assets.............................. 376 730 3,093 6,352
Secured notes payable..................... 650 1,130 1,049 1,049
Series A redeemable, convertible preferred
stock................................... 1,153 1,233 1,563 1,663
Total stockholders' equity (deficit)...... (1,637) (2,228) (1,416) (234)
<CAPTION>
AS OF
DECEMBER 31,
1998
-------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 4,511
Working capital (deficit)................. 3,004
Total assets.............................. 9,902
Secured notes payable..................... 1,049
Series A redeemable, convertible preferred
stock................................... 1,738
Total stockholders' equity (deficit)...... 1,840
</TABLE>
- ------------------------------
(a) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the calculation of earnings (loss) per common share and shares
used in computing earnings (loss) per common share.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. NEON'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.
OVERVIEW
NEON develops, markets and supports Enterprise Access and Integration
software. NEON was incorporated in May 1993 and 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 Web Server enables Web browsers 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 six products, improves the availability and
performance of mainframe subsystems to support the growing demands placed on the
mainframe.
NEON has devoted significant resources to building its sales and marketing
functions, resulting in revenues increasing from $2.3 million in fiscal 1996 to
$12.0 million in fiscal 1998. NEON's revenues increased $5.7 million, or 70%,
from $8.0 million for the nine months ended December 31, 1997 to $13.7 million
for the nine months ended December 31, 1998. NEON has been profitable 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. In fiscal 1996, 1997 and 1998 and the
nine months ended December 31, 1998, maintenance revenues represented 9%, 13%,
19% and 23% of total revenues, respectively. 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 licenses and recognizes license revenues when all of the
following conditions are met: a non-cancelable 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,
17
<PAGE>
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. In regards to these foreign operations, NEON is
exposed to foreign currency fluctuations for its net working capital positions.
At December 31, 1998, NEON had unhedged net current assets denominated in
British pounds aggregating 545,222 British pounds and unhedged net current
liabilities denominated in Deutsche marks aggregating (376,564) Deutsche marks.
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 20%, 11%, 41% and 27% in fiscal
1996, 1997 and 1998 and the nine months ended December 31, 1998, respectively.
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 revenues from
international operations should not vary substantially as a percentage of total
revenue from the level experienced in the nine-month period ended December 31,
1998.
18
<PAGE>
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>
NINE MONTHS
ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------------- -----------------
1995 1996 1997 1998 1997 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License......................................... 98.6% 90.5% 86.8% 80.7% 78.7% 76.7%
Maintenance..................................... 1.4 9.5 13.2 19.3 21.3 23.3
------- ------- ------- ------- ------- -------
Total revenues................................ 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of licenses................................ 1.9 0.8 3.0 4.6 2.3 4.8
Cost of maintenance............................. -- 6.8 5.6 6.2 6.1 4.9
------- ------- ------- ------- ------- -------
Total cost of revenues........................ 1.9 7.6 8.6 10.8 8.4 9.8
------- ------- ------- ------- ------- -------
Gross profit...................................... 98.1 92.4 91.4 89.2 91.6 90.2
Operating expenses:
Sales and marketing............................. 149.0 56.1 49.4 47.5 46.6 38.9
Research and development........................ 301.0 45.8 19.4 17.2 18.3 18.6
General and administrative...................... 28.8 13.3 9.9 12.4 13.1 12.4
Non-cash compensation........................... -- -- -- -- -- 4.6
------- ------- ------- ------- ------- -------
Total operating expenses...................... 478.8 115.3 78.7 77.2 78.0 74.5
------- ------- ------- ------- ------- -------
Operating income (loss)........................... (380.8) (22.9) 12.7 12.0 13.6 15.7
Interest and other, net........................... (1.9) (2.8) (1.0) 0.2 0.2 0.3
------- ------- ------- ------- ------- -------
Income (loss) before provision for income taxes... (382.7) (25.7) 11.7 12.3 13.8 16.0
Provision for income taxes........................ -- -- 0.1 2.6 2.9 6.0
------- ------- ------- ------- ------- -------
Net income (loss)................................. (382.7)% (25.7)% 11.6% 9.7% 10.9% 10.0%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1998
REVENUES
TOTAL REVENUES. NEON's revenues increased 70% from $8.0 million for the
nine months ended December 31, 1997 to $13.7 million for the nine months ended
December 31, 1998. One customer accounted for 16% of total revenues in the nine
months ended December 31, 1998, but no customer accounted for more than 10% of
total revenues in the nine months ended December 31, 1997.
LICENSE. License revenues increased 66% from $6.3 million for the nine
months ended December 31, 1997 to $10.5 million for the nine months ended
December 31, 1998. This increase resulted primarily from a $3.8 million increase
in license sales of NEON's Shadow products and a $552,000 increase in license
sales of Enterprise Subsystem Management products. In addition, this increase
resulted primarily from a $3.9 million increase attributed to a greater number
of license sales of existing products and a $262,000 increase due to increased
sales prices.
MAINTENANCE. Maintenance revenues increased 86% from $1.7 million for the
nine months ended December 31, 1997 to $3.2 million for the nine months ended
December 31, 1998. This increase resulted from an $872,000 increase in first
years' maintenance revenues recognized in association with
19
<PAGE>
new license sales and, to a lesser extent, from a $599,000 increase in
maintenance agreement renewals from NEON's expanded 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 261% from $183,000, or
3% of license revenues, for the nine months ended December 31, 1997 to $662,000,
or 6% of license revenues, for the nine months ended December 31, 1998. The
dollar and percentage increases in the cost of license revenues were primarily
attributable to increased shipments of new Enterprise Subsystem Management
products sold by NEON under the terms of its distributor agreement with
Peregrine/Bridge Transfer Corporation. See "Business--Peregrine/Bridge Transfer
Corporation Relationship."
COST OF MAINTENANCE. Cost of maintenance revenues includes personnel and
other costs related to NEON's customer support department. Cost of maintenance
revenues increased 37% from $492,000, or 29% of maintenance revenues, for the
nine months ended December 31, 1997 to $672,000, or 21% of maintenance revenues,
for the nine months ended December 31, 1998. 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. NEON anticipates that the cost of maintenance revenues
will continue to decrease as a percentage of maintenance revenues as NEON's
customer base continues to expand.
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 42% from $3.7 million, or 47% of
total revenues, for the nine months ended December 31, 1997 to $5.3 million, or
39% of total revenues, for the nine months ended December 31, 1998. The dollar
increase reflects a $568,000 increase in expenses due to the establishment of
NEON's sales office in Germany and the hiring of additional personnel in NEON's
United Kingdom sales office. This dollar increase also reflects a $900,000
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. The percentage decrease is
primarily a result of an increase in NEON's revenues and, to a lesser extent, an
increase in sales by NEON's North American and European internal sales
personnel, who command lower sales commissions than NEON's independent
international distributors. As NEON continues to devote resources to the
expansion of its sales and marketing organization, NEON expects that annual
sales and marketing expenses will increase in absolute dollars but should not
vary substantially as a percentage of total revenues from the level experienced
in the nine months ended December 31, 1998.
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 73% from $1.5 million, or 18% of total revenues, for the nine months
ended December 31, 1997 to $2.5 million, or 19% of total revenues, for the nine
months ended December 31, 1998. The dollar and percentage increases resulted
primarily from an $739,000 increase in recruitment and compensation costs due to
increased staffing and, to a lesser extent, from increased product commissions
paid to product authors. NEON
20
<PAGE>
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 nine months ended December 31, 1998. NEON has adopted Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed." Research and development expenditures
generally 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 62% from
$1.0 million, or 13% of total revenues, for the nine months ended December 31,
1997 to $1.7 million, or 12% of total revenues, for the nine months ended
December 31, 1998. This dollar increase resulted primarily from a $320,000
increase in office and administrative costs associated with NEON's newly
established subsidiaries in the United Kingdom and Germany, a $140,000 increase
in occupancy costs and a $179,000 increase in compensation expense due
principally to administrative personnel additions necessary to support NEON's
growth. NEON anticipates 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 nine-months ended December
31, 1998.
NONCASH COMPENSATION. During the nine months ended December 31, 1998 the
Company 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 will be recognized as expense over the vesting period
of the granted options. During the nine months ended December 31, 1998 $631,000
was recognized as a noncash compensation expense. The remaining differential of
$1.9 million will be recognized over the remaining vesting period of the granted
options.
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 21% and 38% for the nine months ended December 31, 1997 and 1998,
respectively.
FISCAL YEARS ENDED MARCH 31, 1996, 1997 AND 1998
REVENUES
TOTAL REVENUES. Total revenues were $2.3 million, $7.0 million and $12.0
million in fiscal 1996, 1997 and 1998, respectively, representing increases of
202% from fiscal 1996 to fiscal 1997 and 71% from fiscal 1997 to fiscal 1998. No
customer accounted for more than 10% of NEON's total revenues in fiscal 1996,
1997 or 1998.
LICENSE. License revenues were $2.1 million, $6.1 million and $9.7 million
in fiscal 1996, 1997 and 1998, respectively, representing increases of 189% from
fiscal 1996 to fiscal 1997 and 59% from fiscal 1997 to fiscal 1998. The dollar
increase from fiscal 1996 to fiscal 1997 was due primarily to a $3.6 million
increase in license revenues attributable to the increase in the number of
license sales of NEON's existing Shadow products, and to a lesser extent, to
product price increases and license sales of a new product. The dollar increase
from fiscal 1997 to fiscal 1998 was due to a $2.8 million increase in license
revenues attributable to the increase in the number of license sales of existing
products and an $803,000 increase attributable to sales of newly introduced
Enterprise Subsystem Management products.
MAINTENANCE. Maintenance revenues were $219,000, $924,000 and $2.3 million
in fiscal 1996, 1997 and 1998, respectively, representing increases of 321% from
fiscal 1996 to fiscal 1997 and 151% from fiscal 1997 to fiscal 1998. These
dollar increases resulted from renewals of maintenance agreements
21
<PAGE>
from NEON's expanded installed base of customers and the recognition of deferred
first-year maintenance service fees.
COST OF REVENUES
COST OF LICENSES. Cost of license revenues was $18,000, $212,000 and
$552,000 in fiscal 1996, 1997 and 1998, respectively, representing 1%, 3% and 6%
of total license revenues in the respective periods. The dollar and percentage
increases in fiscal 1997 and 1998 were due primarily to increased sales of
Enterprise Subsystem Management products, resulting in increased royalties paid
to Peregrine/Bridge Transfer Corporation under NEON's distributor agreement with
Peregrine/Bridge Transfer Corporation.
COST OF MAINTENANCE. Cost of maintenance revenues was $159,000, $392,000
and $743,000 in fiscal 1996, 1997 and 1998, respectively, representing 72%, 42%
and 32% of total maintenance revenues in the respective periods. The dollar
increases during the periods were due principally to increases in the number of
technical support staff providing support to NEON's growing customer base. The
percentage decreases resulted primarily from maintenance revenues outpacing the
need for additional support staff.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses were $1.3 million, $3.5
million and $5.7 million in fiscal 1996, 1997 and 1998, respectively,
representing 56%, 49% and 48% of total revenues in the respective periods. The
dollar increase from fiscal 1996 to 1997 resulted primarily from a $1.8 million
increase in compensation costs due principally to the hiring of additional sales
personnel and to higher commissions paid as a result of NEON's revenue growth.
The dollar increase from fiscal 1997 to fiscal 1998 resulted primarily from a
$1.3 million increase in costs associated with the recently established sales
offices in the United Kingdom and Germany, as well as a $793,000 increase in
compensation costs due to the hiring of additional sales personnel and increased
commissions paid as a result of NEON's revenue growth.
RESEARCH AND DEVELOPMENT. Research and development expenses were $1.1
million, $1.4 million and $2.1 million in fiscal 1996, 1997 and 1998,
respectively, representing 46%, 19% and 17% of total revenues in the respective
periods. The dollar increases in these periods were primarily attributable to
increased compensation costs due to additional staffing and increased product
commissions paid to product authors.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$310,000, $696,000 and $1.5 million in fiscal 1996, 1997 and 1998, respectively,
representing 13%, 10% and 12% of total revenues in the respective periods. The
dollar increase in fiscal 1996 to fiscal 1997 resulted primarily from increased
occupancy and support costs. The dollar increase from fiscal 1997 to fiscal 1998
resulted primarily from a $400,000 increase in office and administrative costs
associated with the recently established sales offices in the United Kingdom and
Germany.
PROVISION FOR INCOME TAXES. NEON fully utilized its net operating loss
carryforward for U.S. income tax purposes in fiscal 1998. NEON's U.S. income
taxes prior to fiscal 1998 were offset by net operating loss carry forwards. The
effective income tax rate was 21% for fiscal 1998.
22
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated statements of
operations data for the 10 quarters ended December 31, 1998, as well as the
percentage of NEON's revenues represented by each item. These data have been
derived from unaudited interim consolidated financial statements prepared on the
same basis as the audited Consolidated Financial Statements contained herein
and, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair presentation of
such information when read in conjunction with the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1997 1997 1997 1997 1998 1998 1998
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License............................... $ 1,352 $ 1,844 $ 2,101 $ 1,894 $ 1,834 $ 2,578 $ 3,391 $ 2,905 $ 3,057
Maintenance........................... 167 262 385 432 642 638 606 889 1,024
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total revenues...................... 1,519 2,106 2,486 2,326 2,476 3,216 3,997 3,794 4,081
Cost of revenues:
Cost of licenses...................... 8 13 183 111 24 48 368 277 251
Cost of maintenance................... 102 99 114 189 149 154 251 200 207
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total cost of revenues.............. 110 112 297 300 173 202 619 477 458
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit............................ 1,409 1,994 2,189 2,026 2,303 3,014 3,378 3,317 3,623
Operating expenses:
Sales and marketing................... 562 1,230 1,156 1,092 1,312 1,331 1,978 1,417 1,829
Research and development.............. 331 383 366 448 514 508 600 710 840
General and administrative............ 105 157 346 276 308 466 446 512 524
Non-cash compensation................. -- -- -- -- -- -- -- 413 82
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses............ 998 1,770 1,868 1,816 2,134 2,305 3,024 3,052 3,275
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating income........................ 411 224 321 210 169 709 354 265 348
Interest and other, net................. (21 ) (17 ) (9 ) (5 ) 0 24 9 (35 ) 50
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Income before provision for income
taxes.................................. 392 207 312 205 169 733 363 230 398
Provision for income taxes.............. -- -- 7 39 40 154 77 85 147
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net income.............................. $ 392 $ 207 $ 305 $ 166 $ 129 $ 579 $ 286 $ 145 $ 251
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
DEC. 31,
1998
---------
<S> <C>
Revenues:
License............................... $ 4,525
Maintenance........................... 1,269
---------
Total revenues...................... 5,794
Cost of revenues:
Cost of licenses...................... 133
Cost of maintenance................... 266
---------
Total cost of revenues.............. 399
---------
Gross profit............................ 5,395
Operating expenses:
Sales and marketing................... 2,072
Research and development.............. 990
General and administrative............ 665
Non-cash compensation................. 136
---------
Total operating expenses............ 3,863
---------
Operating income........................ 1,532
Interest and other, net................. 29
---------
Income before provision for income
taxes.................................. 1,561
Provision for income taxes.............. 593
---------
Net income.............................. $ 968
---------
---------
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License............................... 89.0% 87.6% 84.5% 81.4% 74.1% 80.2% 84.8%
Maintenance........................... 11.0 12.4 15.5 18.6 25.9 19.8 15.2
----- ----- ----- ----- ----- ----- -----
Total revenues...................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Cost of licenses...................... 0.6 0.6 7.4 4.8 1.0 1.5 9.2
Cost of maintenance................... 6.7 4.7 4.6 8.1 6.0 4.8 6.3
----- ----- ----- ----- ----- ----- -----
Total cost of revenues................ 7.3 5.3 12.0 12.9 7.0 6.3 15.5
----- ----- ----- ----- ----- ----- -----
Gross profit............................ 92.8 94.7 88.0 87.1 93.0 93.7 84.5
Operating expenses:.....................
Sales and marketing................... 37.0 58.4 46.5 46.9 53.0 41.4 49.5
Research and development.............. 21.8 18.2 14.7 19.3 20.7 15.8 15.0
General and administrative............ 6.9 7.5 13.9 11.9 12.4 14.5 11.2
Non-cash compensation................. -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
Total operating expenses............ 65.7 84.0 75.1 78.1 86.2 71.7 75.7
----- ----- ----- ----- ----- ----- -----
Operating income........................ 27.1 10.6 12.9 9.0 6.8 22.0 8.9
Interest and other, net................. (1.4) 0.8 (0.4) 0.2 0.0 0.7 0.2
----- ----- ----- ----- ----- ----- -----
Income before provision for income
taxes.................................. 25.8 9.8 12.6 8.8 6.8 22.8 9.1
Provision for income taxes.............. -- -- 0.3 1.7 1.6 4.8 1.9
----- ----- ----- ----- ----- ----- -----
Net income.............................. 25.8% 9.8% 12.3% 7.1% 5.2% 18.0% 7.2%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
<CAPTION>
<S> <C> <C> <C>
Revenues:
License............................... 76.6% 74.9% 78.1%
Maintenance........................... 23.4 25.1 21.9
----- ----- -----
Total revenues...................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Cost of licenses...................... 7.3 6.1 2.3
Cost of maintenance................... 5.3 5.1 4.5
----- ----- -----
Total cost of revenues................ 12.6 11.2 6.8
----- ----- -----
Gross profit............................ 87.4 88.8 93.1
Operating expenses:.....................
Sales and marketing................... 37.3 44.8 35.8
Research and development.............. 18.7 20.6 17.1
General and administrative............ 13.5 12.9 11.5
Non-cash compensation................. 11.0 2.0 2.3
----- ----- -----
Total operating expenses............ 80.4 80.2 66.7
----- ----- -----
Operating income........................ 7.0 8.5 26.4
Interest and other, net................. (0.9) 1.2 0.5
----- ----- -----
Income before provision for income
taxes.................................. 6.1 9.8 26.9
Provision for income taxes.............. 2.2 3.6 10.2
----- ----- -----
Net income.............................. 3.8% 6.2% 16.7%
----- ----- -----
----- ----- -----
</TABLE>
23
<PAGE>
NEON's quarterly operating results are subject to certain seasonal
fluctuations. Historically, NEON's license revenues have tended to be strongest
in the third and fourth quarters of its fiscal year and to decrease slightly in
its first fiscal quarter. NEON believes this seasonality is due to the calendar
year budgeting cycles of many of its customers, NEON's employee recognition
policies which tend to reward its sales personnel for achieving fiscal year-end
rather than quarterly revenue quotas and the timing of its hiring of sales force
personnel. In future periods, NEON expects that this seasonal trend will
continue to cause first fiscal quarter license revenues to decrease from the
level achieved in the preceding quarter. NEON believes that its quarterly
revenues, expenses and operating results are likely to vary significantly in the
future, that period-to-period comparisons should not be relied upon as
indications of future performance. See "Risk Factors--NEON's Operating Results
May Vary Due to Seasonality" and "--Our Financial Results May Be Affected by
Factors Outside of Our Control."
LIQUIDITY AND CAPITAL RESOURCES
NEON's cash and cash equivalent balance increased to $4.5 million at
December 31, 1998 from $2.8 million at March 31, 1998. This increase was due
primarily to positive cash flows from operating activities. Net cash used by
operating activities was $566,000 in fiscal 1996, and net cash provided by
operating activities was $1.9 million, $1.3 million and $1.8 million in fiscal
1997 and 1998 and the nine months ended December 31, 1998, respectively. Net
cash provided by operating activities during fiscal 1997 and 1998 and the nine
months ended December 31, 1998 was primarily the result of operating
profitability.
Net cash used by NEON in investing activities was $74,000, $306,000,
$276,000 and $216,000 in fiscal 1996, 1997 and 1998 and the nine months ended
December 31, 1998, respectively, principally for purchases of property and
equipment, including computer hardware and software to support NEON's growing
employee base. As of December 31, 1998, NEON had no material commitment for
capital expenditures.
NEON's net cash provided by financing activities was $480,000, $2,000,
$28,000 and $144,000 in fiscal 1996, 1997 and 1998 and the nine months ended
December 31, 1998, respectively. Net cash provided by financing activities in
fiscal 1996 consisted of the proceeds received from the issuance of convertible
promissory notes. The cash provided by financing activities in periods
subsequent to fiscal 1996 were from amounts received from the exercise of
employee stock options.
Since November 1995, NEON has financed its working capital requirements and
capital expenditures from internally generated cash flows from operations. From
its inception in May 1993 through November 1995, NEON received an aggregate of
$2.2 million from financing activities through the sale of preferred stock and
convertible promissory notes. Effective March 31, 1997, NEON amended and
consolidated three original notes dated September 29, 1994, March 30, 1995 and
November 22, 1995. Accrued interest of approximately $169,000 was converted to
principal and $250,000 of principal was converted into 125,000 shares of NEON's
Series A Redeemable, Convertible Preferred Stock. The new note in the amount of
$1.0 million is due March 31, 1999 and accrues interest at eight percent per
annum, payable quarterly.
NEON believes that the net proceeds from the sale of the common stock
offered by it hereby, together with its current cash balances and 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, such financing will be obtainable on terms acceptable to NEON or that
any additional financing will not be dilutive.
24
<PAGE>
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:
- Software products sold to customers
- Internal infrastructure
- 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. Recently developed products have been designed to be 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 verifing that all
of its personal computers, servers and software are Year 2000 compliant. NEON is
in 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
is in the process of upgrading its financial and accounting software. This
upgrade involves purchasing an upgraded version of its existing financial and
accounting software package that the vendor certifies to be free of Year 2000
Problems. NEON believes that this upgrade will be acquired and installed by
March 1999. 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.
SUPPLIERS/THIRD-PARTY RELATIONSHIPS. As mentioned above, NEON has been
gathering information from vendor Web sites 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. There can be no assurance that such suppliers will resolve any or all
Year 2000 Problems with
25
<PAGE>
such 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 operation.
STRAIN ON CUSTOMER'S 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 is currently developing contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. NEON expects to complete its contingency plans
by the end of the first quarter of March 31, 1999. Depending on the systems
affected, these plans could include:
- Accelerated replacement of affected equipment or software
- Short to medium-term use of backup equipment and software
- 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
- 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 condition or results of operations
In calendar year 1998, NEON incurred less than $50,000 in expenses relating
to identification and correction of Year 2000 Problems, and NEON does not expect
to incur more than $50,000 in expenses for such activities in calendar year
1999.
Based on the actions taken to date as discussed above, NEON is reasonably
certain that it has or will identify and resolve all Year 2000 Problems that
could materially adversely affect its business and operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENT OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS 131 establishes standards for the way
that public companies report, in their annual financial statements, certain
information about their operating segments, their products and services, the
geographic areas in which they operate and their major customers. SFAS 131 also
requires that certain information about operating segments be reported in
interim financial statements. SFAS 131 is effective for periods beginning after
December 31, 1997. NEON will consider the adoption of the requirements of SFAS
131 in its financial statements for the year ending March 31, 1999. NEON does
not believe the adoption will have an effect on its financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement is effective for all fiscal
quarters of years beginning after June 1999. NEON will consider the adoption of
the requirements of SFAS 133 in its financial statements for the year ending
March 31, 1999. NEON does not believe the adoption will have an effect on its
financial statements.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5
(REPORTING ON THE COSTS OF START-UP ACTIVITIES). SOP 98-5 requires that costs of
start-up activities be charged to expense as incurred in connection with
potential business initiatives and new geographic markets, and SOP 98-5 will
require that such deferred costs be charged to results of operations upon its
adoption. SOP 98-5 is effective for fiscal years beginning after December 15,
1998. NEON will adopt the requirements of SOP 98-5 as of April 1, 1999.
26
<PAGE>
BUSINESS
OVERVIEW
NEON develops, markets and supports Enterprise Access and Integration
software. NEON's primary product family, Shadow, provides rapid and
cost-effective access to, and connectivity between, enterprise data,
transactions and applications. Shadow products enable the deployment of new
applications and the extension of legacy applications across a variety of
computing environments, including the Internet and client/server and mainframe
systems. Shadow Direct enables client/server applications to access and
integrate with mainframe data and applications. Shadow Web Server enables Web
browsers to access and integrate with mainframe data and applications. Shadow
Enterprise Direct provides access and integration between client/server systems.
These products allow organizations to provide applications that combine the
reliability, scalability, security and control of the mainframe with the
flexibility and cost-effectiveness of the Internet and client/server
environments.
INDUSTRY BACKGROUND
In organizations today, a critical asset is the information technology
infrastructure. Many new organizational initiatives, such as managing
information flows across a supply chain, gaining a deeper understanding of
customer buying habits or characteristics, or engaging in more targeted
marketing, selling and production, depend on the effective delivery of
information where it is needed and when it is needed. One of the greatest
challenges to implementing these new strategies is exploiting powerful new
technologies within the existing systems infrastructure of an enterprise -
specifically, combining the strengths of the mainframe environment with the
benefits of Internet and client/server systems.
The advantages of the various platforms can be described as follows:
- MAINFRAMES. Mainframes offer proven reliability, scalability, security and
control as well as time-tested applications, often representing millions
of dollars of investment for an organization. As a result, many
organizations continue to depend on the mainframe to run core business
processes, such as inventory management, payroll processing and customer
billing and support. Historically, organizations have invested substantial
amounts in mainframe systems. According to International Data Corporation,
in 1997 alone, organizations invested approximately $18 billion in
high-end servers, comprised substantially of mainframe systems. As a
result, a vast amount of corporate data and records resides on mainframe
systems, representing a wealth of important corporate information.
- CLIENT/SERVER SYSTEMS. Client/server systems enable many users and
applications to share data as well as server resources and enable
applications to be developed and deployed more rapidly than mainframe
applications. Many organizations have deployed new client/server
applications, either developed in-house or purchased from packaged
application vendors.
- THE INTERNET. The Internet offers a low-cost, global network
infrastructure that enables organizations to communicate externally with
customers, suppliers and partners and to coordinate internally by
extending employee access to key applications and information. Web-based,
business critical applications typically leverage common Web browser
interfaces and offer a means to improve service levels while reducing
costs.
Organizations are seeking new applications that combine the strengths of the
mainframe environment with the benefits of the Internet and client/server
systems. While these applications offer high strategic value, they create
several challenges. The first set of challenges is organizational. It is very
difficult for organizations to recruit high-quality systems engineers with the
experience necessary to create these new applications. Although some engineers
may understand the complexities of the Internet or client/server environment,
few will be able to combine that expertise with a deep understanding of
mainframe systems. In addition, many talented mainframe systems engineers now
are
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preoccupied with finding and fixing Year 2000 Problems. The shortage of
qualified engineers frequently leads to expensive outsourced development
contracts during a time when internal information technology departments are
under increasing pressure to contain costs.
The second set of challenges is created by the inherent limitations of
existing solutions. Organizations have historically addressed the need to
provide greater access to data and applications by means of a limited number of
inflexible techniques, including data extract programs, screen-scraping and file
transfers. These techniques have typically been implemented in an AD HOC manner
to address specific requirements as they have arisen over time. Accordingly,
they generally require extensive manual custom software coding, provide limited
functionality, flexibility and scalability, and may require a costly, burdensome
and ongoing maintenance program.
Over the past several years, a number of software products, known
generically as "middleware," have been introduced to provide organizations with
a packaged product to attempt to solve their access and integration challenges.
Middleware software provides the connection between a client application and a
server application, database or transaction processing system. Although current
middleware software products provide certain benefits, they generally are
limited in three major areas:
- Many current middleware products have been developed for client/server
systems and cannot integrate directly with mainframe operating systems
without the use of additional databases, hardware or proprietary
application programming interfaces that limit the access, adaptability or
performance of the solution.
- Many current middleware products do not include, or have a limited number
of, systems management tools, making these products more burdensome for
information technology personnel to manage.
- Many current middleware products are difficult to integrate quickly into
existing information technology infrastructures without a significant
investment of time and other resources.
Due to these limitations, organizations are increasingly seeking to deploy
more flexible, easy-to-install, cost-effective and high-performance enterprise
access and integration software products that leverage their investments in
older, legacy technology by integrating the strengths of the mainframe with the
benefits of the Internet and client/server systems.
THE NEON SOLUTION
NEON develops, markets and supports Enterprise Access and Integration
software. NEON's primary product family, Shadow, provides rapid and
cost-effective access to, and connectivity between, enterprise data,
transactions and applications. Shadow products enable the deployment of new
applications and the extension of legacy applications across a variety of
computing environments, including the Internet and client/server and mainframe
systems. This allows organizations to provide applications that combine the
reliability, scalability, security and control of the mainframe with the
flexibility and cost-effectiveness of the Internet and client/server
environments. Shadow Direct enables client/server applications to access and
integrate with mainframe data and applications. Shadow Web Server enables Web
browsers to access and integrate with mainframe data and applications. Shadow
Enterprise Direct provides access and integration between client/server systems.
NEON's Shadow products provide organizations with the following benefits in
deploying new applications and extending existing applications:
- EASY TO USE AND COST-EFFECTIVE. The Shadow products were designed to be
easy to use and compatible with a variety of other applications and to
provide a rapid return on investment. The Shadow products can typically be
installed without on-site assistance within one day. As a result of this
"out-of-the-box" functionality, customers can rapidly implement and
utilize Shadow
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products in deploying new and extending existing applications with minimal
training. Furthermore, unlike many middleware products, the Shadow
products do not require additional hardware and software components to
connect distributed computing applications with mainframe environments.
Due to this reduced complexity, Shadow products lower costs by reducing
the management burden on information technology personnel.
- PRESERVE INFORMATION TECHNOLOGY INVESTMENT. The Shadow products preserve
an organization's investment in mainframe technology while allowing
customers to take advantage of the benefits of the Internet and
client/server environments. NEON believes mainframe platforms will
continue to dominate large-scale information technology systems for the
foreseeable future. Using NEON's Shadow products, organizations can
continue to use these reliable, mission-critical applications as new
technologies and market opportunities evolve.
- FLEXIBILITY. The Shadow products use industry-standard technologies that
allow users to select client-side development tools, mainframe data
sources and connection modes used to connect the client and server. The
Shadow products' flexible architecture allows organizations to maximize
the use of existing internal skills and technologies to develop new
applications using more familiar mainframe and client/server development
tools. These benefits allow organizations to quickly implement a Shadow
product that can be utilized for a variety of applications.
- HIGH PERFORMANCE; SCALABILITY. The Shadow products provide "real time"
access to and integration with mainframe systems through Internet or
client/server applications. While many middleware products provide
connectivity to mainframe systems, few provide the rapid response and
scalability delivered by the Shadow products. The Shadow products'
scalability allows information technology groups to broadly expand the
user base of an application without concerns about deteriorating
application performance.
- EXTENSIVE MANAGEMENT, MONITORING AND CONTROL CAPABILITIES. The Shadow
products provide a number of utilities that support all phases of the
application lifecycle. The Shadow products' end-to-end diagnostics provide
rapid resolution of development problems that result in faster delivery of
applications extended from the mainframe. The Shadow products maintain the
required performance and availability of mainframe-based applications
operating in a distributed environment at significantly reduced system
maintenance costs.
In addition to its Shadow products, NEON markets and sells a suite of
subsystem management software products referred to as Enterprise Subsystem
Management software. As organizations increasingly deploy Internet and
client/server applications that are dependent upon mainframe-based data and
applications, new demands will be placed on mainframe subsystems. For example,
when an application that once was subject to use by a single corporate office is
made available to customers through the Internet, it may need to be operational
on a continuous basis to support global operations. In addition, the number of
potential users accessing the mainframe may increase substantially, and its
workload may fluctuate dramatically. NEON's Enterprise Subsystem Management
software products improve the availability and performance of mainframe
subsystems to support the growing demands placed on the mainframe to support new
users and applications.
THE NEON STRATEGY
NEON's goal is to be the leading provider of enterprise access and
integration software. The following are key elements of the NEON strategy:
- MAINTAIN AND ENHANCE TECHNOLOGICAL LEADERSHIP. NEON believes that it is a
technology leader in providing enterprise access and integration software.
The foundation of its technological leadership is the product architecture
and core code base that underlie the Shadow products. This architecture
not only provides significant advantages over competing products, but
provides
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the building blocks for the delivery of new Shadow products by NEON. NEON
intends to continue to maintain and enhance its technological leadership
by leveraging its proven architecture to rapidly develop and release new
products.
- CAPITALIZE ON MARKET FOR INTERNET APPLICATIONS AND E-BUSINESS
SOLUTIONS. NEON believes that many organizations are looking for
cost-effective ways to take advantage of the new channels, markets and
organizational structures presented by the rapid growth of the Internet.
The Shadow products provide a cost-effective way to "Web-enable"
applications and allow organizations to rapidly deploy new Internet
applications and participate in e-business opportunities. NEON intends to
continue to leverage its leadership in Web-enablement technology for
mainframe data and applications.
- LEVERAGE INSTALLED BASE OF CUSTOMERS. Approximately 200 organizations
worldwide, including approximately one-fourth of the Fortune 100
companies, have purchased NEON's products. NEON's customers span major
industries, including automobile manufacturing, energy, banking, financial
services, publishing, engineering and retail. To date, the majority of
these customers use NEON's products in specific departments, divisions or
locations. NEON believes it can penetrate more deeply into existing
customer sites as well as cross-sell either new Enterprise Access and
Integration products or Enterprise Subsystem Management products. In
addition, NEON believes there is a large opportunity to sell
organization-wide licenses to its installed base.
- EXPLOIT PRODUCT DEVELOPMENT STRENGTH. NEON employs a product authorship
program that rewards NEON's product authors individually with commissions
based on the market success of the NEON products they author. NEON
believes that the proximity of its product authors to the customer is
critical, and its product authorship program is designed to encourage
NEON's authors to evaluate the effectiveness of a product in the actual
customer environment. This authorship program contributes to NEON's
ability to hire and retain highly skilled authors. In addition to its
internal development resources, NEON distributes Enterprise Subsystem
Management products developed by Peregrine/Bridge Transfer Corporation.
NEON believes that its relationship with Peregrine/Bridge Transfer
Corporation enables it to address a complementary software market without
substantial development resource commitment.
- MAXIMIZE BENEFITS OF DIRECT TELESALES MODEL. NEON utilizes a direct
telesales model that minimizes the number of remote sales offices and
customer site visits and focuses on effective use of the telephone and
Internet communications for product demonstrations and product sales. NEON
believes its direct telesales approach allows it to achieve better control
of the sales process and respond more rapidly to customer needs while
maintaining an efficient, low-cost sales model. NEON intends to continue
to expand its direct telesales force, both domestically and
internationally.
ENTERPRISE ACCESS AND INTEGRATION PRODUCTS
The Shadow product family consists of three major software products: Shadow
Direct, Shadow Web Server and Shadow Enterprise Direct.
SHADOW DIRECT. Shadow Direct provides organizations with direct access to
mainframe-based data, transactions and applications from desktop computers.
Shadow Direct may be used in multi-tier client/ server environments utilizing
computer operating programs such as Unix and Windows NT. In multi-tier
environments, different parts of a computer program may be distributed among
several tiers of computers or networks. Shadow Direct eliminates the need for
separate hardware and software components and provides a number of unique
connection capabilities to meet a wide variety of corporate application
requirements. Shadow Direct also provides strong performance qualities, such as
scalability, management and control.
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SHADOW WEB SERVER. Shadow Web Server provides "Web-enablement" of mainframe
applications for access by Web browsers, thereby allowing organizations to
rapidly install and deploy Web-based applications. Shadow Web Server provides
direct Internet access to mainframe-based data and transactions from the most
popular Web browsers. Unlike most competitive products providing Web-based
access to mainframes, Shadow Web Server allows information technology
organizations to utilize existing mainframe programming skills and software
management techniques without extensive retraining in distributed computing
languages and development tools. In addition, Shadow Web Server Web-enables
mainframe applications without compromising mainframe security levels and
provides secure access by supporting industry standard and proprietary NEON
security technologies. Similar to Shadow Direct, Shadow Web Server minimizes the
number of components that limit the scalability, manageability and control of
other products.
Shadow Direct and Shadow Web Server can be enhanced with Shadow Add-on
Components that meet changing application demands. The add-on components give
the customer the ability to purchase additional capabilities when required,
providing an adaptable solution that meets customers' evolving needs by
extending client, server and connection capabilities. For example, the server is
typically extended to support additional data or transactional sources as the
need arises to use these in new applications. In addition, batch encryption and
decryption of files is available for sensitive business transmission of data.
This add-on component provides a low-cost, cross-platform encryption technology
to provide secure transmission of sensitive business information. The add-on
components provide NEON's customers with an extendable and flexible long-term
solution for their Enterprise Access and Integration needs.
SHADOW ENTERPRISE DIRECT. Shadow Enterprise Direct provides organizations
with direct access to Unix and Windows NT-based data and applications from the
desktop. Shadow Enterprise Direct eliminates the need for maintaining multiple
database drivers and provides unique connection capabilities to meet a wide
variety of corporate database and applications requirements. Shadow Enterprise
Direct also provides strong performance qualities, such as scalability,
manageability and control.
NEON'S UNIQUE PRODUCT ARCHITECTURE
NEON's Enterprise Access and Integration Architecture is central to the
Shadow products' success. NEON designed this architecture to be open and
significantly less complex than competing architectures. NEON believes its
architecture not only provides significant technological advantages over
competing products, but also reduces the cost of product development and
time-to-market. NEON's Enterprise Access and Integration Architecture allows
organizations to implement a single architecture that meets mainframe access and
integration needs and maintains open standards for flexibility and adaptability.
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The following graphic depicts the Enterprise Access and Integration
Architecture:
[Schematic depicting NEON's Enterprise Access and Integration architecture.
The graphic sets forth line items for Shadow Client, Shadow Connection, Shadow
Management/Run-Time, Shadow Access and a bottom line item styled "Data and
Applications." At the top of the schematic are three categories styled Internet,
Client/Server and N-Tier depicting the relationship between the product
architecture and the capabilities for enterprise access and integration.]
The Enterprise Access and Integration Architecture consists of four
fundamental architectural elements that work together to deliver flexible,
high-performance capabilities for enterprise access and integration: Shadow
Client, Shadow Connection, Shadow Management/Run-Time and Shadow Access. Each
element represents a substantial NEON investment measured in terms of lines of
code and man-years of development.
SHADOW CLIENT. Shadow Client supports client application programming
interfaces, protocols and security standards for all major application
environments, including the Hypertext Markup Language and Hypertext Transfer
Protocol used in Internet applications and including Open Database Connectivity,
a standard application programming interface used in connection with
client/server systems. In addition, NEON is continuing to develop and intends to
deliver similar products to support emerging technologies such as Java Database
Connectivity, an application program interface used in connecting programs
written in Java to databases.
SHADOW CONNECTION. Shadow Connection provides support for a number of
connection options from the client to Shadow Management/Run-Time. These options
provide flexibility, allowing organizations to select connection modes to fit a
variety of application demands.
SHADOW MANAGEMENT/RUN-TIME. Shadow Management/Run-Time is the hub for all
Shadow Add-on Components which allows local and remote access to mainframe-based
data and transactions. Shadow Management/Run-Time provides management,
execution, security and control of the enterprise access environment.
SHADOW ACCESS. Shadow Access integrates and supports a series of plug-in
modules for access to data and transactional sources. Organizations purchase
Shadow Add-on Components as their needs evolve. NEON continues to develop and
market additional add-on components to expand the versatility of the solution.
ENTERPRISE SUBSYSTEM MANAGEMENT PRODUCTS
NEON's Enterprise Subsystem Management products cost-effectively maintain
the performance and availability required by mainframe environments as the
demand for new applications increases. NEON markets these products through its
distributor agreement with Peregrine/Bridge Transfer Corporation.
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NEON provides five products that address the market opportunity in
Information Management Systems subsystem management. These products maintain
high availability, integrity and performance of Information Management Systems
databases, and the ability to load and unload data, to manage indices and to
place Information Management Systems data where desired. These products provide
cost-effective means to handle demands of existing and new applications as they
are updated to take advantage of Internet and client/server computing. NEON also
provides Customer Information and Control Affinities Server, a product that
addresses the market opportunity for Customer Information and Control solutions,
which are established middleware solutions from IBM for mainframe computers.
This product allows organizations to more completely realize the advantages of
IBM's System/390 SYSPLEX platform in the Customer Information and Control
subsystem area.
CUSTOMERS
NEON's customer base spans major industries, including automobile,
manufacturing, energy, banking, financial services, publishing, engineering and
retail. The following is a representative list of NEON's customers that have
purchased at least $100,000 in licensed software and first year maintenance
services since April 1, 1996. One customer accounted for 16% of total revenues
in the nine months ended December 31, 1998.
Allied Dunbar Assurance
Allied Signal
American Express Travel
American Transtech
Avon Products
BASF Computer Services
Blue Cross Blue Shield of
Minnesota
Boeing
Cendant
Consumers Energy
Dayton Hudson
Delta Technology
Deutsche Bank
Duke University Medical
Center
Foundation Health Systems
HM Land Registry
Hyundai Heavy Industries
J. Sainsbury Group
Marks & Spencer
Merrill Lynch
Metro MGI Informatic
Motorola
National Institutes of Health
National Westminster Bank
Norwest Services
Norwich Union Life
Office Depot
Qantas
Reynolds Metals
Royal Bank of Canada
Sears
Severn Trent Systems
Skandia
St. George Bank
State of Illinois
Texaco
Texas Legislative Council
Texas Workforce Commission
Trygg Hansa
U.S. Department of Defense
U.S. Postal Service
Unipart Information Technology
VW Gedas (U.K.)
Wells Fargo Bank
NEON provides its products to customers under non-exclusive,
non-transferable licenses. Under NEON's current standard license agreement,
licensed software may be used solely for the customer's internal operations, and
NEON does not sell or transfer title to its products to its customers.
CUSTOMER CASE STUDIES
The following examples illustrate how some of NEON's customers are using
Shadow products to provide rapid, cost-effective access to and connectivity
between enterprise data, transactions and applications. There can be no
assurance that new or existing customers will achieve any or all of the benefits
described below.
SKANDIA
Skandia, headquartered in Sweden, provides worldwide insurance and financial
services to individuals, businesses and the public sector. Skandia employs over
10,000 people.
CHALLENGE. With most of Skandia's data and applications residing on
mainframe systems, Skandia's Information Technology Internet Group was given the
task of integrating those systems with several new Web-based applications. One
application was to provide call center personnel with in-depth information on
customers as they called in, allowing them to respond more quickly and
accurately to
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customer inquiries and improve customer satisfaction. On a technical level, this
application was required to integrate with Skandia's telephone systems and call
center software, to provide call center personnel with a complete and updated
profile of the customers before speaking with them over the phone.
RESULT. The initial Web-based application was designed, developed and
integrated with Shadow Web Server in less than two days. Skandia was able to
implement the application on an enterprise-wide basis within nine man-weeks.
Through a browser interface, the application prompts a call center worker for a
customer number, which identifies the customer and provides access to the
appropriate customer records residing on a mainframe. The application contains a
combination of textual information, graphics and links to mainframe-based data,
allowing the call center representative to obtain specific information about the
customer. The Shadow solution provided the high level of security, manageability
and performance required for a distributed Web-based application while
leveraging the benefits of Skandia's mainframe environment. The result was a
significant improvement in customer satisfaction.
TEXACO
Texaco Inc. is one of the world's largest companies principally engaged in
the worldwide exploration for and production, transportation, refining and
marketing of petroleum products.
CHALLENGE. Transporting natural gas from the wellhead to the consumer
requires a cooperative effort among producers, pipeline operators, regional and
local distribution companies and other members of the supply chain.
Historically, it also required the generation and manual processing of paper
documents which accompanied virtually every step of the production, distribution
and billing process. Texaco wanted to replace this process with a Web-based
solution to reduce processing cost, improve the accuracy of data and, more
fundamentally, to improve the integration between the members of its natural gas
supply chain.
RESULT. Shadow Web Server provided the needed access between Texaco's
mainframe environment and the Internet, enabling Texaco to provide an integrated
supply chain solution and a more efficient process for the distribution of
natural gas. The application has saved countless hours of re-keying of
information, produced significant cost savings and substantially improved the
accuracy of transaction data.
SALES AND MARKETING
NEON sells its products through a direct telesales force and, to a lesser
extent, through independent distributors.
DIRECT TELESALES. NEON utilizes a direct telesales model that minimizes the
number of remote sales offices and customer site visits and focuses on effective
use of the telephone and Internet communications for product demonstrations and
product sales. When necessary, NEON's sales force will also travel to customer
locations for on-site demonstrations and product trials. The direct telesales
model allows NEON's sales representatives to be successful without substantial
travel, thereby improving earning potential and providing a higher quality of
life. NEON believes this model is a significant factor in recruiting and
retaining outstanding sales professionals. NEON believes its direct telesales
approach allows it to achieve better control of the sales process and to respond
more rapidly to customer needs, while maintaining an overall low-cost sales
model. Sales cycles typically range from three to six months.
The direct telesales force for North America is based in Sugar Land, Texas
and generates a substantial majority of NEON's revenues. In January 1997, NEON
established its first international direct telesales office in London, England.
In August 1997, NEON established another international direct telesales office
in Frankfurt, Germany. NEON increased the size of its direct telesales
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organization from 21 to 31 individuals over the last fiscal year and expects to
continue hiring sales personnel, both domestically and internationally, over the
next fiscal year.
INDEPENDENT DISTRIBUTORS. NEON has also established indirect distribution
channels through independent distributors in Europe, Latin America and the
Pacific Rim. At December 31, 1998, NEON had 11 distributors covering 16
countries. NEON's distributors typically perform marketing, sales and technical
support functions in their assigned country or region. They may distribute
directly to the customer, via other resellers or through a combination of both
channels. NEON continuously trains its international distributors in both
product capabilities and sales methodologies.
In addition to its internal marketing activities, NEON has established
relationships with other vendors that are complementary to NEON's efforts to
expand acceptance of the Shadow and Enterprise Subsystem Management products.
NEON's internal marketing activities include trade and road shows, public
relations, news releases, trade article placements and technical analyst
meetings as well as targeted print trade advertising. NEON also relies on its
Internet site and Web-based seminars to supplement its primary marketing
activities.
ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS. NEON has original equipment
manufacturer relationships with Ardent Software (formerly Prism Solutions),
Informatica and Xantel. These companies embed Shadow Direct in their products to
provide access to mainframe-based enterprise data and transactions from their
respective applications. The original equipment manufacturer relationships and
NEON's software limit access to only their applications. In addition to
generating revenues, these relationships provide an opportunity for NEON's
direct telesales force to sell licenses offering broader Shadow product
functionality.
MARKETING RELATIONSHIPS. NEON has recently developed marketing
relationships with BEA Systems, IBM, Microsoft and Netscape. NEON believes that
these relationships could present NEON with access to sales opportunities
requiring a unique combination of product features and requirements that are not
available from any of the foregoing vendors acting independently.
CUSTOMER SUPPORT
NEON believes that high-quality and long-term customer support is a critical
requirement for continued growth and increased sales of its products. NEON has
made significant investments in increasing the size of its support organization
in the past and plans to continue to do so in the future. Customer support
personnel provide pre-sale, installation and post-sale technical support by
toll-free telephone, E-mail and facsimile, and through NEON's Internet site and
bulletin boards. Customer support is available on an around-the-clock basis. In
addition, customer service representatives contact each customer within six
months after installation to assess customer satisfaction and obtain feedback.
As a result of the "out-of-the-box" functionality of its products, NEON does not
require a large customer support organization.
PRODUCT DEVELOPMENT
NEON's research and development efforts are focused primarily on expanding
its Enterprise Access and Integration products. NEON believes that attracting
and retaining talented software developers is an important component of NEON's
product development activities. To this end, NEON has instituted a product
authorship incentive program that rewards NEON's product authors individually
with commissions based on the market success of the applications designed,
written, marketed and supported by them. NEON believes that the proximity of its
product authors to the customer is critical, and its product authorship program
is designed to encourage NEON's developers to evaluate the effectiveness of a
product in the actual user environment. NEON incorporates the recommendations of
existing and potential customers when developing its products and believes that
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continued dialogue with customers is an important element in developing
enhancements to existing products and in the development of new products.
NEON has in the past devoted and expects in the future to devote a
significant amount of resources to developing new and enhanced products. NEON
currently has a number of product development initiatives underway.
Specifically, NEON is currently developing a Shadow product that will simplify
the maintenance of passwords between Microsoft's SNA/Servers and mainframes. In
addition, NEON is continuing to enhance its existing Shadow product line to
include support for the Object Linking and Embedding database, a connectivity
standard used in connecting Windows operating systems to databases, and to
provide a Web-browser-based management interface.
TEXACO WORK AGREEMENT
NEON has a work agreement with Texaco pursuant to which Texaco provides NEON
use of its mainframe computer and certain of its under-utilized data processing
resources. NEON uses Texaco's resources in developing a number of its
application interfaces. The Texaco agreement specifies that ideas, concepts,
know-how and techniques that NEON develops under the agreement are to remain its
property and that Texaco may use such developments solely for its internal
information technology operations. NEON has granted Texaco and its subsidiaries
and affiliates a worldwide, perpetual, non-transferable and royalty-free license
with respect to any products developed pursuant to the work agreement. Either
party to the work agreement may terminate the agreement upon 30-days' written
notice to the other party. Upon termination of the work agreement, NEON would
have to locate alternative mainframe sources to develop certain of its products.
NEON believes alternative mainframe sources are available at reasonable rates.
PEREGRINE/BRIDGE TRANSFER CORPORATION RELATIONSHIP
NEON markets and sells a suite of Enterprise Subsystem Management products,
in addition to its Shadow products, that improve the efficiency and performance
of mainframe environments. These products are developed pursuant to a
development and distribution agreement with Peregrine/Bridge Transfer
Corporation. The Peregrine/Bridge Transfer Corporation agreement provides NEON
with exclusive rights to distribute Peregrine/Bridge Transfer Corporation's
Enterprise Subsystem Management software, with the exception of limited
co-marketing rights held by IBM relating to one of the Peregrine/Bridge Transfer
Corporation Enterprise Subsystem Management products, as well as access to
Peregrine/Bridge Transfer Corporation's team of software developers.
Peregrine/Bridge Transfer Corporation currently employs 12 developers with an
average of 21 years of experience. The agreement grants NEON worldwide
distribution rights through March 31, 2004. The agreement also grants to NEON
first refusal rights to acquire Peregrine/Bridge Transfer Corporation by
matching any third-party offer that Peregrine/Bridge Transfer Corporation or its
stockholder chooses to accept, and an option to acquire Peregrine/Bridge
Transfer Corporation that is exercisable on or after January 1, 2002 or such
earlier date that NEON has paid Peregrine/Bridge Transfer Corporation royalty
payments totaling $10.0 million or more in any single fiscal year. NEON believes
that its relationship with Peregrine/Bridge Transfer Corporation provides it
with an opportunity to address a new and related software products market,
Enterprise Subsystem Management, without committing substantial development
resources, and enhances its overall research and development capabilities. See
"--Legal Proceedings" and "Certain Transactions--Peregrine/Bridge Transfer
Corporation Agreements."
COMPETITION
NEON competes in markets that are intensely competitive and characterized by
rapidly changing technology and evolving standards. NEON's competitors are
diverse and offer a variety of solutions directed at various segments of the
Enterprise Access and Integration and Enterprise Subsystem Management software
markets. NEON has experienced, and expects to continue to experience, increased
competition from current and potential competitors, many of whom have greater
name
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recognition, a larger installed customer base and significantly greater
financial, technical, marketing, and other resources than NEON.
NEON's Shadow products compete principally with middleware products from
established vendors such as IBM, Oracle and Information Builders and to a lesser
extent with BEA Systems, IONA Technologies, New Era of Networks and TSI
International Software. NEON's Enterprise Subsystem Management products face
significant competition from products offered by BMC Software. In addition, NEON
faces competition from:
- Other business applications vendors who may internally develop, or attain
through acquisitions and partnerships, middleware and enterprise subsystem
management solutions
- Internal development efforts by corporate information technology
departments
- New entrants to the middleware or enterprise subsystem management markets
NEON's competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or devote greater resources to
the development, promotion and sale of their products than NEON. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins, longer sales cycles and loss of market share, any of which would
materially adversely affect NEON's business, operating results and financial
condition.
PROPRIETARY RIGHTS
NEON relies primarily on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
its proprietary rights. However, NEON believes that these measures afford only
limited protection. There can be no assurance that others will not develop
technologies that are similar or superior to NEON's technology or design around
the copyrights and trade secrets owned by NEON. NEON licenses its products
pursuant to software license agreements, which include acknowledgements and
agreements by the licensee that are intended to establish and protect NEON's
proprietary rights and confidential information. NEON believes, however, that
these measures afford only limited protection. Despite NEON's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy aspects of
NEON's products or to obtain and use information that NEON regards as
proprietary. Policing unauthorized use of NEON's products is difficult and NEON
is unable to determine the extent to which piracy of its software products
exists. In addition, the laws of some foreign countries do not protect NEON's
proprietary rights as fully as do the laws of the United States. There can be no
assurance that NEON's means of protecting its proprietary rights will be
adequate or that competition will not independently develop similar or superior
technology.
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." We are currently opposing in the U.S.
Patent and Trademark Office New Era of Network's application to register
"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
(a) 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 (b) cancellation of NEON's federal trademark registration for
NEON. Any litigation to enforce our right to use the NEON name in our business
or to prevent others from using the NEON name would be expensive and
time-consuming, would divert management resources and may not be adequate to
protect our business. If we should lose any such litigation, we may have to
change our name, which also would be expensive and time-consuming and could
adversely affect our business. In addition, New Era of Network's use of the
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<PAGE>
"NEON" symbol on the Nasdaq National Market may create confusion in the
marketplace and result in variations in our stock price that are attributable to
facts or circumstances relating to New Era of Networks.
NEON has code-sharing arrangements with third parties under which it has
obtained and used certain source code in the development of some of its software
products. If any of these agreements are terminated, NEON could be required to
spend time and software development resources. Any diversion of these resources
could delay NEON's development of new products or product enhancements.
NEON is not aware that it is infringing any proprietary rights of third
parties. There can be no assurance, however, that third parties will not claim
infringement by NEON of their intellectual property rights. BMC Software has
brought suit against NEON and other parties alleging misappropriation and
infringement of certain trade secrets. See "--Legal Proceedings." NEON expects
that software product developers will increasingly be subject to infringement
claims as the number of products and competitors in NEON's industry segment
grows and the functionality of products in different industry segments overlaps.
Any such claims, with or without merit, could be time consuming to defend,
result in costly litigation, divert management's attention and resources, cause
product shipment delays or require NEON to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to NEON, if at all. In the event of a successful
claim of product infringement against NEON and failure or inability of NEON to
either license the infringed or similar technology or develop alternative
technology on a timely basis, NEON's business, operating results and financial
condition could be materially adversely affected.
HUMAN RESOURCES
As of December 31, 1998, NEON and its subsidiaries employed 77 persons,
including 41 in sales, marketing and field operations, 15 in research and
development, 11 in finance and administration and 10 in client services. None of
NEON's employees are represented by a labor union. NEON has experienced no work
stoppages and believes its relationship with its employees is good. Competition
for qualified personnel in NEON's industry is intense.
FACILITIES
NEON's principal administrative, engineering, manufacturing, marketing and
sales facility is approximately 34,300 square feet and is located in Sugar Land,
Texas. The lease for this facility will expire on August 31, 2003. In addition,
NEON leases offices in London, England and Frankfurt, Germany. Management
believes that its current facilities are adequate to meet its needs through the
next 12 months and that, if required, suitable additional space will be
available on commercially reasonable terms to accommodate expansion of NEON's
operations.
LEGAL PROCEEDINGS
BMC Software filed suit against Peregrine/Bridge Transfer Corporation,
Skunkware, Inc., the privately held sole stockholder of Peregrine/Bridge
Transfer Corporation, John J. Moores (a director of NEON) and other parties in
the District Court of Travis County, Texas, 200th Judicial District. In December
1996, NEON was named as a codefendant in that suit. BMC Software alleges
misappropriation and infringement of certain trade secrets, confidential
information and corporate opportunity, as well as breach of contract and
fiduciary relations by the individuals. In the lawsuit, BMC Software states that
it is seeking damages based upon the disgorgement of all revenues derived from
the sale or license of the Peregrine/Bridge Transfer Corporation utilities
through the date of judgment. Furthermore, BMC Software is seeking to hold
Peregrine/Bridge Transfer Corporation, NEON, Skunkware and Mr. Moores jointly
and severally liable for these damages. NEON believes that there was no
misappropriation of trade secrets or corporate opportunity as alleged by BMC
Software
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<PAGE>
and therefore that the lawsuit is without merit. NEON has filed counterclaims
against BMC Software for anti-competitive practices. Peregrine/Bridge Transfer
Corporation is defending NEON in the lawsuit pursuant to an indemnification
provision in the distributor agreement between NEON and Peregrine/ Bridge
Transfer Corporation. See "Certain Transactions--Peregrine/Bridge Transfer
Corporation Agreements." Peregrine/Bridge Transfer Corporation is minimally
capitalized, and there can be no assurance that Peregrine/Bridge Transfer
Corporation will continue to have sufficient resources to fund the costs and
expenses of the lawsuit or indemnify NEON against an adverse judgment. If
Peregrine/ Bridge Transfer Corporation should cease defending NEON in the
lawsuit, NEON will be required to provide its own defense and may not be able to
recover the related costs from Peregrine/Bridge Transfer Corporation. If BMC
Software is successful in obtaining a judgment in its favor against NEON in the
lawsuit, that judgment could have a material adverse effect on NEON.
We have filed an opposition in the U.S. Patent and Trademark Office opposing
New Era of Networks' application to register "NEONet." On December 24, 1998, New
Era of Networks, Inc. filed a complaint against NEON in the United States
District Court for District of Colorado seeking (a) 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 (b) cancellation of
NEON's federal trademark registration for "NEON." See "--Proprietary Rights."
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of NEON as of January 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
John J. Moores (a)........................ 54 Chairman of the Board of Directors
President, Chief Executive Officer and
Joe Backer................................ 61 Director
Peter Schaeffer........................... 43 Chief Technology Officer and Director
John S. Reiland........................... 49 Chief Financial Officer and Director
Don Pate.................................. 43 Vice President--Worldwide Sales
Wayne E. Webb, Jr......................... 47 Vice President and General Counsel
Jonathan J. Reed.......................... 42 Vice President of Marketing
Charles E. Noell III (a)(b)............... 47 Director
Norris van den Berg (a)(b)................ 60 Director
Richard Holcomb (a)....................... 36 Director
</TABLE>
- --------------------------
(a) Member of the Compensation Committee.
(b) Member of the Audit Committee.
JOHN J. MOORES has served as Chairman of NEON's Board of Directors since May
1993. Since December 1994, Mr. Moores has served as owner and Chairman of the
Board of the San Diego Padres Baseball Club, L.P. and since September 1991 as
Chairman of the Board of JMI Services, Inc., a private investment company. In
1980, Mr. Moores founded BMC, a vendor of system software utilities, and served
as its President and Chief Executive Officer until 1986 and as its Chairman of
the Board until 1992. Mr. Moores also serves as Chairman of the Board of
Peregrine Systems, Inc., an infrastructure management software company, and
numerous privately held companies, including Skunkware, Inc. Mr. Moores serves
as a director of BindView Development Corporation, a systems management software
company. Mr. Moores holds a B.S. in Economics and a J.D. from the University of
Houston.
JOE BACKER has served as NEON's President and Chief Executive Officer and as
a member of NEON's Board of Directors since November 1995. From December 1993 to
October 1995, Mr. Backer was a private investor. Mr. Backer held the position of
Senior Vice President of BMC from November 1989 to November 1993. Mr. Backer
also serves as President, Chief Executive Officer and a member of the Board of
Directors of Peregrine/Bridge Transfer Corporation and Skunkware. In addition,
Mr. Backer serves as a member of the Board of Directors of Pavilion Technologies
Inc., a privately held software company headquartered in Austin, Texas. Mr.
Backer holds a B.S. in Electrical Engineering from Purdue University.
PETER SCHAEFFER is NEON's founder and has been a member of the Board of
Directors of NEON and NEON's predecessor-in-interest, NEON System, Inc., an
Illinois corporation, since July 1991. Since November 1995, Mr. Schaeffer has
served as NEON's Chief Technology Officer. From July 1991 to October 1995, Mr.
Schaeffer served as NEON's President and Chief Executive Officer. From June 1990
to June 1991, Mr. Schaeffer was employed with Goal Systems International, Inc.,
a privately held software development company. In 1986, Mr. Schaeffer co-founded
MVS Software, a privately held software development company, and was Vice
President--Technology of MVS Software until April 1990. Mr. Schaeffer holds a
B.S. in Organic Chemistry from the University of Chicago.
JOHN S. REILAND has served as NEON's Chief Financial Officer since July 1996
and as a member of NEON's Board of Directors since November 1998. Mr. Reiland
also serves as Chief Financial Officer of Peregrine/Bridge Transfer Corporation
and of Skunkware. From June 1994 to April 1996, Mr. Reiland served as Senior
Vice President, Chief Financial Officer and a director of Pointe
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Communications Corporation, an international telecommunication and Internet
service provider. From May 1991 to May 1994, Mr. Reiland served as Vice
President of Motor Columbus AG, an international long-distance telephone service
reseller, and also served as President of its subsidiary, WorldCom
International, Inc. Mr. Reiland is a Certified Public Accountant and holds a
B.B.A. in Accounting from the University of Houston.
DON PATE has served as NEON's Vice President--Worldwide Sales since March
1998 and served as NEON's Vice President of Sales from November 1996 to March
1998. From October 1989 to November 1996, Mr. Pate served in several sales and
sales management positions with BMC, including Manager of International Sales,
Sales Operations Manager and Regional Manager. Prior to that, Mr. Pate was a
salesman for the IBM Corporation. Mr. Pate holds a B.S. in Economics and
Psychology from Houston Baptist University.
WAYNE E. WEBB, JR. has served as NEON's Vice President and General Counsel
since June 1998. Mr. Webb is also Vice President and General Counsel of
Peregrine/Bridge Transfer Corporation. From August 1989 through May 1998, Mr.
Webb was a partner in the law firm of Fulbright & Jaworski LLP. Mr. Webb holds a
B.S. in Electrical Engineering from Rice University and a J.D. from the
University of Texas at Austin.
JONATHAN J. REED has served as NEON's Vice President of Marketing since
January 1999. From January 1998 through December 1998, Mr. Reed served as NEON's
Director of Marketing. From July 1996 to December 1997, Mr. Reed served as
NEON's Principal Consultant and Technical Marketing Manager. From April 1995
until July 1996, Mr. Reed served as Alliance Manager for Sybase, Inc., a
distributed computing company. From March 1991 to April 1995, Mr. Reed was
employed by BMC where he served as a Commercial Analyst. Mr. Reed holds a B.S.
in Biology from the University of Houston and an M.S. in Management and Computer
Science from Houston Baptist University.
CHARLES E. NOELL III has served as a director of NEON since May 1993. Since
January 1992, Mr. Noell has served as President and Chief Executive Officer of
JMI Services, Inc., and as a General Partner of JMI Equity Fund, L.P. Mr. Noell
is a director of Peregrine/Bridge Transfer Corporation and also serves as a
director of Transaction Systems Architects, Inc., an electronic funds transfer
company. Mr. Noell also serves on the board of numerous privately held
companies, including Peregrine/Bridge Transfer Corporation and Skunkware. Mr.
Noell holds a B.A. in History from the University of North Carolina at Chapel
Hill and an M.B.A. from Harvard University.
NORRIS VAN DEN BERG has served as a director of NEON since May 1993. Mr. van
den Berg has served as a General Partner of JMI Equity Fund since July 1991. Mr.
van den Berg is also a director of Peregrine/Bridge Transfer Corporation,
Skunkware, Inc. and of Ardent Software, Inc. (formerly Prism Solutions, Inc.), a
data integration software company. Mr. van den Berg holds a B.A. in Philosophy
and Mathematics from the University of Maryland.
RICHARD HOLCOMB has served as a director of NEON since May 1993. Mr. Holcomb
is a co-founder of haht Software, a privately held software company, and has
served as its Chairman of the Board since 1995. Mr. Holcomb co-founded Q+E
Software, a privately held supplier of client/server database access technology,
and from 1986 through 1994 served as its President. Mr. Holcomb serves as an
appointed member of the North Carolina Information Resources Management
Commission and on the board of the North Carolina Electronics and Technologies
Association. Mr. Holcomb holds a B.A. in Computer Science from the University of
South Carolina and a M.S. in Computer Science from North Carolina State
University.
BOARD OF DIRECTORS AND COMMITTEES
Following the offering, NEON's Board of Directors will consist of seven
directors divided into three classes with each class serving for a term of three
years. At each annual meeting of stockholders,
41
<PAGE>
directors will be elected by the holders of the common stock to succeed those
directors whose terms are expiring. Messrs. Backer and Noell are Class I
directors whose terms will expire in 2000; Messrs. Holcomb and van den Berg are
Class II directors whose terms will expire in 2001; and Messrs. Moores, Reiland
and Schaeffer are Class III directors whose terms will expire in 2002.
The Board of Directors has created a Compensation Committee and an Audit
Committee. The Compensation Committee makes recommendations to the Board of
Directors concerning salaries and incentive compensation for NEON's officers and
employees and administers NEON's 1993 Stock Plan, the 1999 Long-Term Incentive
Plan and the Stock Option Plan for Non-Employee Directors. The members of the
Compensation Committee are Messrs. Holcomb, Moores, Noell and van den Berg
(chairman). The Audit Committee makes recommendations to the Board of Directors
regarding the selection of independent auditors, reviews the results and scope
of audits and other accounting-related services and reviews and evaluates NEON's
internal control functions. The members of the Audit Committee are Messrs. Noell
(chairman) and van den Berg.
DIRECTORS' COMPENSATION
During fiscal 1998, NEON's outside directors were not compensated for
serving as members of NEON's Board of Directors, and NEON expects that such
policy will not change in fiscal 1999, except that outside directors
subsequently joining the Board of Directors will receive option grants under the
Stock Option Plan for Non-Employee Directors as described below. Mr. Holcomb
received an option grant of 13,800 shares in fiscal 1998.
NEON has adopted the Stock Option Plan for Non-Employee Directors for
compensation of its outside directors and has reserved 100,000 shares of its
common stock for issuance thereunder. Outside directors joining the Board of
Directors after the offering will receive options to purchase 7,500 shares of
NEON common stock exercisable at the fair market value of the common stock at
the close of business on the date immediately preceding the date of grant (the
initial outside directors will be eligible for such grants upon their
re-election to the Board of Directors). These annual options will vest equally
in 33 1/3% increments over the three-year period from the date of grant. All
stock options granted pursuant to the Stock Option Plan for Non-Employee
Directors will be nonqualified stock options and will remain exercisable for a
period of ten years from the date of grant or, if sooner, six months after the
option holder ceases to be a director of NEON. In the event of a change in
control of NEON or certain other significant events, all options outstanding
under the Stock Option Plan for Non-Employee Directors shall terminate, provided
that immediately before the effective date of such transaction each holder of an
outstanding option under the Stock Option Plan for Non-Employee Directors shall
be entitled to purchase the total number of shares of common stock that such
option holder would have been entitled to purchase during the entire remaining
term of the option.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Holcomb, Moores, Noell and van den Berg served on the Compensation
Committee during fiscal 1998. These individuals do not serve as officers or
employees of NEON. The following table sets forth other interlocks involving the
officers and directors of NEON.
<TABLE>
<S> <C>
Mr. Moores.................................. Director of Skunkware, Inc.,
the sole stockholder of
Peregrine/ Bridge Transfer
Corporation
Chairman of the Board of JMI
Services, Inc.
Messrs. Noell and van den Berg.............. Directors of Peregrine/Bridge
Transfer Corporation
Mr. Noell is President and
Chief Executive Officer of JMI
Services, Inc.
Mr. van den Berg is an
executive officer of JMI
Services, Inc.
Mr. Backer.................................. President, Chief Executive
Officer and a director of
Peregrine/Bridge Transfer
Corporation and of Skunkware,
Inc.
Mr. Reiland................................. Chief Financial Officer of
Peregrine/Bridge Transfer
Corporation and of Skunkware,
Inc.
Mr. Webb.................................... Vice President and General
Counsel of Peregrine/Bridge
Transfer Corporation
</TABLE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the compensation
earned by NEON's Chief Executive Officer and the four most highly compensated
executive officers (collectively, the "Named Executive Officers") other than the
Chief Executive Officer during fiscal 1998. The table excludes certain
perquisites and other personal benefits received by a Named Executive Officer
that do not exceed the lesser of $50,000 or 10% of any such officer's salary and
bonus disclosed in the table.
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<PAGE>
There were no options or stock appreciation rights granted to the Named
Executive Officers during fiscal 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- -------------------------------------------------------- --------- --------- ---------------
<S> <C> <C> <C>
Joe Backer
President and Chief Executive Officer................. $ 130,000 $ 140,602 $ --
Peter Schaeffer
Chief Technology Officer.............................. 100,000 22,188 --
John S. Reiland
Chief Financial Officer............................... 110,000 22,544 --
Don Pate
Vice President--Worldwide Sales....................... 95,833 96,848 --
Jonathan J. Reed
Vice President of Marketing........................... 112,708 12,695 --
</TABLE>
OPTION EXERCISES IN FISCAL 1998 AND MARCH 31, 1998 OPTION VALUES. The
following table sets forth, for each Named Executive Officer, information
concerning option exercises for fiscal 1998 and the number and value of
securities underlying unexercised options held on March 31, 1998. The
calculations of the value realized and of the unexercised in-the-money options
are based on the midpoint of the proposed offering price range, less the
exercise price payable for such shares, multiplied by the number of shares
issued upon exercise of the option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS HELD AT OPTIONS HELD AT
SHARES MARCH 31, 1998 MARCH 31, 1998
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- ------------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joe Backer............ 22,000 $ 281,600 115,504 137,496 $1,478,451 $ 1,759,949
Peter Schaeffer....... -- -- 395,835 -- 5,066,688 --
John S. Reiland....... 13,189 168,819 -- 39,561 -- 506,381
Don Pate.............. -- -- 13,189 39,561 168,819 506,381
Jonathan J. Reed...... 3,564 44,728 -- 10,686 -- 67,055
</TABLE>
STOCK PLANS
1999 LONG-TERM INCENTIVE PLAN. The 1999 Plan provides for the grant of
incentive stock options and non-qualified stock options to purchase NEON common
stock, stock appreciation rights, restricted stock and performance units, to key
employees of NEON. The purpose of the 1999 Plan is to attract and retain
skilled, qualified executives and key employees to motivate them to achieve
long-range goals and to further identify their interests with those of the other
stockholders of NEON.
NEON has reserved 2,000,000 shares of its common stock for issuance under
the 1999 Plan. The 1999 Plan will be administered by the Compensation Committee
of the Board of Directors. The purchase price of common stock issuable upon
exercise of incentive stock options must not be less than the fair market value
of the common stock on the date of grant or, in the case of incentive stock
options issued to holders of more than 10% or greater of the outstanding voting
securities of NEON, 110% of the fair market value on the date of grant. The
maximum term of any incentive stock option is ten years. The aggregate fair
market value on the date of the grant of the stock for which incentive stock
options are exercisable for the first time by an employee during any calendar
year may not exceed $100,000. Eligible product authors selected by the
Compensation Committee may elect to
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<PAGE>
receive non-qualified stock options for NEON common stock in lieu of a specified
percentage of commissions earned during the year, with the exercise price for
those options to be equal to 50% of the fair market value of the common stock on
the date of the grant. Options are exercisable over a period of time in
accordance with the terms of option agreements entered into at the time of the
grant. Options granted under the 1999 Plan are generally nontransferable by the
optionee and, unless otherwise determined by the Compensation Committee, must be
exercised by the optionee during the period of the optionee's employment with
NEON. In the event of a change in control of NEON or certain other significant
events, all options outstanding under the 1999 Plan shall terminate, unless
otherwise provided by the terms of the transaction, provided that immediately
before the effective date of the transaction each holder of an option under the
1999 Plan shall be entitled to purchase the total number of shares of NEON
common stock that such optionee would have been entitled to purchase during the
entire remaining term of the option.
1993 STOCK PLAN. The 1993 Plan was adopted by NEON's Board of Directors and
approved by the stockholders in May 1993. The 1993 Plan provides for the awards
of incentive stock option and non-qualified stock options to directors, officers
and employees of NEON. The 1993 Plan is administered by the Compensation
Committee of the Board of Directors. There are an aggregate of 2,600,000 shares
reserved for issuance upon exercise of options granted under the 1993 Plan. With
certain exceptions, employee options vest ratably over a four-year period
commencing with the date of grant and expire ten years after the date of grant,
unless terminated earlier as a result of termination of employment. As of
December 31, 1998, there were outstanding under the 1993 Plan options to
purchase an aggregate of 1,629,077 shares of NEON common stock at a weighted
average exercise price of $2.26 per share held by 76 employees and one director.
In connection with NEON's adoption of the 1999 Plan, NEON will not make any new
grants under the 1993 Plan and options previously issued under the 1993 Plan
will be exercisable in accordance with their terms.
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS. Under the Stock Option Plan
for Non-Employee Directors, nonqualified stock options will be granted to
outside directors upon their election to NEON's Board of Directors after this
offering. See "--Directors' Compensation."
401(K) PLAN
NEON has adopted the NEON Systems, Inc. 401(k) Plan. NEON's 401(k) Plan is
available to all employees who have attained age 21 and have completed six
months of service. An employee may contribute, on a pre-tax basis, up to 15% of
the employee's wages from NEON, subject to limitations specified under the
Internal Revenue Code. Under the terms of NEON's 401(k) Plan, NEON may make a
discretionary matching contribution equal to a percentage of the employee's
contribution to the 401(k) Plan determined annually by NEON and a discretionary
amount determined annually by NEON and divided among eligible participants based
upon an employee's annual compensation in relation to the aggregate annual
compensation of all eligible participants. Contributions are allocated to each
employee's individual account and are, at the employee's election, invested in
one, all or some combination of the investment funds available under such 401(k)
plan. Employee contributions are fully vested and non-forfeitable. Employees
will vest in any NEON contributions at the rate of 20% for each year of service
commencing after the second year of service. To date, NEON has not made any
matching contributions under the 401(k) plan.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware General Corporation Law and NEON's Certificate of Incorporation
limit the liability of each director of NEON to it or its stockholders for
monetary damages for breach of his fiduciary duty as a director, except for:
- Any breach of the director's duty of loyalty to the corporation or its
stockholders
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<PAGE>
- Acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of the law
- Unlawful payments of dividends or unlawful stock repurchases or
redemptions
- Any transaction from which the director derived an improper personal
benefit
NEON's Certificate of Incorporation and Bylaws provide that NEON will
indemnify its directors and officers against expense or liability in an action
to the fullest extent permitted by Delaware law. In addition, NEON is also a
party to indemnification agreements with each of its directors. NEON intends to
maintain directors' and officers' liability insurance.
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<PAGE>
CERTAIN TRANSACTIONS
PEREGRINE/BRIDGE TRANSFER CORPORATION AGREEMENTS
NEON entered into a distributor agreement with Peregrine/Bridge Transfer
Corporation, a database software company, in January 1996. Under the distributor
agreement, NEON marketed and sublicensed certain Enterprise Subsystem Management
products under a non-exclusive worldwide license from Peregrine/Bridge Transfer
Corporation. The distributor agreement provided that NEON pay license fees for
licensed products and for maintenance and support and upgrade services equal to
50% of the revenues received by NEON. NEON incurred license fees of $117,350,
$448,917 and $421,435 to Peregrine/Bridge Transfer Corporation in fiscal 1997,
1998 and the nine months ended December 31, 1998, respectively. NEON did not pay
any license fees to Peregrine/Bridge Transfer Corporation in fiscal 1996.
In December 1998, NEON and Peregrine/Bridge Transfer Corporation amended the
distributor agreement. The amended agreement grants NEON an exclusive, worldwide
license to market and sublicense Enterprise Subsystem Management products, with
the exception of limited co-marketing rights held by IBM relating to one of the
Peregrine/Bridge Transfer Corporation Enterprise Subsystem Management products.
The amended distributor agreement has an initial term through March 31, 2004.
See "Business--Product Development--Peregrine/Bridge Transfer Corporation
Relationship." The amended agreement grants to NEON first refusal rights to
acquire Peregrine/Bridge Transfer Corporation by matching any third-party offer
that Peregrine/Bridge Transfer Corporation or its stockholder chooses to accept,
and an option to acquire Peregrine/Bridge Transfer Corporation that is
exercisable on or after January 1, 2002 or such earlier date that NEON has paid
Peregrine/Bridge Transfer Corporation license fees totaling $10.0 million or
more in any single fiscal year. In addition, beginning April 1, 1999, the
amended agreement provides for NEON to make quarterly advances in respect of
anticipated license fees, with the advances to be in equal quarterly payments
based on annualized license fee amounts of $1.0 million, $2.0 million, $3.0
million, $4.0 million and $5.0 million for fiscal 2000, 2001, 2002, 2003 and
2004, respectively. Following the date, if any, in each quarter when the license
fees earned equal the aggregate amount of quarterly advances outstanding on the
first day of such quarter, the license fee that NEON pays under the agreement
decreases from 50% to 40% of the revenues received by NEON, with the decrease
continuing in effect until the start of the next quarter. Upon any termination
or expiration of the distributor agreement, any advances then outstanding are to
be refunded to NEON by Peregrine/Bridge Transfer Corporation. NEON is a co-
defendant with Peregrine/Bridge Transfer Corporation and other parties in an
infringement action brought by BMC. See "Business--Legal Proceedings."
NEON has a services agreement with Peregrine/Bridge Transfer Corporation
pursuant to which Peregrine/Bridge Transfer Corporation pays NEON for general
and administrative services supplied to it by NEON, for the time spent by NEON's
management developing and implementing Peregrine/ Bridge Transfer Corporation's
product development and market strategy and for the use of available space in
NEON's offices from time to time. The services agreement is terminable on
30-days' notice by either party. Peregrine/Bridge Transfer Corporation owes NEON
$23,923 per month under the services agreement. For fiscal 1996, 1997 and 1998,
and the nine months ended December 31, 1998, $41,769, $257,076, $287,076 and
$215,307, respectively, was owed by Peregrine/Bridge Transfer Corporation to
NEON under this arrangement.
Due to the timing of cash payments between the two parties related to the
distributor agreement and the services agreement described in the preceding two
paragraphs, NEON has accounts receivable-related party balances of $138,074,
$181,112 and $82,577 as of March 31, 1997 and 1998 and December 31, 1998,
respectively.
Members of NEON's Board of Directors also serve as officers or directors of
other software or computing companies such as Peregrine Systems, which supplies
software that automates the
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<PAGE>
management of data such as inventory/configuration management, order and catalog
management and financial management, and Pavilion Technologies, which supplies
software for analysis, control and optimization of manufacturing assets. NEON,
Peregrine Systems and Pavilion Technologies, while all software companies, are
not sufficiently similar in their operations to be competitors. Thus, NEON does
not believe that the concurrent service of NEON's directors as officers and/or
directors of these entities poses potential conflicts of interest.
PRIVATE PLACEMENT OF SERIES A REDEEMABLE, CONVERTIBLE PREFERRED STOCK
In May 1993, JMI Equity Fund purchased 500,000 shares of Series A
Redeemable, Convertible Preferred Stock of NEON for aggregate consideration of
$1.0 million. These shares are convertible into 2,500,000 shares of common stock
immediately prior to the completion of this offering. Mr. Moores is a limited
partner of JMI Equity Fund and Messrs. Noell and van den Berg are general
partners of JMI Equity Fund.
In connection with this transaction, JMI Equity Fund, NEON and Mr. Schaeffer
entered into a stockholders agreement setting forth the rights of JMI Equity
Fund and Mr. Shaeffer to elect a specified number of directors of NEON. Pursuant
to this stockholders agreement, Messrs. Holcomb, Moores, Noell and Schaeffer
were elected and currently serve as directors of NEON. The stockholders
agreement between JMI Equity Fund, NEON and Mr. Schaeffer will terminate upon
the closing of the offering.
The shares of common stock issued upon conversion of the Series A
Redeemable, Convertible Preferred Stock are entitled to registration rights. See
"Description of Capital Stock--Registration Rights."
ISSUANCE OF CONVERTIBLE DEBT TO JMI EQUITY FUND
In fiscal 1995 and fiscal 1996, JMI Equity Fund made loans to NEON in
aggregate amounts of $300,000 and $830,000, respectively. These loans bear
interest at the rate of eight percent per annum and were evidenced by secured
convertible promissory notes that provide for the conversion of outstanding
amounts under the notes into shares of NEON's Series A Redeemable, Convertible
Preferred Stock. On March 31, 1997, these notes were amended and the notes,
together with accrued interest of approximately $169,000, were consolidated. At
such time, JMI Equity Fund exercised its right to convert $250,000 of the
indebtedness into 125,000 shares of the Series A Redeemable, Convertible
Preferred Stock and relinquished its rights to convert the balance of the
outstanding indebtedness. Upon completion of the offering, these shares will be
converted into 625,000 shares of NEON's common stock. The new note in the amount
of approximately $1.0 million is due March 31, 1999 and bears interest at eight
percent per annum. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
NEON'S POLICY
NEON believes that all of the transactions set forth above were made on
terms no less favorable to NEON than could have been obtained from unaffiliated
third parties. All future transactions, including loans, between NEON and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
outside directors on the Board of Directors, and will continue to be on terms no
less favorable to NEON than could be obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
This table sets forth, as of January 31, 1999, certain information regarding
the beneficial ownership of NEON's outstanding common stock, both before this
offering and immediately following this offering by:
- Each person known by NEON to own beneficially more than five percent of
the outstanding common stock
- Each director and each of the Named Executive Officers of NEON
- The selling stockholder
- All directors and executive officers of NEON as a group
The following calculations of the percentage of outstanding shares are based
on 5,807,251 shares of NEON's common stock outstanding as of January 31, 1999
and 8,243,251 shares outstanding immediately following the completion of this
offering and assumes no exercise of the underwriters' over-allotment option. The
calculation includes 3,125,000 shares of NEON common stock issuable upon
conversion of the outstanding shares of preferred stock immediately prior to the
completion of the offering. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities, subject to community
property laws, where applicable. Shares of NEON common stock subject to options
that are presently exercisable or exercisable within 60 days of January 31, 1999
are deemed to be outstanding and beneficially owned by the person holding such
options for the purpose of computing the percentage of ownership of such person
but are not treated as outstanding for the purpose of computing the percentage
of any other person.
Unless otherwise noted, each of the persons listed below has sole voting and
investment power with respect to his shares and the address for each of the
persons listed below is: c/o NEON Systems, Inc., 14100 Southwest Freeway, Suite
500, Sugar Land, Texas 77478.
<TABLE>
<CAPTION>
SHARES OWNED PRIOR SHARES OWNED AFTER THE
TO THE OFFERING OFFERING
---------------------- SHARES ----------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
--------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
FIVE PERCENT STOCKHOLDER:
JMI Equity Fund, L.P. (a)............... 3,125,000 53.8% -- 3,125,000 37.9%
DIRECTORS AND OFFICERS:
John J. Moores (b)...................... -- -- -- -- --
Charles E. Noell III (c)................ 3,125,000 53.8 -- 3,125,000 37.9
Norris van den Berg (d)................. 3,125,000 53.8 -- 3,125,000 37.9
Richard Holcomb (e)..................... 13,800 * -- 13,800 *
Joe Backer (f).......................... 221,439 3.7 -- 221,439 2.6
Peter Schaeffer (g)..................... 2,065,835 33.3 -- 2,065,835 23.9
John S. Reiland......................... 26,376 * -- 26,376 *
Don Pate (h)............................ 26,376 * -- 26,376 *
Jonathan J. Reed (i).................... 7,126 * -- 7,126 *
SELLING STOCKHOLDER:
Dean Bobrowski.......................... 183,480 3.2 64,000 119,480 1.4
All executive officers and directors as a
group (10 persons) (j)................... 5,533,732 85.8 -- 5,533,732 62.3
</TABLE>
- --------------------------
* Less than one percent. (FOOTNOTES ON FOLLOWING PAGE)
49
<PAGE>
(a) Includes 3,125,000 shares of common stock issuable upon conversion of
625,000 shares of Series A Redeemable, Convertible Preferred Stock held by
JMI Equity Fund, L.P., which conversion will occur prior to the completion
of the offering. The address of JMI Equity Fund, L.P. is 12680 High Bluff
Drive, San Diego, California 92130.
(b) Excludes 3,125,000 shares issuable upon conversion of 625,000 shares of
Series A Redeemable, Convertible Preferred Stock held by JMI Equity Fund,
L.P., of which Mr. Moores is a limited partner. Mr. Moores does not exercise
voting or dispositive control over the shares held by JMI Equity Fund, L.P.
and disclaims beneficial ownership of all such shares except to the extent
of his pecuniary interest therein.
(c) Includes 3,125,000 shares of common stock issuable upon conversion of
625,000 shares of Series A Redeemable, Convertible Preferred Stock held by
JMI Equity Fund, L.P. Mr. Noell is a general partner of JMI Equity Fund,
L.P. Mr. Noell disclaims beneficial ownership of all shares held by JMI
Equity Fund, L.P. except to the extent of his pecuniary interest therein.
(d) Includes 3,125,000 shares of common stock issuable upon conversion of
625,000 shares of Series A Redeemable, Convertible Preferred Stock held by
JMI Equity Fund, L.P. Mr. van den Berg is a general partner of JMI Equity
Fund, L.P. Mr. van den Berg disclaims beneficial ownership of all shares
held by JMI Equity Fund, L.P. except to the extent of his pecuniary interest
therein.
(e) Includes 13,800 shares of common stock issuable upon exercise of outstanding
stock options that are presently exercisable or will become exercisable
within 60 days of January 31, 1999.
(f) Includes 20,000 shares held by John Backer and Kristin Backer, the children
of Mr. Backer, as to which Mr. Backer disclaims beneficial ownership.
Includes 201,439 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of January 31, 1999.
(g) Includes 395,835 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of January 31, 1999.
(h) Includes 26,376 shares of common stock issuable upon exercise of outstanding
stock options that are presently exercisable or will become exercisable
within 60 days of January 31, 1999.
(i) Includes 1,781 shares of common stock issuable upon exercise of outstanding
stock options that are presently exercisable or will become exercisable
within 60 days of January 31, 1999.
(j) Includes 639,231 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of January 31, 1999.
John J. Moores, a director of NEON, has advised NEON that he may acquire, in
his individual capacity and/or in his capacity as a trustee of various trusts,
up to 300,000 shares of NEON's common stock from one or more existing NEON
stockholders, including up to 100,000 shares from Peter Schaeffer, Chief
Technology Officer and a director of NEON. Mr. Moores has advised that he
intends to consummate this purchase immediately before the closing of this
offering for a purchase price per share equal to the net price per share
received by the selling stockholder in the offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering NEON's authorized capital stock will
consist of 30,000,000 shares of common stock, $0.01 par value per share, and
10,000,000 shares of preferred stock, $0.01 par value per share, issuable in
series. There will be 5,807,251 shares of NEON common stock outstanding
immediately prior to consummation of the offering, held of record by 54
stockholders, and there will be no shares of preferred stock outstanding.
COMMON STOCK
Holders of NEON common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The holders of common stock are
not entitled to cumulate voting rights with respect to the election of
directors, and as a result, minority stockholders will not be able to elect
directors on the basis of their votes alone. Subject to preferences that may be
applicable to any then outstanding shares of preferred stock, holders of common
stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of NEON,
holders of the common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding preferred stock. Holders of common stock have no preemptive,
conversion or other rights to subscribe for additional securities of NEON. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of the offering will be, validly issued, fully paid
and nonassessable.
PREFERRED STOCK
NEON's Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by stockholders. The issuance of preferred stock could adversely
affect the voting power of holders of NEON's common stock and the likelihood
that such holders will receive dividend payments and payments upon liquidation
and could have the effect of delaying, deferring or preventing a change in
control of NEON. Accordingly, the issuance of shares of preferred stock may
discourage bids for the common stock or may otherwise adversely affect the
market price of the common stock. NEON has no present plan to issue any shares
of preferred stock.
REGISTRATION RIGHTS
NEON is a party to a registration rights agreement among NEON, Mr. Schaeffer
and JMI Equity Fund. Under the terms of the registration rights agreement, JMI
Equity Fund and Mr. Schaeffer are entitled to registration rights with respect
to the 4,795,000 shares of common stock owned by them, which includes the
3,125,000 shares of common stock to be issued to JMI Equity Fund upon conversion
of the 625,000 shares of preferred stock prior to completion of the offering.
Each time NEON proposes to register any of its securities under the Securities
Act, whether for its own account or for other stockholders, JMI Equity Fund and
Mr. Schaeffer are entitled to have their shares of common stock registered by
NEON as well, unless NEON is registering its securities on Form S-4 or Form S-8.
Additionally, JMI Equity Fund may require NEON to prepare and file two
registration statements under the Securities Act at NEON's expense to register
the shares of common stock held by JMI Equity Fund. JMI Equity Fund may also
require NEON to file additional registration statements on Form S-3 at its
request. All of these registration rights are subject to conditions and
limitations, including the right of the underwriters of an offering to limit the
number of shares included in the
51
<PAGE>
registration and the right of NEON not to effect a requested registration within
90 days after the effective date of a NEON registration statement for a firm
commitment underwritten public offering in which JMI Equity Fund and Mr.
Schaeffer shall have been entitled to register their shares. NEON must pay
expenses related to the registering and distributing of shares of common stock
of JMI Equity Fund and Mr. Schaeffer under the registration rights agreement.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
DELAWARE ANTI-TAKEOVER STATUTE. NEON is subject to the provisions of
Section 203 of the Delaware General Corporation Law, an anti-takeover law.
Subject to certain exceptions, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless
- Prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder
- Upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer or
- On or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder
For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior to
the date of determination whether the person is an "Interested Stockholder," did
own) 15% or more of the corporation's voting stock.
CERTIFICATE OF INCORPORATION. On January 19, 1999, NEON's stockholders
approved certain amendments to the Certificate of Incorporation, effective
immediately prior to the consummation of the offering, to provide:
- For the authorization of the board of directors to issue, without further
action by the stockholders, up to 10,000,000 shares of preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof
- That any action required or permitted to be taken by stockholders of NEON
must be effected at a duly called annual or special meeting of the
stockholders and may not be effected by a consent in writing
- That special meetings of stockholders of NEON may be called only by the
Chairman of the Board, the Chief Executive Officer or a majority of the
members of the board of directors
- For a classified board of directors
- That vacancies on the board of directors, including newly created
directorships, can be filled only by a majority of the directors then in
office
52
<PAGE>
- That directors of NEON may be removed only for cause and only by the
affirmative vote of holders of at least 66 2/3% of the outstanding shares
of voting stock, voting together as a single class
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board of directors and in the policies
formulated by the board of directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of NEON.
These provisions are designed to reduce the vulnerability of NEON to an
unsolicited proposal for a takeover of NEON that does not contemplate the
acquisition of all of its outstanding shares, or an unsolicited proposal for the
restructuring or sale of all or part of NEON. Such provisions, however, could
discourage potential acquisition proposals and could delay or prevent a change
in control of NEON. Such provisions may also have the effect of preventing
changes in the management of NEON. See "Risk Factors--Provisions of Our Charter
and Bylaws and Delaware Law Could Deter Takeover Attempts."
TRANSFER AGENT AND REGISTRAR
NEON will apply for quotation of its common stock on the Nasdaq National
Market under the symbol "NESY." The Transfer Agent and Registrar for the common
stock is ChaseMellon Shareholder Services, L.L.C., and its address is 2323 Bryan
Street, Suite 2300, Dallas, Texas 75201.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for NEON's common
stock. Upon completion of the offering and assuming no exercise of stock options
after January 31, 1999, there will be an aggregate of 8,243,251 shares of NEON's
common stock outstanding. Of these shares, all of the shares sold in the
offering will be freely transferable without restriction or limitation under the
Securities Act of 1933, as amended, unless purchased by "affiliates" of NEON, as
defined under the Securities Act. The remaining 5,743,251 shares are "restricted
shares" within the meaning of Rule 144 under the Securities Act, and are subject
to restrictions under the Securities Act and the lock-up agreements described
below.
NEON's stockholders and option holders have agreed not to sell, offer for
sale, or otherwise dispose of any NEON common stock for a period of 180 days
from the date of this prospectus without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. In addition, during the 180-day
period, NEON has agreed not to file any registration statement with respect to
its common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. Beginning 180 days after the date of
this prospectus, 5,682,166 of the restricted shares will become available for
sale in the public market, subject to the volume and other limitations of Rule
144. JMI Equity Fund and Mr. Schaeffer have certain rights to have 4,795,000
shares registered in the future under the Securities Act pursuant to the terms
of an agreement with NEON. See "Description of Capital Stock-- Registration
Rights."
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least one year, shares of common stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of NEON is entitled to
sell within any three-month period the number of shares of common stock that
does not exceed the greater of (1) one percent of the number of then outstanding
shares or (2) the average weekly reported trading volume during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain notice and manner of sale requirements and to the availability of
current public information about NEON and must be made in unsolicited brokers'
transactions or to a market maker. A person who is not an "affiliate" of NEON
under the Securities Act during the three
53
<PAGE>
months preceding a sale and who has beneficially owned such shares for at least
two years is entitled to sell such shares under Rule 144 without regard to the
volume, notice, information and manner of sale provisions of such rule.
Affiliates of NEON must comply with the restrictions and requirements of Rule
144 when transferring restricted shares even after the two year holding period
has expired and must comply with the restrictions and requirements of Rule 144
other than the one-year holding period in order to sell unrestricted shares.
Rule 144 does not require the same person to have held the securities for the
applicable periods.
Any employee, officer or director of, or consultant to, NEON who purchased
or was awarded shares or options to purchase shares pursuant to a written
compensatory plan or contract is entitled to rely on the resale provisions of
Rule 701 under the Securities Act, which permits affiliates and non-affiliates
to sell such shares without having to comply with the holding period
restrictions of Rule 144, in each case commencing 90 days after the date of this
prospectus. In addition, non-affiliates may sell such shares without complying
with the public information, volume and notice provisions of Rule 144. Rule 701
is available for option holders of NEON as to all 595,286 shares issued pursuant
to the exercise of options granted prior to this offering.
After the offering, NEON intends to file a registration statement on Form
S-8 to register all of the shares of Common Stock reserved for issuance pursuant
to the 1993 Stock Plan, the 1999 Long-Term Incentive Plan and the Stock Option
Plan for Non-Employee Directors. Accordingly, shares issued upon exercise of
such options will be freely tradeable by holders who are not affiliates of NEON
and, subject to the volume and other limitations of Rule 144, by holders who are
affiliates of NEON.
Prior to the offering, there has been no market for the NEON common stock.
No predictions can be made of the effect, if any, that market sales of shares of
common stock or the availability of such shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of NEON's common stock could adversely affect the prevailing market price of the
common stock, as well as impair the ability of NEON to raise capital through the
issuance of additional equity securities. See "Risk Factors--Availability of
Significant Amounts of Common Stock for Sale Could Adversely Affect Its Market
Price."
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC and
CIBC Oppenheimer Corp., have severally agreed to purchase from NEON and the
selling stockholder the respective number of shares of common stock set forth
opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS: SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.......................
Hambrecht & Quist LLC.....................................................
CIBC Oppenheimer Corp.....................................................
-----------
Total..................................................................... 2,500,000
-----------
-----------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The underwriters initially propose to offer the shares of NEON common stock
in part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $ per share.
The underwriters may allow, and such dealers may re-allow, to certain other
dealers a concession not in excess of $ per share. After the initial
offering of the common stock, the public offering price and other selling terms
may be changed by the representatives of the underwriters at any time without
notice. The underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
DLJDIRECT Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJDIRECT Inc. for sale to
brokerage account holders.
NEON has granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of 375,000 additional shares of common stock at the
initial public offering price less underwriting discounts and commissions. The
underwriters may exercise such option solely to cover overallotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based on
such underwriter's percentage underwriting commitment as indicated in the
preceding table.
NEON and the selling stockholder have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments that the underwriters may be required to make in
respect thereof.
55
<PAGE>
Each of NEON, its executive officers, directors, stockholders and option
holders have agreed, subject to certain exceptions, not to
- Offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into
or exercisable or exchangeable for common stock or
- Enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock
for a period of 180 days after the date of this prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation. In
addition, during such 180-day period, NEON has also agreed not to file any
registration statement with respect to, and each of its executive officers,
directors and certain stockholders of NEON has agreed not to make any demand
for, or exercise any right with respect to, the registration of any shares of
NEON's common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation.
Prior to the offering, there has been no established trading market for
NEON's common stock. The initial public offering price of the shares of NEON's
common stock offered hereby will be determined by negotiation among NEON and the
representatives of the underwriters. The factors to be considered in determining
the initial public offering price include the history of and the prospects for
the industry in which NEON competes, the past and present operations of NEON,
the historical results of operations of NEON, the prospects for future earnings
of NEON, the recent market prices of securities of generally comparable
companies and the general condition of the securities markets at the time of the
offering.
Other than in the United States, no action has been taken by NEON, the
selling stockholder or the underwriters that would permit a public offering of
the shares of common stock offered hereby in any jurisdiction where action for
that purpose is required. The shares of common stock offered hereby may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements in connection with the offer and sale of any
shares of common stock be distributed or published in any jurisdiction, except
under circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons with this prospectus should inform
themselves about and observe any restrictions relating to the offering and the
distribution of this prospectus. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any shares of common stock offered
hereby in any jurisdiction in which such an offer or a solicitation is unlawful.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of NEON's common stock.
Specifically, the underwriters may overallot the offering, creating a syndicate
short position. The underwriters may bid for and stabilize the price of the
common stock. In addition, the underwriting syndicate may reclaim selling
concessions from syndicate members and selected dealers if they repurchase
previously distributed common stock in syndicate covering transactions, in
stabilizing transactions or otherwise. These activities may stabilize or
maintain the market price of the common stock above independent market levels.
The underwriters are not required to engage in these activities, and may end any
of these activities at any time.
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<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for NEON by Locke Liddell & Sapp LLP, Dallas,
Texas. Certain legal matters in connection with the offering will be passed upon
for the underwriters by Brobeck, Phleger & Harrison LLP, Austin, Texas.
EXPERTS
The consolidated financial statements of NEON Systems, Inc. and subsidiaries
as of March 31, 1997 and 1998 and December 31, 1998, and for each of the years
in the three-year period ended March 31, 1998 and the nine-month period ended
December 31, 1998 have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein and in the registration statement, and upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
NEON has filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the shares of common stock offered hereby. This prospectus does not
contain all the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to NEON and
the shares offered by this prospectus, you should refer to the registration
statement, including the exhibits and schedules filed thereto. Statements
contained in this prospectus as to the contents of any agreement, contract or
other document referred to are qualified by and subject to the copy of such
contract or other document filed as an exhibit to the registration statement or
such other document. You may inspect a copy of the registration statement
without charge at the Commission's principal office in Washington, D.C. and
obtain copies of all or any part thereof upon payment of certain fees from the
Public Reference Section of the Commission at the Commission's principal office,
450 Fifth Street, N.W., Washington, D.C. 20549, or at the Commission's Regional
Offices in New York, located at 7 World Trade Center, Suite 1300, New York, New
York 10048, or in Chicago, located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. The Commission maintains an Internet site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The Commission's World
Wide Web address is www.sec.gov.
NEON intends to furnish holders of its common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. NEON intends to furnish such other reports as it may determine or as may
be required by law.
57
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................................................. F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NEON Systems, Inc.:
We have audited the accompanying consolidated balance sheets of NEON
Systems, Inc. and subsidiaries (collectively, the "Company") as of March 31,
1997 and 1998 and December 31, 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the three-year period ended March 31, 1998 and the nine-month period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NEON Systems, Inc. and subsidiaries as of March 31, 1997 and 1998 and December
31, 1998 and the results of their operations and their cash flows for each of
the years in the three-year period ended March 31, 1998 and the nine-month
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Houston, Texas
January 29, 1999
F-2
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
----------------------- DECEMBER 31,
1997 1998 1998
----------- ---------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 1,705,188 $2,804,073 $4,510,841
Accounts receivable--trade.................................................... 901,764 2,283,194 4,029,301
Accounts receivable--related party............................................ 138,074 181,112 82,577
Deferred tax assets........................................................... -- 380,532 595,053
Other current assets.......................................................... 27,902 246,193 109,852
----------- ---------- -------------
Total current assets........................................................ 2,772,928 5,895,104 9,327,624
----------- ---------- -------------
Property and equipment:
Furniture and equipment....................................................... 398,936 662,155 748,422
Purchased software............................................................ 65,810 78,774 78,774
Less accumulated depreciation and amortization.............................. (144,787) (289,131) (430,313)
----------- ---------- -------------
Property and equipment, net................................................. 319,959 451,798 396,883
Deferred assets................................................................. -- -- 129,269
Other assets, net............................................................... -- 5,268 48,433
----------- ---------- -------------
Total assets................................................................ $ 3,092,887 $6,352,170 $9,902,209
----------- ---------- -------------
----------- ---------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accrued expenses............................................................... $ 365,006 $ 564,217 $ 355,233
Accounts payable.............................................................. 155,133 359,819 804,836
Taxes payable................................................................. 83,142 365,056 472,569
Deferred tax liabilities...................................................... -- -- 27,897
Customer deposits............................................................. 146,400 -- --
Deferred maintenance revenue.................................................. 1,147,259 2,584,340 3,614,393
Secured notes payable (Note 2)................................................ -- 1,049,101 1,049,101
----------- ---------- -------------
Total current liabilities................................................... 1,896,940 4,922,533 6,324,029
----------- ---------- -------------
Secured notes payable (Note 2).................................................. 1,049,101 -- --
Series A redeemable, convertible preferred stock, $.01 par value. Authorized
650,000 shares; 625,000 shares issued and outstanding at March 31, 1997 and
1998 and December 31, 1998 (Note 3)........................................... 1,563,333 1,663,333 1,738,333
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value. Authorized 10,000,000 shares; 2,260,380,
2,535,801 and 2,682,251 shares issued and outstanding at March 31, 1997 and
1998 and December 31, 1998, respectively..................................... 22,604 25,358 26,823
Additional paid-in capital.................................................... 577,712 698,751 1,496,218
Accumulated other comprehensive income........................................ 1,133 (962) (15,404)
Retained earnings (accumulated deficit)....................................... (2,017,936) (956,843) 332,210
----------- ---------- -------------
Total stockholders' equity (deficit)........................................ (1,416,487) (233,696) 1,839,847
Commitments and contingencies (Note 7)........................................
----------- ---------- -------------
Total liabilities and stockholders' equity (deficit)........................ $ 3,092,887 $6,352,170 $9,902,209
----------- ---------- -------------
----------- ---------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------- -----------------------
1996 1997 1998 1997 1998
--------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
License....................... $2,108,454 $6,101,089 $9,697,287 $6,306,598 $10,487,224
Maintenance................... 219,458 923,563 2,317,520 1,711,500 3,181,622
--------- --------- --------- ----------- ----------
Total revenues.............. 2,327,912 7,024,652 12,014,807 8,018,098 13,668,846
Cost of revenues:
Cost of licenses.............. 17,614 211,688 551,736 183,356 661,515
Cost of maintenance........... 158,509 392,384 742,953 492,147 672,399
--------- --------- --------- ----------- ----------
Total cost of revenues...... 176,123 604,072 1,294,689 675,503 1,333,914
--------- --------- --------- ----------- ----------
Gross profit.................... 2,151,789 6,420,580 10,720,118 7,342,595 12,334,932
Operating expenses:
Sales and marketing........... 1,306,937 3,469,286 5,712,689 3,734,795 5,317,752
Research and development...... 1,067,069 1,364,313 2,069,915 1,469,751 2,540,036
General and administrative.... 310,018 696,349 1,494,278 1,048,654 1,701,472
Non-cash compensation......... -- -- -- -- 630,944
--------- --------- --------- ----------- ----------
Total operating expenses.... 2,684,024 5,529,948 9,276,882 6,253,200 10,190,204
--------- --------- --------- ----------- ----------
Operating income (loss)......... (532,235) 890,632 1,443,236 1,089,395 2,144,728
Interest income................. -- 23,660 64,029 49,051 67,101
Interest expense................ (66,175) (91,209) (85,521) (63,149) (63,687)
Other, net...................... -- 202 49,151 32,705 40,509
--------- --------- --------- ----------- ----------
Income (loss) before provision
for income taxes.............. (598,410) 823,285 1,470,895 1,108,002 2,188,651
Provision for income taxes...... -- 6,865 309,802 232,680 824,598
--------- --------- --------- ----------- ----------
Net income (loss)............... (598,410) 816,420 1,161,093 875,322 1,364,053
Dividends on series A
redeemable, convertible
preferred stock............... (80,000) (80,000) (100,000) (75,000) (75,000)
--------- --------- --------- ----------- ----------
Net income (loss) applicable to
common stockholders........... $(678,410) $ 736,420 $1,061,093 $ 800,322 $1,289,053
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
Earnings (loss) per common
share:
Basic......................... $ (1.62) $ 0.35 $ 0.45 $ 0.34 $ 0.49
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
Diluted....................... $ (1.62) $ 0.14 $ 0.19 $ 0.14 $ 0.20
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
Shares used in computing
earnings (loss) per common
share:
Basic......................... 417,393 2,094,087 2,370,525 2,340,797 2,607,587
Diluted....................... 417,393 5,671,433 6,267,775 6,238,048 6,933,985
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED RETAINED TOTAL
ADDITIONAL OTHER EARNINGS STOCKHOLDERS'
COMMON PAID-IN COMPREHENSIVE (ACCUMULATED EQUITY
STOCK CAPITAL INCOME DEFICIT) (DEFICIT)
----------- ----------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at March 31,
1995.................. $ 20,870 $ 418,216 $ -- $(2,075,946) $ (1,636,860)
Net loss................ -- -- -- (598,410) (598,410)
Stock option grants..... -- 87,000 -- -- 87,000
Preferred stock
dividends............. -- -- -- (80,000) (80,000)
----------- ----------- --------------- ------------ --------------
Balance at March 31,
1996.................. 20,870 505,216 -- (2,754,356) (2,228,270)
Net income.............. -- -- -- 816,420 816,420
Foreign currency
translation gain...... -- -- 1,133 -- 1,133
--------------
Comprehensive income.... -- -- -- -- 817,553
Exercise of stock
options............... 1,734 654 -- -- 2,388
Stock option grants..... -- 71,842 -- -- 71,842
Preferred stock
dividends............. -- -- -- (80,000) (80,000)
----------- ----------- --------------- ------------ --------------
Balance at March 31,
1997.................. 22,604 577,712 1,133 (2,017,936) (1,416,487)
Net income.............. -- -- -- 1,161,093 1,161,093
Foreign currency
translation loss...... -- -- (2,095) -- (2,095)
--------------
Comprehensive income.... -- -- -- -- 1,158,998
Exercise of stock
options............... 2,754 25,028 -- -- 27,782
Tax benefit related to
exercise of stock
options............... -- 82,349 -- -- 82,349
Stock option grants..... -- 13,662 -- -- 13,662
Preferred stock
dividends............. -- -- -- (100,000) (100,000)
----------- ----------- --------------- ------------ --------------
Balance at March 31,
1998.................. 25,358 698,751 (962) (956,843) (233,696)
Net income.............. -- -- -- 1,364,053 1,364,053
Foreign currency
translation loss...... -- -- (14,442) -- (14,442)
--------------
Comprehensive income.... -- -- -- -- 1,349,611
Exercise of stock
options............... 1,465 142,814 -- -- 144,279
Tax benefit related to
exercise of stock
options............... -- 23,709 -- -- 23,709
Stock option grants..... -- 630,944 -- -- 630,944
Preferred stock
dividends............. -- -- -- (75,000) (75,000)
----------- ----------- --------------- ------------ --------------
Balance at December 31,
1998.................. $ 26,823 $1,496,218 $ (15,404) $ 332,210 $ 1,839,847
----------- ----------- --------------- ------------ --------------
----------- ----------- --------------- ------------ --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------- ----------------------
1996 1997 1998 1997 1998
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $(598,410) $ 816,420 $1,161,093 $ 875,322 $1,364,053
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization.... 31,283 73,291 144,344 108,258 141,182
Deferred tax expense............. -- -- (380,532) -- (186,624)
Noncash compensation expense..... 87,000 71,842 13,662 -- 630,944
Increase (decrease) in cash
resulting from changes in:
Accounts receivable............ (433,920) (567,418) (1,424,468) (1,905,747) (1,647,572)
Other current assets........... (38,827) 10,925 (218,291) (14,580) 136,341
Other assets................... 1,531 380 (5,268) -- (43,165)
Accrued expenses............... 139,837 142,492 199,211 (96,147) (208,984)
Accounts payable............... (4,854) 84,776 204,686 18,011 445,017
Customer deposits.............. -- 146,400 (146,400) (146,400) --
Taxes payable.................. 15,427 32,785 364,263 149,538 131,222
Deferred maintenance revenue... 234,736 895,512 1,437,081 1,415,855 1,030,053
Accrued interest payable....... -- 169,102 -- --
--------- --------- --------- ----------- ---------
Net cash provided by (used in)
operating activities............... (566,197) 1,876,507 1,349,381 404,110 1,792,467
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and
equipment........................ (74,025) (260,897) (263,219) (147,169) (86,267)
Purchases of computer software..... -- (45,159) (12,964) -- --
Other capitalized costs............ -- -- -- -- (129,269)
--------- --------- --------- ----------- ---------
Net cash used in investing
activities......................... (74,025) (306,056) (276,183) (147,169) (215,536)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable........ 480,000 -- -- -- --
Issuance of common stock........... -- 2,388 27,782 16,368 144,279
--------- --------- --------- ----------- ---------
Net cash provided by financing
activities......................... 480,000 2,388 27,782 16,368 144,279
--------- --------- --------- ----------- ---------
Net increase (decrease) in cash and
cash equivalents................... (160,222) 1,572,839 1,100,980 273,309 1,721,210
Effect of exchange rates on cash..... -- 1,133 (2,095) 2,365 (14,442)
Cash and cash equivalents at
beginning of period................ 291,438 131,216 1,705,188 1,705,188 2,804,073
--------- --------- --------- ----------- ---------
Cash and cash equivalents at end of
period............................. $ 131,216 $1,705,188 $2,804,073 $1,980,862 $4,510,841
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Conversion of note payable and
accrued interest into preferred
stock.............................. $ -- $ 250,000 $ -- $ -- $ --
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Cash paid during the period for
income
taxes.............................. $ -- $ -- $ 242,930 $ 131,902 $ 905,206
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Cash paid during the period for
interest........................... $ -- $ -- $ 83,928 $ 62,946 $ 83,928
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED.)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
NEON Systems, Inc. and subsidiaries (collectively, NEON) is comprised of the
parent company, Neon Systems, Inc., and its 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.
BASIS OF CONSOLIDATION OF FINANCIAL STATEMENTS
All significant intercompany balances and transactions have been eliminated
in consolidation.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The unaudited consolidated financial statements for the nine-month period
ended December 31, 1997 have been prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations of such interim
periods in accordance with generally accepted accounting principles.
ESTIMATES
The preparation of consolidated 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 periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues from software license sales are recognized when all of the
following conditions are met: a non-cancelable 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 obligations exists. License revenues generally include
software maintenance agreements for the first year following the date of sale.
In such cases, revenues are allocated between license fees and maintenance
revenues based on NEON specific evidence. Revenues from first-year maintenance
agreements and separately priced software maintenance agreements for subsequent
years are deferred and recognized ratably on a straight-line basis over the
maintenance period.
NEON also markets and sells its products through independent foreign
distributors. License and maintenance revenues from these transactions are
recognized when all of the above conditions are met.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 97-2, SOFTWARE REVENUE RECOGNITION in October 1997, which
replaces the previous revenue recognition rules provided by SOP 91-1. SOP 97-2
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. NEON recognizes revenue in accordance with the provisions of
SOP 97-2.
F-7
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED.)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
accelerated methods for computer hardware and straight-line methods for other
property based on the estimated useful lives, generally three to seven years, of
the various classes of property.
CASH AND CASH EQUIVALENTS
Cash and interest-bearing deposits with original maturities of less than
three months are included in cash and cash equivalents. Cash equivalents consist
of highly liquid investments with original maturities of three months or less.
INCOME TAXES
NEON accounts for income taxes using an asset and liability approach, which
requires the recognition of deferred income tax assets and liabilities for the
expected future tax consequences of events that have been recognized in NEON's
financial statements or tax returns. Deferred income tax assets and liabilities
are determined based on the temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates.
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.
F-8
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED.)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of the numerators and denominators of the basic and diluted
per share computation is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
-------------------------------------- -------------------------
1996 1997 1998 1997 1998
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net income (loss)................................. $ (598,410) $ 816,420 $ 1,161,093 $ 875,322 $ 1,364,053
Dividends on series A redeemable, convertible
preferred stock................................. (80,000) (80,000) (100,000) (75,000) (75,000)
---------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
stockholders.................................. $ (678,410) $ 736,420 $ 1,061,093 $ 800,322 $ 1,289,053
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Weighted average number of common shares
outstanding during the period:
Basic......................................... 417,393 2,094,087 2,370,525 2,340,797 2,607,587
Dilutive stock options........................ -- 452,346 772,251 772,251 1,201,399
Series A redeemable, convertible preferred
stock....................................... -- 3,125,000 3,125,000 3,125,000 3,125,000
---------- ----------- ----------- ----------- -----------
Diluted....................................... 417,393 5,671,433 6,267,775 6,238,048 6,933,985
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Income (loss) per common share:
Basic......................................... $ (1.62) $ 0.35 $ 0.45 $ 0.34 $ 0.49
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Diluted....................................... $ (1.62) $ 0.14 $ 0.19 $ 0.14 $ 0.20
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
The calculation of common shares outstanding for the diluted computation for
the year ended March 31, 1996 excludes the effect of shares of Series A
Redeemable, Convertible Preferred Stock which are convertible into 3,125,000
shares of NEON common stock and dilutive stock options. The inclusion of such
potential common shares in the diluted per share computations would be
antidilutive since NEON incurred a net loss for the year ended March 31, 1996.
During the nine months ended December 31, 1998 the Company 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 will be recognized as expense over the vesting period of the granted
options. During the nine months ended December 31, 1998 $631,000 was recognized
as a noncash compensation expense. The remaining differential of $1.9 million
will be recognized over the remaining vesting period of the granted options.
F-9
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED.)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREFERRED STOCK
The carrying value of the Series A Redeemable, Convertible Preferred Stock
is periodically increased by amounts representing dividends not currently
declared or paid, but which are payable under the mandatory redemption features.
RESEARCH AND PRODUCT DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. Software
development costs that qualify for capitalization under Statement of Financial
Accounting Standards (SFAS) No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED, are evaluated for
recoverability by NEON. No such costs have been capitalized to date as the
impact on the financial statements would be immaterial.
STOCK OPTION PLAN
Prior to April 1, 1996, NEON accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As
such, compensation expense has been recorded on the date of grant only if the
estimated value of the underlying stock exceeded the exercise price. On April 1,
1996, NEON adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1996 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. NEON has
elected to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
FOREIGN CURRENCY TRANSLATION
For NEON's international subsidiaries, the functional currencies are the
British pound and the German mark. Accordingly, assets and liabilities of the
subsidiaries are translated into U.S. dollars at year-end exchange rates. Income
and expense items are translated at average rates prevailing during the period.
The adjustments resulting from translating the financial statements of the
international subsidiaries are reflected as a cumulative translation adjustment
included in stockholders' equity (deficit).
STOCK SPLIT
In August 1996, NEON's Board of Directors declared a five-for-one stock
split of NEON's common stock which was effected as a dividend. All stock-related
data in the consolidated financial statements and related notes reflects this
stock split for all periods presented.
COMPREHENSIVE INCOME
NEON adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130"), COMPREHENSIVE INCOME beginning with NEON's first quarter of fiscal year
1999. The components of
F-10
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED.)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
comprehensive income include only foreign currency translation gains/losses of
$1,133, ($2,095), and ($14,442) for the years ended March 31, 1997 and 1998, and
the nine-month period ended December 31, 1998, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, DISCLOSURES ABOUT SEGMENT OF AN ENTERPRISE AND RELATED INFORMATION
("SFAS 131"). SFAS 131 establishes standards for the way that public companies
report, in their annual financial statements, certain information about their
operating segments, their products and services, the geographic areas in which
they operate and their major customers. SFAS 131 also requires that certain
information about operating segments be reported in interim financial
statements. SFAS 131 is effective for periods beginning after December 31, 1997.
NEON will consider the adoption of the requirements of SFAS 131 in its financial
statements for the year ending March 31, 1999. NEON does not believe the
adoption will have an effect on its financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
(FAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
This Statement is effective for all fiscal quarters of years beginning after
June 1999. NEON will consider the adoption of the requirements of SFAS 133 in
its financial statements for the year ending March 31, 1999. NEON does not
believe the adoption will have an effect on its financial statements.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
(REPORTING ON THE COSTS OF START-UP ACTIVITIES) ("SOP 98-5"). SOP 98-5 requires
that costs of start-up activities be charged to expense as incurred in
connection with potential business initiatives and new geographic markets, and
SOP 98-5 will require that such deferred costs be charged to results of
operations upon its adoption. SOP 98-5 is effective for fiscal years beginning
after December 15, 1998. NEON will adopt the requirements of SOP 98-5 as of
April 1, 1999.
NOTE 2--SECURED NOTE PAYABLE
During the year ended March 31, 1997 NEON amended and consolidated three
original notes dated September 29, 1994, March 30, 1995 and November 22, 1995
for $300,000, $350,000 and $480,000, respectively. These notes and accrued
interest of $169,101 at March 31, 1997 were converted to a new senior note in
the principal amount of $1,049,101 and $250,000 of principal was converted into
125,000 shares of NEON's Series A Redeemable, Convertible Preferred Stock.
The new note is secured by accounts receivable and property and equipment
and accrues interest at the rate of eight percent per annum. The principal
amount of the note is due March 31, 1999.
NOTE 3--SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Series A Redeemable, Convertible Preferred Stock is convertible into
shares of NEON common stock. Each share of Series A Redeemable, Convertible
Preferred Stock is convertible into five shares of common stock (subject to
adjustment upon the occurrence of certain events). The Series A
F-11
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED.)
NOTE 3--SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Redeemable, Convertible Preferred Stock also has voting rights based on the
common stock conversion ratio.
The Series A Redeemable, Convertible Preferred Stock accrues annual
dividends at $0.16 per share. The Series A Redeemable, Convertible Preferred
Stock has mandatory conversion and mandatory redemption provisions, which
require among other things that the Series A Redeemable, Convertible Preferred
Stock be redeemed in April 2000, at the original issuance price of $2.00 per
share plus cumulative unpaid dividends. Series A Redeemable, Convertible
Preferred Stock dividends accrued, but not yet declared, at March 31, 1997 and
1998 and December 31, 1998 were $313,333, $413,333 and $488,333, respectively.
NOTE 4--STOCK OPTION PLAN
Under the 1993 Stock Plan for the officers and employees of NEON, the Board
of Directors authorized the grant of non-qualified incentive stock options to
purchase up to 2,600,000 shares of NEON's Common Stock. Such options become
exercisable either on the date of grant or in such installments as the grant may
specify up to 10 years from the date of grant. In connection with NEON's
adoption of the 1999 Plan, NEON will not make any new grants under the 1993 Plan
and options previously issued under the 1993 Plan will be exercisable in
accordance with their terms. See further discussion of the 1999 Plan in Note 9.
At December 31, 1998, stock options to acquire 1,629,077 shares were granted
and outstanding, with exercise prices ranging from $0.01 to $12.35 per share.
The compensation cost related to these grants has been charged to expense for
approximately $87,000, $72,000 and $13,700 for the years ended March 31, 1996,
1997 and 1998, respectively, and $630,944 for the nine months ended December 31,
1998.
NEON applies APB Opinion No. 25 in accounting for its Plan and, accordingly,
compensation cost has been recognized to the extent that the estimated value of
the underlying stock exceeds the exercise price on the date of the grant. Had
NEON determined compensation cost based on SFAS No. 123, NEON's net income
(loss) and diluted per share amounts would have been the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
NINE-MONTHS
ENDED
DECEMBER
YEARS ENDED MARCH 31, 31,
--------------------------------- ----------
1996 1997 1998 1998
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) as reported..................... $ (598,410) $816,420 $1,161,093 $1,364,053
---------- -------- ---------- ----------
---------- -------- ---------- ----------
Net income (loss), pro forma...................... $ (553,160) $802,539 $1,097,780 $1,323,399
---------- -------- ---------- ----------
---------- -------- ---------- ----------
Net income (loss) per share as reported........... $ (1.62) $ 0.35 $ 0.45 $ 0.49
---------- -------- ---------- ----------
---------- -------- ---------- ----------
Net income (loss) per share, pro forma............ $ (1.62) $ 0.34 $ 0.42 $ 0.48
---------- -------- ---------- ----------
---------- -------- ---------- ----------
</TABLE>
The per share weighted average fair values of stock options granted during
fiscal years ended March 31, 1997 and 1998 were $0.22 and $0.86, respectively
and $5.54 for the nine-month period ended
F-12
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED.)
NOTE 4--STOCK OPTION PLAN (CONTINUED)
December 31, 1998, on the dates of grant using the minimum value method with the
following weighted average assumptions: fiscal year 1997 -- no expected dividend
yield, risk-free interest rate of
6.5%, and an expected life of five years; fiscal year 1998 -- no expected
dividend yield, risk-free interest rate of 5.9%, and an expected life of five
years; and nine-months ended December 31, 1998 -- no expected dividend yield,
risk-free interest rate of 5.8%, and an expected life of five years.
Stock option activity during periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balance at March 31, 1995.................... 703,255 $ 0.13
Granted.................................... 332,330 0.17
----------
Balance at March 31, 1996.................... 1,035,585 0.14
Granted.................................... 371,025 0.22
Exercised.................................. (173,415) 0.04
Forfeited.................................. (28,500) 0.20
----------
Balance at March 31, 1997.................... 1,204,695 0.18
Granted.................................... 303,920 0.86
Exercised.................................. (275,421) 0.09
Forfeited.................................. (24,054) 0.44
----------
Balance at March 31, 1998.................... 1,209,140 0.36
Granted.................................... 624,590 5.54
Exercised.................................. (146,450) 0.97
Forfeited.................................. (58,203) 1.26
----------
Balance at December 31, 1998................. 1,629,077 2.26
----------
----------
</TABLE>
At December 31, 1998, the weighted average remaining contractual life of
outstanding options was 8.5 years. At March 31, 1997 and 1998 and December 31,
1998, the number of options exercisable was 583,061, 566,936 and 697,825,
respectively, and the weighted average exercise prices of those options were
$0.18, $0.20 and $0.23, respectively.
F-13
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED.)
NOTE 5--INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
--------------------------- -----------------
1996 1997 1998 1998
-------- ------ --------- -----------------
<S> <C> <C> <C> <C>
United States Federal:
Current................................................... $ -- $ -- $ 647,905 1$,022,777
Deferred.................................................. -- -- (354,340) (214,521)
State--current.............................................. -- -- 23,210 4,188
State--deferred............................................. -- -- -- 12,154
Foreign--current............................................ -- 6,865 (6,973) --
-------- ------ --------- -----------------
$ -- $6,865 $ 309,802 $824,598
-------- ------ --------- -----------------
-------- ------ --------- -----------------
</TABLE>
For the years ended March 31, 1997 and 1998 and the nine months ended
December 31, 1998, NEON's effective income tax rate differed from the statutory
tax rate as follows:
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------------------- --------------------
1997 1998 1998
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory tax rate........................... $ 279,917 34.0% $ 500,105 34.0% $ 744,141 34.0%
Increase (decrease) in valuation
allowance.................................. (279,917) (34.0) (217,427) (14.8) 114,273 5.2
State tax expense............................ -- -- 23,210 1.6 8,787 0.4
Foreign sales corporation.................... -- -- -- -- (52,700) (2.4)
Other........................................ 6,865 1.0 3,914 0.3 10,097 0.5
---------- ------- ---------- ------- ---------- -------
Effective tax rate........................... $ 6,865 1.0% $ 309,802 21.1% $ 824,598 37.7%
---------- ------- ---------- ------- ---------- -------
---------- ------- ---------- ------- ---------- -------
</TABLE>
F-14
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED.)
NOTE 5--INCOME TAXES (CONTINUED)
As of March 31, 1997 and 1998, and December 31, 1998, deferred tax assets
were as follows:
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
-------------------- ------------
1997 1998 1998
--------- --------- ------------
<S> <C> <C> <C>
Deferred maintenance revenues................ $ 424,142 $ 318,291 $ 212,442
Deferred compensation expense................ -- -- 233,197
Net operating loss carryforwards:
United Kingdom............................. 18,465 54,484 155,937
Germany.................................... -- 225,180 332,930
Other...................................... -- 7,757 --
--------- --------- ------------
Total deferred tax assets................ 442,607 605,712 934,506
Valuation allowance...................... (442,607) (225,180) (339,453)
--------- --------- ------------
Net deferred tax assets.................. $ -- $ 380,532 $ 595,053
--------- --------- ------------
--------- --------- ------------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized and a valuation allowance is recorded. The valuation
allowance (increased) decreased $(194,271), $279,917, $217,427 and $(107,751)
during the years ended March 31, 1996, 1997 and 1998 and for the nine months
ended December 31, 1998, respectively.
At December 31, 1998, NEON has net operating loss carryforwards for income
tax purposes of $503,024 and $979,210 related to the United Kingdom and Germany,
respectively, which are available to offset future taxable income in the
respective country, if any. The net operating losses are carried forward
indefinitely.
NOTE 6--RELATED PARTY TRANSACTIONS
NEON entered into a distributor agreement with Peregrine/Bridge Transfer
Corporation, a database software company, in January 1996. In December 1998,
NEON amended its distributor agreement with Peregrine/Bridge Transfer
Corporation whereby Peregrine/Bridge Transfer Corporation has granted the
Company an exclusive, worldwide license to market and sublicense Enterprise
Subsystem Management products, with the exception of limited co-marketing rights
held by IBM relating to one of Peregrine/Bridge Transfer Corporation Enterprise
Subsystem Management products. The amended distributor agreement has an initial
term through March 31, 2004. The distributor agreement provides that NEON pay
license fees for license products and for maintenance and support and upgrade
services equal to 50% of the revenues received by NEON. NEON incurred license
fees of $0, $117,350 and $448,917 for the years ended March 31, 1996, 1997 and
1998, respectively, and $92,268 and $421,435 for the nine-month periods ended
December 31, 1997 and 1998, respectively to Peregrine/Bridge Transfer
Corporation. NEON also has a services agreement with Peregrine/Bridge Transfer
Corporation pursuant to which Peregrine/Bridge Transfer Corporation reimburses
NEON for Peregrine/Bridge Transfer Corporation's share of the general and
administrative expenses supplied to it by NEON and for the time spent by NEON's
management developing and implementing Peregrine/
F-15
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED.)
NOTE 6--RELATED PARTY TRANSACTIONS (CONTINUED)
Bridge Transfer Corporation's product development and market strategy. Such
amounts are presented as a reduction of general and administrative expenses in
the accompanying consolidated financial statements. Peregrine/Bridge Transfer
Corporation pays NEON $23,923 per month under the services agreement. Such
amounts totaled $41,769, $257,076 and $287,076 for the years ended March 31,
1996, 1997 and 1998, respectively and $215,307 for each of the nine-month
periods ended December 31, 1997 and 1998, and are included as a reduction of
general and administrative expenses in the accompanying statements of
operations. Due to the timing of cash payments between the two parties related
to the distributor agreement and the services agreement described above, NEON
has accounts receivable-related party of $138,074, $181,112 and $82,577 as of
March 31, 1997, 1998 and December 31, 1998, respectively.
NEON and Peregrine/Bridge Transfer Corporation have certain common
directors. In addition, the controlling stockholder of Peregrine/Bridge Transfer
Corporation's sole shareholder, Skunkware, Inc. is NEON's chairman of the Board
of Directors. NEON's president and chief executive officer, chief financial
officer, and general counsel have the same responsibilities at Peregrine/Bridge
Transfer Corporation.
NOTE 7--COMMITMENTS AND CONTINGENCIES
NEON leases office space and computer software under operating lease
agreements expiring through 2000. Future minimum rental payments under operating
leases having initial or remaining noncancelable lease terms in excess of one
year are as follows:
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31,
<S> <C>
1999......................................... $ 546,878
2000......................................... 695,520
2001......................................... 685,620
2002......................................... 685,620
2003......................................... 685,620
Thereafter................................... 228,540
----------
$3,527,798
----------
----------
</TABLE>
Total rent expense under all operating leases was $58,331, $168,964 and
$433,035 in the years ended March 31, 1996, 1997 and 1998, respectively and
$334,734 and $369,478 for the nine months ended December 31, 1997 and 1998,
respectively.
In December 1996, NEON was named as a codefendant in a lawsuit originally
filed in August 1995 against Peregrine/Bridge Transfer Corporation, a director
of NEON and a group of employees of Peregrine/Bridge Transfer Corporation who
were also former employees of BMC Software. NEON is a distributor for
Peregrine/Bridge Transfer Corporation. BMC Software alleges misappropriation and
infringment of certain trade secrets, confidential information and corporate
opportunity, as well as breach of contract and fiduciary relations by the
individuals. In the lawsuit, BMC Software states that it is seeking damages
based upon the disgorgement of all revenues derived from the sale or license of
the Peregrine/Bridge Transfer Corporation utilities products through the date of
judgment. Furthermore, BMC Software is seeking to hold Peregrine/Bridge Transfer
Corporation, NEON and a director of
F-16
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED.)
NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)
NEON jointly and severally liable for these damages. NEON believes that the
lawsuit is without merit and has filed counterclaims against BMC Software for
anti-competitive practices. Peregrine/Bridge Transfer Corporation is defending
NEON in the lawsuit pursuant to an indemnification provision in the distributor
agreement between NEON and Peregrine/Bridge Transfer Corporation.
Peregrine/Bridge Transfer Corporation is minimally capitalized, and there can be
no assurance that Peregrine/Bridge Transfer Corporation will continue to have
sufficient resources to fund the costs and expenses of the lawsuit or indemnify
NEON against an adverse judgment. If Peregrine/Bridge Transfer Corporation
should cease defending NEON in the lawsuit, NEON will be required to provide its
own defense and may not be able to recover the related costs from
Peregrine/Bridge Transfer Corporation. If BMC Software is successful in
obtaining a judgment in its favor against NEON in the lawsuit, that judgment
could have a material adverse effect on NEON.
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 Network's 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. Any litigation to enforce our right to use the NEON name in the Company's
business or to prevent others from using the NEON name would be expensive and
time-consuming, would divert management resources and may not be adequate to
protect our business. If the Company should lose any such litigation, it may
have to change our name, which also would be expensive and time-consuming and
could adversely affect our 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 these matters will not have a material adverse effect on NEON's
consolidated financial position, results of operations or liquidity.
NOTE 8--FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS
The table below summarizes selected financial information with respect to
NEON's operations by geographic location. NEON's United Kingdom operations
accounted for over 96% of total European revenues in fiscal 1996, 1997 and 1998.
F-17
<PAGE>
NEON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED.)
NOTE 8--FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS (CONTINUED)
During the nine-month period ended December 31, 1998, NEON had one customer
whom accounted for 16% of the consolidated revenue.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
--------------------------------------- -----------------------------
1996 1997 1998 1998
----------- ----------- ----------- -------------
1997
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
United States................ $ 2,327,912 $ 6,660,990 $ 9,735,198 $ 6,396,931 $ 10,817,079
Europe....................... -- 363,662 2,279,609 1,621,167 2,851,768
----------- ----------- ----------- ------------- -------------
$ 2,327,912 $ 7,024,652 $12,014,807 $ 8,018,098 $ 13,668,847
----------- ----------- ----------- ------------- -------------
----------- ----------- ----------- ------------- -------------
Operating income (loss):
United States................ $ (598,410) $ 778,810 $ 2,056,686 $ 1,294,713 $ 3,018,887
Europe....................... -- 20,613 (697,580) (205,318) (874,159)
----------- ----------- ----------- ------------- -------------
$ (598,410) $ 799,423 $ 1,359,106 $ 1,089,395 $ 2,144,728
----------- ----------- ----------- ------------- -------------
----------- ----------- ----------- ------------- -------------
Identifiable assets:
United States................ $ 730,037 $ 2,456,061 $ 3,964,737 $ 3,586,984 $ 7,509,083
Europe....................... -- 636,826 2,387,433 1,740,815 2,393,126
----------- ----------- ----------- ------------- -------------
$ 730,037 $ 3,092,887 $ 6,352,170 $ 5,327,799 $ 9,902,209
----------- ----------- ----------- ------------- -------------
----------- ----------- ----------- ------------- -------------
</TABLE>
NOTE 9--SUBSEQUENT EVENTS
In January 1999, NEON adopted the 1999 Long-Term Incentive Plan which
provides for the grant of incentive stock options and non-qualified stock
options to purchase NEON common stock, stock appreciation rights, restricted
stock and performance units, to key employees of NEON. NEON has reserved
2,000,000 shares of its common stock for issuance under the 1999 Plan.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[LOGO]
2,500,000 SHARES OF COMMON STOCK
--------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
CIBC OPPENHEIMER
----------------
DLJDIRECT INC.
- ------------------------------------------------------------
We have not authorized any dealer, sales person or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of NEON have
not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in these shares of common stock may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table indicates the estimated expenses to be incurred by NEON
in connection with the offering described in the Registration Statement.
<TABLE>
<S> <C>
Securities and Exchange Commission filing
fee........................................ $11,190
NASD filing fee.............................. 4,238
NASDAQ National Market listing fee........... 72,875
Blue sky fees and expenses................... 2,000
Printing and engraving fees.................. 100,000
Accountants' fees and expenses............... 150,000
Legal fees and expenses...................... 150,000
Transfer agent's fees and expenses........... 3,000
Miscellaneous................................ 6,697
-------
Total.................................... $500,000
-------
-------
</TABLE>
- ------------------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides,
in effect, that any person made a party to any action by reason of the fact that
he is or was a director, officer, employee or agent of NEON may and, in certain
cases, must be indemnified by NEON against, in the case of a non-derivative
action, judgments, fines, amounts paid in settlement and reasonable expenses
(including attorneys' fees) incurred by him as a result of such action, and in
the case of a derivative action, against expenses (including attorneys' fees),
if in either type of action he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of NEON. This
indemnification does not apply, in a derivative action, to matters as to which
it is adjudged that the director, officer, employee or agent is liable to NEON,
unless upon court order it is determined that, despite such adjudication of
liability, but in view of all the circumstances of the case, he is fairly and
reasonably entitled to indemnity for expenses, and, in a non-derivative action,
to any criminal proceeding in which such person had reasonable cause to believe
his conduct was unlawful.
Article 15 of NEON's Certificate of Incorporation, as amended, provides that
no director of NEON shall be liable to NEON or its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by the DGCL.
Article 16 of NEON's Certificate of Incorporation, as amended, also provides
that NEON shall indemnify to the fullest extent permitted by Delaware law any
and all of its directors and officers, or former directors and officers, or any
person who may have served at NEON's request as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise.
Reference is made to Section 8 of the form of Underwriting Agreement filed
as Exhibit 1.1 hereto, pursuant to which the Underwriters and the Selling
Stockholders have agreed to indemnify officers and directors of NEON against
certain liabilities under the Securities Act.
NEON has entered into Indemnification Agreements with each director of NEON,
a form of which is filed as Exhibit 10.14 to this Registration Statement.
Pursuant to such agreements, NEON will be obligated, to the extent permitted by
applicable law, to indemnify such directors against all expenses, judgments,
fines and penalties incurred in connection with the defense or settlement of any
actions brought against them by reason of the fact that they were directors of
NEON or assumed certain
II-1
<PAGE>
responsibilities at the direction of NEON. NEON also intends to purchase
directors and officers liability insurance in order to limit its exposure to
liability for indemnification of directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, NEON has issued unregistered shares of its
Common Stock, par value $.01 per share, to a limited number of persons as
described below. NEON also issued 125,000 shares of its Series A Redeemable,
Convertible Preferred Stock, par value $.01 per share, to JMI Equity Fund, L.P.
in the transaction described in paragraph (2) below.
(1) From August 1996 through November 1998, NEON issued and sold 594,860
shares of Common Stock to employees at prices ranging from $0.01 to $1.00 per
share upon exercise of stock options granted pursuant to NEON's 1993 Stock Plan.
(2) In March 1997, NEON issued and sold 125,000 shares of Series A
Redeemable, Convertible Preferred Stock to JMI Equity Fund, L.P. pursuant to the
conversion of $250,000 in convertible debt held by such limited partnership.
(3) In June 1998, NEON issued and sold 47,780 shares of Common Stock to
Wayne E. Webb, Jr. for an aggregate purchase price of $86,004 pursuant to a
restricted stock purchase effected under the 1993 Plan.
(4) Effectively immediately prior to the consummation of the sale of shares
of Common Stock pursuant to NEON's offering, NEON will issue 3,125,000 shares of
its Common Stock to JMI Equity Fund, L.P. pursuant to the conversion of 625,000
shares of its Series A Redeemable, Convertible Preferred Stock held by such
limited partnership.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and NEON believes that each
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof or Rule 701 pursuant to compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701.
The recipients in such transactions represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with NEON, to information about
NEON.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------------------------------------------------------------------
<S> <C>
1.1+ Form of Underwriting Agreement by and among NEON Systems,
Inc. and the Underwriters.
3.1* Form of Certificate of Incorporation of NEON Systems, Inc,
as amended.
3.2* Bylaws of NEON Systems, Inc.
4.1+ Specimen Stock Certificate.
4.2* Certificate of Incorporation, as amended and Bylaws of NEON
Systems, Inc. (see Exhibits 3.1 and 3.2).
5.1+ Opinion of Locke Liddell & Sapp LLP.
10.1* NEON Systems, Inc. 1993 Stock Plan.
10.2* NEON Systems, Inc. 401(k) Plan.
10.3+ NEON Systems, Inc. 1999 Long-Term Incentive Plan.
10.4* NEON Systems, Inc. Stock Option Plan for Non-Employee
Directors.
10.5* Distributor Agreement dated as of January 1, 1996 by and
between Peregrine/Bridge Transfer Corporation and NEON
Systems, Inc., as amended.
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.6* Texaco Inc. Information Technology Department Miscellaneous
Work Agreement dated as of July 1, 1991 between NEON
Systems, Inc. and Texaco Inc.
10.7* Series A Stock Purchase Agreement dated as of May 19, 1993
by and between NEON Systems, Inc., JMI Equity Fund, L.P.
and Peter Schaeffer.
10.8* Secured Convertible Promissory Note Purchase Agreement dated
as of September 29, 1994 by and between NEON Systems, Inc.
and JMI Equity Fund, L.P., as amended.
10.9* Secured Convertible Promissory Note Purchase Agreement dated
as of March 30, 1995 by and between NEON Systems, Inc. and
JMI Equity Fund, L.P., as amended.
10.10* Secured Convertible Promissory Note Purchase Agreement dated
as of November 22, 1995 by and between NEON Systems, Inc.
and JMI Equity Fund, L.P.
10.11* Secured Promissory Note dated March 31, 1997 to the order of
JMI Equity Fund, L.P. in the original principal amount of
$1,049,100.78, as amended.
10.12* Amendment to Convertible Debt Documentation and Exercise of
Conversion Right dated March 31, 1997 by and between NEON
Systems, Inc. and JMI Equity Fund, L.P.
10.13* Registration Rights Agreement dated as of May 19, 1993 by
and between NEON Systems, Inc., JMI Equity Fund, L.P. and
Peter Schaeffer.
10.14* Form of Indemnification Agreement between NEON Systems, Inc.
and each of its directors.
10.15* Lease Agreement between Turner Andreac, LLC and NEON
Systems, Inc., for office space located at 14100 Southwest
Freeway, Suite 500 in Sugar Land, Texas.
10.16* Lease Agreement, dated December 19, 1996, between Nu-Swift
Sovereign Limited and NEON Systems (U.K.) Limited , for
office space located at Sovereign House 26/30 London Road
in Twickenham, Middlesex.
10.17* Lease Agreement dated September 1, 1997 between NEON Systems
GmbH and Triple P. Deutschland GmbH.
10.18* Agreement by and between Goal Systems International Inc.,
NEON Systems, Inc. and Peter Schaeffer dated January 8,
1992.
10.19* Stockholders Agreement dated May 19, 1993 by and among NEON
Systems, Inc. and JMI Equity Fund, L.P. and Peter
Schaeffer.
10.20* Stock Restriction Agreement dated May 19, 1993 by and among
NEON Systems, Inc., Peter Schaeffer and JMI Equity Fund,
L.P.
10.21+ Service Agreement dated as of December 18, 1998 by and among
NEON Systems, Inc. and Peregrine/Bridge Transfer
Corporation.
10.22* Stock Purchase Agreement dated June 1, 1998 by and between
NEON Systems, Inc. and Wayne E. Webb, Jr.
10.23* Stockholders Agreement, dated June 1, 1998, by and between
NEON Systems, Inc. and Wayne E. Webb, Jr.
11.1* Statement regarding Computation of Per Share Earnings.
21.1* Subsidiaries of NEON Systems, Inc.
23.1+ Consent of KPMG LLP.
23.2+ Consent of Locke Liddell & Sapp LLP (included in its opinion
filed as Exhibit 5.1).
24.1* Power of Attorney (included on first signature page).
27.1* Financial Data Schedule for year ended March 31, 1996.
27.2* Financial Data Schedule for year ended March 31, 1997.
27.3* Financial Data Schedule for year ended March 31, 1998.
27.4* Financial Data Schedule for six months ended September 30,
1998.
27.5+ Financial Data Schedule for nine months ended December 31,
1998.
</TABLE>
- ------------------------
* Previously filed.
+ Filed herewith.
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions, are not applicable or the
information has been provided in the Consolidated Financial Statements or the
Notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Company hereby undertakes to provide the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company, the Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by any director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on this day of February, 1999.
NEON SYSTEMS, INC.
By: *
-----------------------------------------
Joe Backer
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Chairman of the Board February , 1999
John J. Moores
President and Chief
* Executive Officer
- ------------------------------ (Principal Executive February , 1999
Joe Backer Officer) and Director
*
- ------------------------------ Chief Technology Officer February , 1999
Peter Schaeffer and Director
Chief Financial Officer
/s/ JOHN S. REILAND (Principal Financial and
- ------------------------------ Accounting Officer) and February , 1999
John S. Reiland Director
*
- ------------------------------ Director February , 1999
Charles E. Noell III
*
- ------------------------------ Director February , 1999
Norris van den Berg
*
- ------------------------------ Director February , 1999
Richard Holcomb
</TABLE>
* The undersigned has executed this Amendment No. 1 to the Registration
Statement on behalf of each of the persons named above pursuant to the Power of
Attorney filed with the Securities and Exchange Commission.
<TABLE>
<S> <C> <C> <C>
*By: /s/ JOHN S. REILAND
-------------------------
John S. Reiland
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------------------------------------------------------------------
<S> <C>
1.1+ Form of Underwriting Agreement by and among NEON Systems,
Inc. and the Underwriters.
3.1* Form of Certificate of Incorporation of NEON Systems, Inc,
as amended.
3.2* Bylaws of NEON Systems, Inc.
4.1+ Specimen Stock Certificate.
4.2* Certificate of Incorporation, as amended and Bylaws of NEON
Systems, Inc. (see Exhibits 3.1 and 3.2).
5.1+ Opinion of Locke Liddell & Sapp LLP.
10.1* NEON Systems, Inc. 1993 Stock Plan.
10.2* NEON Systems, Inc. 401(k) Plan.
10.3+ NEON Systems, Inc. 1999 Long-Term Incentive Plan.
10.4* NEON Systems, Inc. Stock Option Plan for Non-Employee
Directors.
10.5* Distributor Agreement dated as of January 1, 1996 by and
between Peregrine/Bridge Transfer Corporation and NEON
Systems, Inc., as amended.
10.6* Texaco Inc. Information Technology Department Miscellaneous
Work Agreement dated as of July 1, 1991 between NEON
Systems, Inc. and Texaco Inc.
10.7* Series A Stock Purchase Agreement dated as of May 19, 1993
by and between NEON Systems, Inc., JMI Equity Fund, L.P.
and Peter Schaeffer.
10.8* Secured Convertible Promissory Note Purchase Agreement dated
as of September 29, 1994 by and between NEON Systems, Inc.
and JMI Equity Fund, L.P., as amended.
10.9* Secured Convertible Promissory Note Purchase Agreement dated
as of March 30, 1995 by and between NEON Systems, Inc. and
JMI Equity Fund, L.P., as amended.
10.10* Secured Convertible Promissory Note Purchase Agreement dated
as of November 22, 1995 by and between NEON Systems, Inc.
and JMI Equity Fund, L.P.
10.11* Secured Promissory Note dated March 31, 1997 to the order of
JMI Equity Fund, L.P. in the original principal amount of
$1,049,100.78, as amended.
10.12* Amendment to Convertible Debt Documentation and Exercise of
Conversion Right dated March 31, 1997 by and between NEON
Systems, Inc. and JMI Equity Fund, L.P.
10.13* Registration Rights Agreement dated as of May 19, 1993 by
and between NEON Systems, Inc., JMI Equity Fund, L.P. and
Peter Schaeffer.
10.14* Form of Indemnification Agreement between NEON Systems, Inc.
and each of its directors.
10.15* Lease Agreement between Turner Andreac, LLC and NEON
Systems, Inc., for office space located at 14100 Southwest
Freeway, Suite 500 in Sugar Land, Texas.
10.16* Lease Agreement, dated December 19, 1996, between Nu-Swift
Sovereign Limited and NEON Systems (U.K.) Limited , for
office space located at Sovereign House 26/30 London Road
in Twickenham, Middlesex.
10.17* Lease Agreement dated September 1, 1997 between NEON Systems
GmbH and Triple P. Deutschland GmbH.
10.18* Agreement by and between Goal Systems International Inc.,
NEON Systems, Inc. and Peter Schaeffer dated January 8,
1992.
10.19* Stockholders Agreement dated May 19, 1993 by and among NEON
Systems, Inc. and JMI Equity Fund, L.P. and Peter
Schaeffer.
10.20* Stock Restriction Agreement dated May 19, 1993 by and among
NEON Systems, Inc., Peter Schaeffer and JMI Equity Fund,
L.P.
10.21+ Service Agreement dated as of December 18, 1998 by and among
NEON Systems, Inc. and Peregrine/Bridge Transfer
Corporation.
10.22* Stock Purchase Agreement dated June 1, 1998 by and between
NEON Systems, Inc. and Wayne E. Webb, Jr.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------------------------------------------------------------------
10.23* Stockholders Agreement, dated June 1, 1998, by and between
NEON Systems, Inc. and Wayne E. Webb, Jr.
<S> <C>
11.1* Statement regarding Computation of Per Share Earnings.
21.1* Subsidiaries of NEON Systems, Inc.
23.1+ Consent of KPMG LLP.
23.2+ Consent of Locke Liddell & Sapp LLP (included in its opinion
filed as Exhibit 5.1).
24.1* Power of Attorney (included on first signature page).
27.1* Financial Data Schedule for year ended March 31, 1996.
27.2* Financial Data Schedule for year ended March 31, 1997.
27.3* Financial Data Schedule for year ended March 31, 1998.
27.4* Financial Data Schedule for six months ended September 30,
1998.
27.5+ Financial Data Schedule for nine months ended December 31,
1998.
</TABLE>
- ------------------------
* Previously filed.
+ Filed herewith.
<PAGE>
APPENDIX
DESCRIPTION OF ARTWORK ON INSIDE FRONT COVER
Graphic titled "NEON Enterprise Access and Integration Software" and
subtitled "Unleashing the Power of the Internet and Mainframe and Client/Server
Systems." Photo composition of a mainframe sitting on a desert landscape against
a stormy sky. Three fingers of lightening are breaking out of the mainframe and
connecting to images that represent the Internet, the client/server and the
n-tier. Text below graphic: NEON's Shadow products provide rapid and
cost-effective access to and connectivity between enterprise data, transactions
and applications. Shadow products enable the deployment of new applications and
the extension of legacy applications across a variety of computing environments,
including the Internet and client/server and mainframe systems. These products
allow organizations to provide applications that combine the reliability,
scalability, security and control of the mainframe with the flexibility and
cost-effectiveness of the Internet and client/server environments.
<PAGE>
DESCRIPTION OF ARTWORK ON INSIDE BACK COVER
Two-color listing of NEON Enterprise Access and Integration software
products, appropriately trademarked and listed by Shadow Products, Shadow Add-On
Components, and Enterprise Subsystem Management Products.
<PAGE>
__________ Shares
NEON SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
__________, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
HAMBRECHT & QUIST LLC
CIBC OPPENHEIMER CORP.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
NEON Systems, Inc., a Delaware corporation (the "COMPANY"), proposes
to issue and sell to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS"), and certain stockholders of the Company named in Schedule II
hereto (the "SELLING STOCKHOLDERS") severally propose to sell to the
Underwriters, an aggregate of _______________ shares of common stock, $0.01
par value per share, of the Company (the "FIRM SHARES"), of which __________
shares are to be issued and sold by the Company and ___________ shares are to
be sold by the Selling Stockholders, with each Selling Stockholder selling
the number of Firm Shares set forth opposite such Selling Stockholder's name
in Schedule II hereto. The Company and a Selling Stockholder of the Company
named in Schedule III hereto severally propose to issue and sell to the
several Underwriters not more than an additional _______ shares of common
stock, $0.01 par value per share (the "ADDITIONAL SHARES"), of which up to
____________ shares are to be issued and sold by the Company and
______________ shares are to be sold by the Selling Stockholder, if requested
by the Underwriters as provided in Section 2 hereof. The Firm Shares and
the Additional Shares are hereinafter referred to collectively as the
"SHARES". The shares of common stock of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "COMMON STOCK". The Company and the Selling Stockholders are hereinafter
sometimes referred to collectively as the "SELLERS".
<PAGE>
SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of
1933, as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended
at the time it became effective, including the information (if any) deemed to
be part of the registration statement at the time of effectiveness pursuant
to Rule 430A under the Act, is hereinafter referred to as the "REGISTRATION
STATEMENT"; and the prospectus in the form first used to confirm sales of
Shares is hereinafter referred to as the "PROSPECTUS". If the Company has
filed or is required pursuant to the terms hereof to file a registration
statement pursuant to Rule 462(b) under the Act registering additional shares
of Common Stock (a "RULE 462(b) REGISTRATION STATEMENT"), then, unless
otherwise specified, any reference herein to the term "Registration
Statement" shall be deemed to include such Rule 462(b) Registration Statement.
SECTION 2. AGREEMENTS TO SELL AND PURCHASE AND LOCK-UP AGREEMENTS .
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees to
issue and sell ______________ Firm Shares, (ii) each Selling Stockholder
agrees, severally and not jointly, to sell the number of Firm Shares set
forth opposite such Selling Stockholder's name in Schedule II hereto and
(iii) each Underwriter agrees, severally and not jointly, to purchase from
each Seller at a price per Share of $______ (the "PURCHASE PRICE") the number
of Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees to
issue and sell ________ Additional Shares, (ii) the Selling Stockholder
agrees to sell the number of Additional Shares set forth opposite his name in
Schedule III hereto and (iii) the Underwriters shall have the right to
purchase, severally and not jointly, up to _______ Additional Shares from the
Sellers at the Purchase Price. Additional Shares may be purchased solely
for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. The Underwriters may exercise their right to
purchase Additional Shares in whole or in part from time to time by giving
written notice thereof to the Company within 30 days after the date of this
Agreement. You shall give any such notice on behalf of the Underwriters and
such notice shall specify the aggregate number of Additional Shares to be
purchased pursuant to such exercise and the date for payment and delivery
thereof, which date shall be a business day (i) no earlier than two business
days after such notice has been given (and, in any event, no earlier than the
Closing Date (as hereinafter defined)) and (ii) no later than ten business
days after such notice has been given. If any Additional Shares are to be
purchased, each Underwriter, severally and not jointly, agrees to purchase
from the Sellers the number of Additional Shares (subject to such adjustments
to
2
<PAGE>
eliminate fractional shares as you may determine) which bears the same
proportion to the total number of Additional Shares to be purchased from the
Sellers as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I bears to the total number of Firm Shares. In the
event that less than all of the Additional Shares are to be purchased, the
Additional Shares shall first be purchased from the Selling Stockholder
before Additional Shares are purchased from the Company.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other
arrangement that transfers all or a portion of the economic consequences
associated with the ownership of any Common Stock (regardless of whether any
of the transactions described in clause (i) or (ii) is to be settled by the
delivery of Common Stock, or such other securities, in cash or otherwise),
except to the Underwriters pursuant to this Agreement, for a period of 180
days after the date of the Prospectus without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding the
foregoing, during such period (i) the Company may grant stock options
pursuant to the Company's existing stock option plan and (ii) the Company may
issue shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof. The Company also
agrees not to file any registration statement with respect to any shares of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days after the date of the
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. In addition, each Selling Stockholder agrees that,
for a period of 180 days after the date of the Prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation, it
will not make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock. The Company shall, prior to
or concurrently with the execution of this Agreement, deliver an agreement
executed by (i) each Selling Stockholder, (ii) each of the directors and
officers of the Company who is not a Selling Stockholder and (iii) each
security holder listed on Annex I hereto to the effect that such person will
not, during the period commencing on the date such person signs such
agreement and ending 180 days after the date of the Prospectus, without the
prior written consent of Donaldson, Lufkin & Jenrette Corporation, (A) engage
in any of the transactions described in the first sentence of this paragraph
or (B) make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock.
SECTION 3. TERMS OF PUBLIC OFFERING. The Sellers are advised by you
that the Underwriters propose (i) to make a public offering of their
respective portions
3
<PAGE>
of the Shares as soon after the execution and delivery of this Agreement as
in your judgment is advisable and (ii) initially to offer the Shares upon the
terms set forth in the Prospectus.
SECTION 4. DELIVERY AND PAYMENT. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations
and registered in such names as Donaldson, Lufkin & Jenrette Securities
Corporation shall request no later than two business days prior to the
Closing Date or the applicable Option Closing Date (as defined below), as the
case may be. The Shares shall be delivered by or on behalf of the Sellers,
with any transfer taxes thereon duly paid by the respective Sellers, to
Donaldson, Lufkin & Jenrette Securities Corporation through the facilities of
The Depository Trust Company ("DTC"), for the respective accounts of the
several Underwriters, against payment to the Sellers of the Purchase Price
therefor by wire transfer of Federal or other funds immediately available in
New York City. The certificates representing the Shares shall be made
available for inspection not later than 9:30 A.M., New York City time, on the
business day prior to the Closing Date or the applicable Option Closing Date,
as the case may be, at the office of DTC or its designated custodian (the
"DESIGNATED OFFICE"). The time and date of delivery and payment for the Firm
Shares shall be 9:00 A.M., New York City time, on ________, 1999 or such
other time on the same or such other date as Donaldson, Lufkin & Jenrette
Securities Corporation and the Company shall agree in writing. The time and
date of delivery and payment for the Firm Shares are hereinafter referred to
as the "CLOSING DATE." The time and date of delivery and payment for any
Additional Shares to be purchased by the Underwriters shall be 9:00 A.M., New
York City time, on the date specified in the applicable exercise notice given
by you pursuant to Section 2 or such other time on the same or such other
date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company
shall agree in writing. The time and date of delivery and payment for any
Additional Shares are hereinafter referred to as the "OPTION CLOSING DATE."
The documents to be delivered on the Closing Date or any Option
Closing Date on behalf of the parties hereto pursuant to Section 9 of this
Agreement shall be delivered at the offices of Brobeck, Phleger & Harrison
LLP, 301 Congress Avenue, Suite 1200, Austin, Texas 78701, Attn: Ronald G.
Skloss and the Shares shall be delivered at the Designated Office, all on the
Closing Date or such Option Closing Date, as the case may be.
SECTION 5. AGREEMENTS OF THE COMPANY. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm
such advice in writing, (i) of any request by the Commission for amendments
to the Registration Statement or amendments or supplements to the Prospectus
or for additional information, (ii) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or of
the suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation
4
<PAGE>
of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective
and (v) of the happening of any event during the period referred to in
Section 5(d) below which makes any statement of a material fact made in the
Registration Statement or the Prospectus untrue or which requires any
additions to or changes in the Registration Statement or the Prospectus in
order to make the statements therein not misleading. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
(b) To furnish to you four signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated
by you such number of conformed copies of the Registration Statement as so
filed and of each amendment to it, without exhibits, as you may reasonably
request.
(c) To prepare the Prospectus, the form and substance of which
shall be satisfactory to you, and to file the Prospectus in such form with
the Commission within the applicable period specified in Rule 424(b) under
the Act; during the period specified in Section 5(d) below, not to file any
further amendment to the Registration Statement and not to make any amendment
or supplement to the Prospectus of which you shall not previously have been
advised or to which you shall reasonably object after being so advised; and,
during such period, to prepare and file with the Commission, promptly upon
your reasonable request, any amendment to the Registration Statement or
amendment or supplement to the Prospectus which may be necessary or advisable
in connection with the distribution of the Shares by you, and to use its best
efforts to cause any such amendment to the Registration Statement to become
promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business
day after the date of this Agreement and from time to time thereafter for
such period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or
a dealer, to furnish in New York City to each Underwriter and any dealer as
many copies of the Prospectus (and of any amendment or supplement to the
Prospectus) as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of
counsel for the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the
5
<PAGE>
Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so
that the statements in the Prospectus, as so amended or supplemented, will
not in the light of the circumstances when it is so delivered, be misleading,
or so that the Prospectus will comply with applicable law, and to furnish to
each Underwriter and to any dealer as many copies thereof as such Underwriter
or dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with
you and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters
and by dealers under the state securities or Blue Sky laws of such
jurisdictions as you may request, to continue such registration or
qualification in effect so long as required for distribution of the Shares
and to file such consents to service of process or other documents as may be
necessary in order to effect such registration or qualification; PROVIDED,
HOWEVER, that the Company shall not be required in connection therewith to
qualify as a foreign corporation in any jurisdiction in which it is not now
so qualified or to take any action that would subject it to general consent
to service of process or taxation other than as to matters and transactions
relating to the Prospectus, the Registration Statement, any preliminary
prospectus or the offering or sale of the Shares, in any jurisdiction in
which it is not now so subject.
(g) To mail and make generally available to its stockholders as
soon as practicable an earnings statement covering the twelve-month period
ending March 31, 2000 that shall satisfy the provisions of Section 11(a) of
the Act, and to advise you in writing when such statement has been so made
available.
(h) During the period of three years after the date of this
Agreement, to furnish to you as soon as available copies of all reports or
other communications furnished to the record holders of Common Stock or
furnished to or filed with the Commission or any national securities exchange
on which any class of securities of the Company is listed and such other
publicly available information concerning the Company and its subsidiaries as
you may reasonably request.
(i) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incident to the performance of the Sellers' obligations under
this Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel, the Company's accountants and any Selling Stockholder's
counsel (in addition to the Company's counsel) in connection with the
registration and delivery of the Shares under the Act and all other fees and
expenses in connection with the preparation, printing, filing and
distribution of the Registration Statement (including financial statements
and exhibits), any preliminary prospectus, the Prospectus and all amendments
and supplements to any of the foregoing, including the mailing and delivering
of copies thereof to the Underwriters and
6
<PAGE>
dealers in the quantities specified herein, (ii) all costs and expenses
related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv)
all expenses in connection with the registration or qualification of the
Shares for offer and sale under the securities or Blue Sky laws of the
several states and all costs of printing or producing any Preliminary and
Supplemental Blue Sky Memoranda in connection therewith (including the filing
fees and fees and disbursements of counsel for the Underwriters in connection
with such registration or qualification and memoranda relating thereto), (v)
the filing fees and disbursements of counsel for the Underwriters in
connection with the review and clearance of the offering of the Shares by the
National Association of Securities Dealers, Inc., (vi) all fees and expenses
in connection with the preparation and filing of the registration statement
on Form 8-A relating to the Common Stock and all costs and expenses incident
to the listing of the Shares on the Nasdaq National Market, (vii) the cost of
printing certificates representing the Shares, (viii) the costs and charges
of any transfer agent, registrar and/or depositary, and (ix) all other costs
and expenses incident to the performance of the obligations of the Company
and the Selling Stockholders hereunder for which provision is not otherwise
made in this Section.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the
Nasdaq National Market for a period of three years after the date of this
Agreement.
(k) To use its best efforts to do and perform all things required
or necessary to be done and performed under this Agreement by the Company
prior to the Closing Date or any Option Closing Date, as the case may be, and
to satisfy all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness
of this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so
covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on
the date of this Agreement and to pay to the Commission the filing fee for
such Rule 462(b) Registration Statement at the time of the filing thereof or
to give irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the Act.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement
filed after the effectiveness of this Agreement will become effective no
later than 10:00 P.M., New York City time, on the date of this Agreement; and
no stop order
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suspending the effectiveness of the Registration Statement is in effect, and
no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended,
if applicable, will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, (ii) the Registration Statement
(other than any Rule 462(b) Registration Statement to be filed by the Company
after the effectiveness of this Agreement) and the Prospectus comply and, as
amended or supplemented, if applicable, will comply in all material respects
with the Act, (iii) if the Company is required to file a Rule 462(b)
Registration Statement after the effectiveness of this Agreement, such Rule
462(b) Registration Statement and any amendments thereto, when they become
effective (A) will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading and (B) will comply in all
material respects with the Act and (iv) the Prospectus does not contain and,
as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations
and warranties set forth in this paragraph do not apply to statements or
omissions in any preliminary prospectus based upon information relating to
any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(d) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has the corporate power and
authority to carry on its business as described in the Prospectus and to own,
lease and operate its properties, and each is duly qualified and is in good
standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its ownership or leasing
of property requires such qualification,
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except where the failure to be so qualified would not have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole.
(e) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens granted
or issued by the Company or any of its subsidiaries relating to or entitling
any person to purchase or otherwise to acquire any shares of the capital
stock of the Company or any of its subsidiaries, except as otherwise
disclosed in the Registration Statement.
(f) All the outstanding shares of capital stock of the Company
(including the Additional Shares to be sold by the Selling Stockholders) have
been duly authorized and validly issued and are fully paid, non-assessable
and not subject to any preemptive or similar rights; and the Shares to be
issued and sold by the Company have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar
rights.
(g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation
of its respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material
to the Company and its subsidiaries, taken as a whole, to which the Company
or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound.
(j) The execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions hereof and
the consummation of the transactions contemplated hereby will not (i) require
any consent, approval, authorization or other order of, or qualification
with, any court or governmental body or agency (except such as may be
required under the securities or Blue Sky laws of the various states), (ii)
conflict with or constitute a breach of any of the terms or provisions of, or
a default under, the charter or by-laws of the Company or any of
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its subsidiaries or any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is material to the Company and its subsidiaries,
taken as a whole, to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or their respective
property is bound, (iii) violate or conflict with any applicable law or any
rule, regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over the Company, any of its subsidiaries
or their respective property or (iv) result in the suspension, termination or
revocation of any Authorization (as defined below) of the Company or any of
its subsidiaries or any other impairment of the rights of the holder of any
such Authorization.
(k) Except as disclosed in the Registration Statement, the Company
owns or possesses the licenses or other rights to use all patents,
trademarks, service marks, trade names, copyrights, mask work rights,
technology, know-how and trade secrets necessary to conduct the business now
or proposed to be conducted by the Company as described in the Registration
Statement, and except as disclosed in the Registration Statement, neither the
Company nor any of its subsidiaries has received any notice of infringement
of or conflict with (or knows of such infringement of or conflict with)
asserted rights of others with respect to any patents, trademarks, service
marks, trade names, copyrights, mask work rights, technology, know-how or
trade secrets, which, singly or in the aggregate, if the subject of any
unfavorable decision, ruling or finding, would have a material adverse effect
on the current or future consolidated financial position, stockholders'
equity or results of operations of the Company and its subsidiaries,
considered as one enterprise; and , except as disclosed in the Registration
Statement, to the Company's knowledge, the discoveries, inventions, products
or processes of the Company referred to in the Registration Statement do not
infringe or conflict with any right or patent of any third party, or any
discovery, invention, product or process which is the subject of a patent
application filed by any third party.
(l) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is or could be a
party or to which any of their respective property is or could be subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described; nor are there any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not so described or filed as required.
(m) Neither the Company nor any of its subsidiaries has violated
any foreign, federal, state or local law or regulation relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any
provisions of the Employee Retirement Income Security Act of 1974, as
amended, or any provisions of the Foreign Corrupt Practices Act or the rules
and regulations promulgated thereunder, except for such violations which,
singly or in the aggregate, would not have a material adverse effect on the
business, prospects,
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financial condition or results of operation of the Company and its
subsidiaries, taken as a whole.
(n) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other
approvals (each, an "AUTHORIZATION") of, and has made all filings with and
notices to, all governmental or regulatory authorities and self-regulatory
organizations and all courts and other tribunals, including, without
limitation, under any applicable Environmental Laws, as are necessary to own,
lease, license and operate its respective properties and to conduct its
business, except where the failure to have any such Authorization or to make
any such filing or notice would not, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
Each such Authorization is valid and in full force and effect and each of the
Company and its subsidiaries is in compliance with all the terms and
conditions thereof and with the rules and regulations of the authorities and
governing bodies having jurisdiction with respect thereto; and no event has
occurred (including, without limitation, the receipt of any notice from any
authority or governing body) which allows or, after notice or lapse of time
or both, would allow, revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or both, would
result in any other impairment of the rights of the holder of any such
Authorization; and such Authorizations contain no restrictions that are
burdensome to the Company or any of its subsidiaries; except where such
failure to be valid and in full force and effect or to be in compliance, the
occurrence of any such event or the presence of any such restriction would
not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole.
(o) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any Authorization, any related constraints on operating activities
and any potential liabilities to third parties) which would, singly or in the
aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(p) No relationship, direct or indirect, exists between or among
the Company or any of its subsidiaries on the one hand, and the directors,
officers, stockholders, customers or suppliers of the Company or any of its
subsidiaries on the other hand, which is required by the Act to be described
in the Registration Statement or the Prospectus which is not so described.
(q) This Agreement has been duly authorized, executed and delivered
by the Company.
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(r) KPMG Peat Marwick, LLP are independent public accountants with
respect to the Company and its subsidiaries as required by the Act.
(s) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), together with related schedules and notes, present fairly the
consolidated financial position, results of operations and changes in
financial position of the Company and its subsidiaries on the basis stated
therein at the respective dates or for the respective periods to which they
apply; such statements and related schedules and notes have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; the supporting
schedules, if any, included in the Registration Statement present fairly in
accordance with generally accepted accounting principles the information
required to be stated therein; and the other financial and statistical
information and data set forth in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) are, in all material
respects, accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company.
(t) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(u) All material tax returns required to be filed by the Company
and each of its subsidiaries in any jurisdiction have been filed, other than
those filings being contested in good faith, and all material taxes,
including withholding taxes, penalties and interest, assessments, fees and
other charges due pursuant to such returns or pursuant to any assessment
received by the Company or any of its subsidiaries have been paid, other than
those being contested in good faith and for which adequate reserves have been
provided.
(v) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(w) There are no contracts, agreements or understandings between
the Company and any person, other than Peter Schaeffer and JMI Equities Fund,
L.P., granting such person the right to require the Company to file a
registration
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statement under the Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(x) Since the respective dates as of which information is given in
the Prospectus and other than as set forth in the Prospectus (exclusive of
any amendments or supplements thereto subsequent to the date of this
Agreement), (i) there has not occurred any material adverse change or any
development involving a prospective material adverse change in the condition,
financial or otherwise, or the earnings, business, management or operations
of the Company and its subsidiaries, taken as a whole, (ii) there has not
been any material adverse change or any development involving a prospective
material adverse change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of
its subsidiaries has incurred any material liability or obligation, direct or
contingent.
(y) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to the Underwriters as to
the matters covered thereby.
SECTION 7. REPRESENTATIONS AND WARRANTIES OF THE SELLING
STOCKHOLDERS. Each Selling Stockholder represents and warrants to each
Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares to
be sold by such Selling Stockholder pursuant to this Agreement and has, and
on the Closing Date or Option Closing Date, as the case may be, will have,
good and clear title to such Shares, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
(b) The Shares to be sold by such Selling Stockholder have been
duly authorized and are validly issued, fully paid and non-assessable.
(c) Such Selling Stockholder has, and on the Closing Date or Option
Closing Date, as the case may be, will have, full legal right, power and
authority, and all authorization and approval required by law, to enter into
this Agreement, the Custody Agreement signed by such Selling Stockholder and
_______________________, as Custodian, relating to the deposit of the Shares
to be sold by such Selling Stockholder (the "CUSTODY AGREEMENT") and the
Power of Attorney of such Selling Stockholder appointing certain individuals
as such Selling Stockholder's attorneys-in-fact (the "ATTORNEYS") to the
extent set forth therein, relating to the transactions contemplated hereby
and by the Registration Statement and the Custody Agreement (the "POWER OF
ATTORNEY") and to sell, assign, transfer and deliver the Shares to be sold by
such Selling Stockholder in the manner provided herein and therein.
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(d) This Agreement has been duly authorized, executed and delivered
by or on behalf of such Selling Stockholder.
(e) The Custody Agreement of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its terms.
(f) The Power of Attorney of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding instrument of such Selling Stockholder, enforceable in
accordance with its terms, and, pursuant to such Power of Attorney, such
Selling Stockholder has, among other things, authorized the Attorneys, or any
one of them, to execute and deliver on such Selling Stockholder's behalf
this Agreement and any other document that they, or any one of them, may deem
necessary or desirable in connection with the transactions contemplated
hereby and thereby and to deliver the Shares to be sold by such Selling
Stockholder pursuant to this Agreement.
(g) Upon delivery of and payment for the Shares to be sold by such
Selling Stockholder pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
(h) The execution, delivery and performance of this Agreement and
the Custody Agreement and Power of Attorney of such Selling Stockholder by or
on behalf of such Selling Stockholder, the compliance by such Selling
Stockholder with all the provisions hereof and thereof and the consummation
of the transactions contemplated hereby and thereby will not (i) require any
consent, approval, authorization or other order of, or qualification with,
any court or governmental body or agency (except such as may be required
under the securities or Blue Sky laws of the various states), (ii) conflict
with or constitute a breach of any of the terms or provisions of, or a
default under, the organizational documents of such Selling Stockholder, if
such Selling Stockholder is not an individual, or any indenture, loan
agreement, mortgage, lease or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder or any
property of such Selling Stockholder is bound or (iii) violate or conflict
with any applicable law or any rule, regulation, judgment, order or decree of
any court or any governmental body or agency having jurisdiction over such
Selling Stockholder or any property of such Selling Stockholder.
(i) Each certificate signed by or on behalf of such Selling
Stockholder and delivered to the Underwriters or counsel for the Underwriters
shall be deemed to be a representation and warranty by such Selling
Stockholder to the Underwriters as to the matters covered thereby.
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To the best of such Selling Stockholder's knowledge, the
representations and warranties of the Company set forth in Section 6 hereof
are true and correct in all material respects on and as of the date hereof.
SECTION 8. INDEMNIFICATION.
(a) The Sellers, jointly and severally, agree to indemnify and hold
harmless each Underwriter, its directors, its officers and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), from and against any and all losses, claims, damages,
liabilities and judgments (including, without limitation, any legal or other
expenses incurred in connection with investigating or defending any matter,
including any action, that could give rise to any such losses, claims,
damages, liabilities or judgments) caused by any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), the Prospectus (or any amendment or supplement
thereto) or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or judgments are caused by any such
untrue statement or omission or alleged untrue statement or omission based
upon information relating to any Underwriter furnished in writing to the
Company by such Underwriter through you expressly for use therein PROVIDED,
HOWEVER, that the foregoing indemnity agreement with respect to any
preliminary prospectus shall not inure to the benefit of any Underwriter who
failed to deliver a Prospectus, as then amended or supplemented, (so long as
the Prospectus and any amendment or supplement thereto was provided by the
Company to the several Underwriters in the requisite quantity and on a timely
basis to permit proper delivery on or prior to the Closing Date) to the
person asserting any losses, claims, damages, liabilities or judgments caused
by any untrue statement or alleged untrue statement of a material fact
contained in such preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, if such
material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person. Notwithstanding the foregoing, the
aggregate liability of any Selling Stockholder pursuant to this Section 8(a)
shall be limited to an amount equal to the total proceeds (before deducting
underwriting discounts and commissions and expenses) received by such Selling
Stockholder from the Underwriters for the sale of the Shares sold by such
Selling Stockholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, each person, if any, who controls the Company
within the
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meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
Selling Stockholder and each person, if any, who controls such Selling
Stockholder within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Sellers
to such Underwriter but only with reference to information relating to such
Underwriter furnished in writing to the Company by such Underwriter through
you expressly for use in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b)
(the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the
person against whom such indemnity may be sought (the "INDEMNIFYING PARTY")
in writing and the indemnifying party shall assume the defense of such
action, including the employment of counsel reasonably satisfactory to the
indemnified party and the payment of all fees and expenses of such counsel,
as incurred (except that in the case of any action in respect of which
indemnity may be sought pursuant to both Sections 8(a) and 8(b), the
Underwriter shall not be required to assume the defense of such action
pursuant to this Section 8(c), but may employ separate counsel and
participate in the defense thereof, but the fees and expenses of such
counsel, except as provided below, shall be at the expense of such
Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of the indemnified
party unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties
to any such action (including any impleaded parties) include both the
indemnified party and the indemnifying party, and the indemnified party shall
have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the indemnifying party (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of
the indemnified party). In any such case, the indemnifying party shall not,
in connection with any one action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for (i) the fees and expenses of more
than one separate firm of attorneys (in addition to any local
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counsel) for all Underwriters, their officers and directors and all pesons,
if any, who control any Underwriter within the meaning of either Section 15
of the Act or Section 20 of the Exchange Act, (ii) the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel)
for the Company, its directors, its officers who sign the Registration
Statement and all persons, if any, who control the Company within the meaning
of either such Section and (iii) the fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) for all Selling
Stockholders and all persons, if any, who control any Selling Stockholder
within the meaning of either such Section, and all such fees and expenses
shall be reimbursed as they are incurred. In the case of any such separate
firm for the Underwriters, their officers and directors and such control
persons of any Underwriters, such firm shall be designated in writing by
Donaldson, Lufkin & Jenrette Securities Corporation. In the case of any
such separate firm for the Company and such directors, officers and control
persons of the Company, such firm shall be designated in writing by the
Company. In the case of any such separate firm for the Selling Stockholders
and such control persons of any Selling Stockholders, such firm shall be
designated in writing by the Attorneys. The indemnifying party shall
indemnify and hold harmless the indemnified party from and against any and
all losses, claims, damages, liabilities and judgments by reason of any
settlement of any action (i) effected with its written consent or (ii)
effected without its written consent if the settlement is entered into more
than twenty business days after the indemnifying party shall have received a
request from the indemnified party for reimbursement for the fees and
expenses of counsel (in any case where such fees and expenses are at the
expense of the indemnifying party) and, prior to the date of such settlement,
the indemnifying party shall have failed to comply with such reimbursement
request. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement or compromise of, or consent to
the entry of judgment with respect to, any pending or threatened action in
respect of which the indemnified party is or could have been a party and
indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
on claims that are or could have been the subject matter of such action and
(ii) does not include a statement as to or an admission of fault, culpability
or a failure to act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section
8 is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages, liabilities or judgments referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause 8(d)(i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
8(d)(i) above but also the relative fault of the Sellers on the one hand and
the Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The
relative benefits received by the Sellers on the one hand and the
Underwriters on the other hand
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shall be deemed to be in the same proportion as the total net proceeds from
the offering (after deducting underwriting discounts and commissions, but
before deducting expenses) received by the Sellers, and the total
underwriting discounts and commissions received by the Underwriters, bear to
the total price to the public of the Shares, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the Sellers
on the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the Selling
Stockholders on the one hand or the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or judgments referred to
in the immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses incurred by such
indemnified party in connection with investigating or defending any matter,
including any action, that could have given rise to such losses, claims,
damages, liabilities or judgments. Notwithstanding the provisions of this
Section 8, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(d) are several in proportion to the respective
number of Shares purchased by each of the Underwriters hereunder and not
joint.
(e) The remedies provided for in this Section 8 are not exclusive
and shall not limit any rights or remedies which may otherwise be available
to any indemnified party at law or in equity.
(f) Each Selling Stockholder hereby designates NEON Systems, Inc,
14100 Southwest Freeway, Suite 500, Sugar Land, Texas, as its authorized
agent, upon which process may be served in any action which may be instituted
in any state or federal court in the State of New York by any Underwriter,
any director or officer of any Underwriter or any person controlling any
Underwriter asserting a claim for indemnification or contribution under or
pursuant to this Section 8, and each Selling Stockholder will accept the
jurisdiction of such court in such action,
18
<PAGE>
and waives, to the fullest extent permitted by applicable law, any defense
based upon lack of personal jurisdiction or venue. A copy of any such
process shall be sent or given to such Selling Stockholder, at the address
for notices specified in Section 12 hereof.
SECTION 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares under this
Agreement are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained
in this Agreement shall be true and correct on the Closing Date with the same
force and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York
City time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by F. Joseph Backer and John Reiland, in their
capacities as the President and Chief Executive Officer and Chief Financial
Officer of the Company, respectively, confirming the matters set forth in
Sections 6(y), 9(a) and 9(b) and that the Company has complied with all of
the agreements and satisfied all of the conditions herein contained and
required to be complied with or satisfied by the Company on or prior to the
Closing Date.
(d) Since the respective dates as of which information is given in
the Prospectus and other than as set forth in the Prospectus (exclusive of
any amendments or supplements thereto subsequent to the date of this
Agreement), (i) there shall not have occurred any change or any development
involving a prospective change in the condition, financial or otherwise, or
the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there shall not have been any change or
any development involving a prospective change in the capital stock or in the
long-term debt of the Company or any of its subsidiaries and (iii) neither
the Company nor any of its subsidiaries shall have incurred any liability or
obligation, direct or contingent, the effect of which, in any such case
described in clause 9(d)(i) or 9(d)(ii), in your judgment, is material and
adverse and, in your judgment, makes it impracticable to market the Shares on
the terms and in the manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling
Stockholder contained in this Agreement shall be true and correct on the
Closing Date with the same force and effect as if made on and as of the
Closing Date and you shall have
19
<PAGE>
received on the Closing Date a certificate dated the Closing Date from each
Selling Stockholder to such effect and to the effect that such Selling
Stockholder has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by
such Selling Stockholder on or prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing
Date, of Locke Purnell Rain Harrell counsel for the Company and the Selling
Stockholders, to the effect that:
(i) each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation and has the corporate power
and authority to carry on its business as described in the Prospectus and
to own, lease and operate its properties;
(ii) each of the Company and its subsidiaries is duly
qualified and is in good standing as a foreign corporation authorized to
do business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification, except
where the failure to be so qualified would not have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole;
(iii) all the outstanding shares of capital stock of the
Company (including the Additional Shares to be sold by the Selling
Stockholders) have been duly authorized and validly issued and are fully
paid, non-assessable and not subject to any preemptive or similar rights;
(iv) the Shares to be issued and sold by the Company hereunder
have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will
be validly issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive or similar rights;
(v) all of the outstanding shares of capital stock of each of
the Company's subsidiaries have been duly authorized and validly issued
and are fully paid and non-assessable, and are owned by the Company,
directly or indirectly through one or more subsidiaries, free and clear
of any security interest, claim, lien, encumbrance or adverse interest of
any nature;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company and by or on behalf of each Selling Stockholder;
20
<PAGE>
(vii) the authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the Prospectus;
(viii) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's knowledge
after due inquiry, pending before or contemplated by the Commission;
(ix) the statements under the captions "Risk Factors--Limited
Protection of our Proprietary Technology", "Risk Factors--Possible
Confusion with Respect to Our Name", "Risk Factors--Exposure to BMC
Software Litigation", "Business--Legal Proceedings",
"Business--Proprietary Rights", "Management--Stock Plans",
"Management--401(k) Plans", "Certain Transactions", "Description of
Capital Stock" and Underwriting" in the Prospectus and Items 14 and 15 of
Part II of the Registration Statement, insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings;
(x) neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws and, to the best of such
counsel's knowledge after due inquiry, neither the Company nor any of its
subsidiaries is in default in the performance of any obligation,
agreement, covenant or condition contained in any indenture, loan
agreement, lease or other agreement or instrument that is material to the
Company and its subsidiaries, taken as a whole, to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound;
(xi) the execution, delivery and performance of this Agreement
by the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby will
not (A) require any consent, approval, authorization or other order of,
or qualification with, any court or governmental body or agency (except
such as may be required under the securities or Blue Sky laws of the
various states), (B) conflict with or constitute a breach of any of the
terms or provisions of, or a default under, the charter or by-laws of the
Company or any of its subsidiaries or any indenture, loan agreement,
lease or other agreement or instrument that is material to the Company
and its subsidiaries, taken as a whole, to which the Company or any of
its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound, (C) violate or
conflict with any applicable law or any rule, regulation, judgment, order
or decree of any court or any governmental body or agency having
jurisdiction over the Company, any of its subsidiaries or their
respective property or (D) result
21
<PAGE>
in the suspension, termination or revocation of any Authorization of
the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization;
(xii) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which the
Company or any of its subsidiaries is or could be a party or to which any
of their respective property is or could be subject that are required to
be described in the Registration Statement or the Prospectus and are not
so described, or of any statutes, regulations, contracts or other
documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration
Statement that are not so described or filed as required;
(xiii) neither the Company nor any of its subsidiaries has
violated any Environmental Law, any provisions of the Employee Retirement
Income Security Act of 1974, as amended, or any provisions of the Foreign
Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate,
would not have a material adverse effect on the business, prospects,
financial condition or results of operation of the Company and its
subsidiaries, taken as a whole;
(xiv) each of the Company and its subsidiaries has such
Authorizations of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations
and all courts and other tribunals, including, without limitation, under
any applicable Environmental Laws, as are necessary to own, lease,
license and operate its respective properties and to conduct its
business, except where the failure to have any such Authorization or to
make any such filing or notice would not, singly or in the aggregate,
have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole; each such Authorization is valid and in full force and
effect and each of the Company and its subsidiaries is in compliance with
all the terms and conditions thereof and with the rules and regulations
of the authorities and governing bodies having jurisdiction with respect
thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which allows
or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or, after
notice or lapse of time or both, would result in any other impairment of
the rights of the holder of any such Authorization; and such
Authorizations contain no restrictions that are burdensome to the Company
or any of its subsidiaries; except where such failure to be valid and in
full force and effect or to be in compliance, the occurrence of any such
event or the presence of any such restriction
22
<PAGE>
would not, singly or in the aggregate, have a material adverse effect
on the business, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole;
(xv) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be, an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended;
(xvi) to the best of such counsel's knowledge after due
inquiry, there are no contracts, agreements or understandings between the
Company and any person, other than Peter Schaeffer and JMI Equity Fund,
L.P. (each of whose rights have been effectively satisfied or waived),
granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the
Shares registered pursuant to the Registration Statement;
(xvii) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and
other financial data included therein as to which no opinion need be
expressed) comply as to form in all material respects with the Act, (B)
such counsel has no reason to believe that at the time the Registration
Statement became effective or on the date of this Agreement, the
Registration Statement and the prospectus included therein (except for
the financial statements and other financial data as to which such
counsel need not express any belief) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading and
(C) such counsel has no reason to believe that the Prospectus, as amended
or supplemented, if applicable (except for the financial statements and
other financial data, as aforesaid) contains any untrue statement of a
material fact or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(xviii) each Selling Stockholder is the lawful owner of the
Shares to be sold by such Selling Stockholder pursuant to this Agreement
and has good and clear title to such Shares, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever;
(xix) each Selling Stockholder has full legal right, power and
authority, and all authorization and approval required by law, to enter
into this Agreement and the Custody Agreement and the Power of Attorney
of such Selling Stockholder and to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder in the manner provided
herein and therein;
23
<PAGE>
(xx) the Custody Agreement of each Selling Stockholder has
been duly authorized, executed and delivered by such Selling Stockholder
and is a valid and binding agreement of such Selling Stockholder,
enforceable in accordance with its terms;
(xxi) the Power of Attorney of each Selling Stockholder has
been duly authorized, executed and delivered by such Selling Stockholder
and is a valid and binding instrument of such Selling Stockholder,
enforceable in accordance with its terms, and, pursuant to such Power of
Attorney, such Selling Stockholder has, among other things, authorized
the Attorneys, or any one of them, to execute and deliver on such Selling
Stockholder's behalf this Agreement and any other document they, or any
one of them, may deem necessary or desirable in connection with the
transactions contemplated hereby and thereby and to deliver the Shares to
be sold by such Selling Stockholder pursuant to this Agreement;
(xxii) upon delivery of and payment for the Shares to be sold by
each Selling Stockholder pursuant to this Agreement, good and clear title
to such Shares will pass to the Underwriters, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever; and
(xxiii) the execution, delivery and performance of this Agreement
and the Custody Agreement and Power of Attorney of each Selling
Stockholder by such Selling Stockholder, the compliance by such Selling
Stockholder with all the provisions hereof and thereof and the
consummation of the transactions contemplated hereby and thereby will not
(A) require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except
such as may be required under the securities or Blue Sky laws of the
various states), (B) conflict with or constitute a breach of any of the
terms or provisions of, or a default under, the organizational documents
of such Selling Stockholder, if such Selling Stockholder is not an
individual, or any indenture, loan agreement, mortgage, lease or other
agreement or instrument to which such Selling Stockholder is a party or
by which any property of such Selling Stockholder is bound or (C) violate
or conflict with any applicable law or any rule, regulation, judgment,
order or decree of any court or any governmental body or agency having
jurisdiction over such Selling Stockholder or any property of such
Selling Stockholder.
The opinion of Locke Purnell Rain Harrell described in Section 9(f) above
shall be rendered to you at the request of the Company and the Selling
Stockholders and shall so state therein.
(g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Brobeck, Phleger & Harrison LLP, counsel for the Underwriters,
24
<PAGE>
as to the matters referred to in Sections 9(f)(iv), 9(f)(vi) (but only with
respect to the Company), 9(f)(ix) (but only with respect to the statements
under the captions "Description of Capital Stock" and "Underwriting") and
9(f)(xvii).
In giving such opinions with respect to the matters covered by Section
9(f)(xvii), counsel for the Company and the Selling Stockholders and counsel
for the Underwriters may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification except as specified.
(h) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from KPMG Peat Marwick,
LLP, independent public accountants, containing the information and
statements of the type ordinarily included in accountants' "comfort letters"
to Underwriters with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectus.
(i) The Company shall have delivered to you the agreements
specified in Section 2 hereof which agreements shall be in full force and
effect on the Closing Date.
(j) The Shares shall have been duly listed for quotation on the
Nasdaq National Market.
(k) The Company and the Selling Stockholders shall not have failed
on or prior to the Closing Date to perform or comply with any of the
agreements herein contained and required to be performed or complied with by
the Company or the Selling Stockholders, as the case may be, on or prior to
the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents (including, without limitation, legal opinions
and comfort letters) as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance or sale of such
Additional Shares by the Sellers.
SECTION 10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This
Agreement shall become effective upon the execution and delivery of this
Agreement by the parties hereto.
This Agreement may be terminated at any time on or prior to the
Closing Date by you by written notice to the Sellers if any of the following
has occurred: (i) any outbreak or escalation of hostilities or other
national or international calamity or crisis or change in economic conditions
or in the financial markets of
25
<PAGE>
the United States or elsewhere that, in your judgment, is material and
adverse and, in your judgment, makes it impracticable to market the Shares on
the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other
instruments on the New York Stock Exchange, the American Stock Exchange, the
Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the
Chicago Board of Trade or the Nasdaq National Market or limitation on prices
for securities or other instruments on any such exchange or the Nasdaq
National Market, (iii) the suspension of trading of any securities of the
Company on any exchange or in the over-the-counter market, (iv) the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of any court or other governmental
authority which in your opinion materially and adversely affects, or will
materially and adversely affect, the business, prospects, financial condition
or results of operations of the Company and its subsidiaries, taken as a
whole, (v) the declaration of a banking moratorium by either federal or New
York State authorities or (vi) the taking of any action by any federal, state
or local government or agency in respect of its monetary or fiscal affairs
which in your opinion has a material adverse effect on the financial markets
in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they
have agreed to purchase hereunder on such date and the aggregate number of
Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not
more than one-tenth of the total number of Firm Shares or Additional Shares,
as the case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion
which the number of Firm Shares set forth opposite its name in Schedule I
bears to the total number of Firm Shares which all the non-defaulting
Underwriters have agreed to purchase, or in such other proportion as you may
specify, to purchase the Firm Shares or Additional Shares, as the case may
be, which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; PROVIDED that in no event shall the number
of Firm Shares or Additional Shares, as the case may be, which any
Underwriter has agreed to purchase pursuant to Section 2 hereof be increased
pursuant to this Section 10 by an amount in excess of one-ninth of such
number of Firm Shares or Additional Shares, as the case may be, without the
written consent of such Underwriter. If on the Closing Date any Underwriter
or Underwriters shall fail or refuse to purchase Firm Shares and the
aggregate number of Firm Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Firm Shares to be purchased
by all Underwriters and arrangements satisfactory to you, the Company and the
Selling Stockholders for purchase of such Firm Shares are not made within 48
hours after such default, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter, the Company or the Selling
Stockholders. In any such case which does not result in termination of this
Agreement, either you or the Sellers shall
26
<PAGE>
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. If, on an Option Closing Date, any Underwriter or Underwriters
shall fail or refuse to purchase Additional Shares and the aggregate number
of Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Additional Shares to be purchased on
such date, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase such Additional Shares or
(ii) purchase not less than the number of Additional Shares that such
non-defaulting Underwriters would have been obligated to purchase on such
date in the absence of such default. Any action taken under this paragraph
shall not relieve any defaulting Underwriter from liability in respect of any
default of any such Underwriter under this Agreement.
SECTION 11. AGREEMENTS OF THE SELLING STOCKHOLDERS. Each Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Stockholder to the Underwriters.
(b) To do and perform all things to be done and performed by such
Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares to be sold by
such Selling Stockholder pursuant to this Agreement.
SECTION 12. MISCELLANEOUS. Notices given pursuant to any provision
of this Agreement shall be addressed as follows: (i) if to the Company, to
NEON Systems, Inc., 14100 Southwest Freeway, Suite 500, Sugar Land, Texas
77478, (ii) if to the Selling Stockholders, to [NAME OF ATTORNEY-IN-FACT] c/o
[ADDRESS OF ATTORNEY-IN-FACT] and (iii) if to any Underwriter or to you, to
you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue,
New York, New York 10172, Attention: Syndicate Department, or in any case to
such other address as the person to be notified may have requested in
writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and
the several Underwriters set forth in or made pursuant to this Agreement
shall remain operative and in full force and effect, and will survive
delivery of and payment for the Shares, regardless of (i) any investigation,
or statement as to the results thereof, made by or on behalf of any
Underwriter, the officers or directors of any Underwriter, any person
controlling any Underwriter, the Company, the officers or directors of the
Company, any person controlling the Company, any Selling Stockholder or any
person controlling such Selling Stockholder, (ii) acceptance of
27
<PAGE>
the Shares and payment for them hereunder and (iii) termination of this
Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally,
to reimburse the several Underwriters for all out-of-pocket expenses
(including the fees and disbursements of counsel) incurred by them.
Notwithstanding any termination of this Agreement, the Company shall be
liable for all expenses which it has agreed to pay pursuant to Section 5(i)
hereof. The Sellers also agree, jointly and severally, to reimburse the
several Underwriters, their directors and officers and any persons
controlling any of the Underwriters for any and all fees and expenses
(including, without limitation, the fees disbursements of counsel) incurred
by them in connection with enforcing their rights hereunder (including,
without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the Selling
Stockholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement,
and no other person shall acquire or have any right under or by virtue of
this Agreement. The term "successors and assigns" shall not include a
purchaser of any of the Shares from any of the several Underwriters merely
because of such purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
28
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
NEON SYSTEMS, INC
By:
--------------------------------
F. Joseph Backer
President and Chief Executive
Officer
THE SELLING STOCKHOLDERS
NAMED IN SCHEDULE II AND III
HERETO, ACTING
SEVERALLY
By:
--------------------------------
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
HAMBRECHT & QUIST LLC
CIBC OPPENHEIMER CORP.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
--------------------------------
29
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
- ------------ ---------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities
Corporation
Hambrecht & Quist LLC
CIBC Oppenheimer Corp.
---------------
Total
---------------
---------------
</TABLE>
<PAGE>
SCHEDULE II
Selling Stockholders
--------------------
<TABLE>
<CAPTION>
Number of Firm
Name Shares Being Sold
- ---- -----------------
<S> <C>
---------------
Total
---------------
---------------
</TABLE>
<PAGE>
SCHEDULE III
Selling Stockholders
---------------------
<TABLE>
<CAPTION>
Number of Additional
Name Shares Being Sold
- ---- --------------------
<S> <C>
---------------
Total
---------------
---------------
</TABLE>
<PAGE>
Annex I
[Insert names of security holders of the Company who will be required to
sign lock ups]
ii
<PAGE>
FACE
COMMON STOCK PAR VALUE $.01 PER SHARE
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
C
THIS CERTIFICATE IS TRANSFERABLE
IN NEW YORK, NEW YORK AND
RIDGEFIELD PARK, NEW JERSEY
CUSIP 640509 10 5
SEE REVERSE FOR
CERTAIN DEFINITIONS
This Certifies that is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01 PER
SHARE, OF
NEON Systems, Inc.
(hereinafter referred to as the "Corporation"), transferable on the books of
the Corporation by the holder hereof in person or by duly authorized attorney
upon surrender of this Certificate properly endorsed. This Certificate and
the shares represented hereby are issued and shall be held subject to all of
the provisions of the Certificate of Incorporation and Bylaws, as amended
from time to time, of the Corporation (copies of which are on file with the
Transfer Agent), to all of which the holder, by acceptance hereof, assents.
This Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar. IN WITNESS WHEREOF, the Corporation has caused
this Certificate to be signed by its duly authorized officers and its
facsimile seal to be hereunto affixed. Dated:
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
SECRETARY
COUNTERSIGNED AND REGISTERED:
CHASEMELLON Shareholder Services, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
BACK
NEON Systems, Inc.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof of the Corporation, and the qualifications, limitations or
restrictions of such preferences and/or rights. Any such request may be made
to the Corporation or the Transfer Agent.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM
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(214) 740-8416
February 10, 1999
NEON Systems, Inc.
14100 Southwest Freeway
Suite 500
Sugar Land, TX 77478
Re: Registration Statement on Form S-1 (No. 333-69651)
Dear Sirs:
We have acted as counsel for NEON Systems, Inc., a Delaware corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended (the "Act"), of an aggregate of two million eight hundred
seventy-five thousand (2,875,000) shares of the Company's Common Stock, $.01 par
value per share (the "Securities"). We have examined such documents and
questions of law as we have deemed necessary to render the opinion expressed
below.
Based upon the foregoing, we are of the opinion that the Securities, when
issued and sold as described in the above-referenced Registration Statement,
will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm in the prospectus under the caption
"Legal Matters." In giving this consent, we do not thereby admit that we come
within the category of persons whose consent is required under Section 7 of the
Act or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
Sincerely,
/s/ Locke Liddell & Sapp LLP
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EXHIBIT 10.3
NEON SYSTEMS, INC.
1999 LONG-TERM INCENTIVE PLAN
I. GENERAL
1. PURPOSE. The NEON Systems, Inc. 1999 Long-Term Incentive Plan (the
"1999 Plan") has been established by NEON Systems, Inc. (the "Company") to:
(a) Attract and retain key executive and managerial employees of the
Company;
(b) Motivate participating employees by means of appropriate
incentives, to achieve long-range goals;
(c) Provide incentive compensation opportunities which are
competitive with those of other major corporations; and
(d) Further identify Participants' interests with those of the
Company's other stockholders through compensation alternatives based on the
Company's common stock;
and thereby promote the long-term financial interest of the Company and its
Subsidiaries, including the growth in value of the Company's equity and
enhancement of long-term stockholder return.
2. EFFECTIVE DATE. Subject to the approval of the holders of a majority
of the Stock of the Company, the 1999 Plan shall be effective as of January 1,
1999; PROVIDED, HOWEVER, that awards made under the 1999 Plan prior to such
approval of the 1999 Plan by stockholders of the Company are contingent on such
approval of the 1999 Plan by the stockholders of the Company and shall be null
and void if approval of the stockholders of the Company is withheld. The 1999
Plan shall terminate on December 31, 2008.
3. DEFINITIONS. The following definitions are applicable to the 1998
Plan.
"Board" means the Board of Directors of the Company.
"Change of Control" has the meaning ascribed to it in Part I.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board.
"Disabled" means the inability of a Participant, by reason of a physical or
mental impairment, to engage in any substantial gainful activity, of which the
Board shall be the sole judge.
"Fair Market Value" of any Stock means (a) if the Stock is listed on a
national securities exchange, the closing price on the Stock on a given date;
(b) if the Stock is traded on an exchange or
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market in which prices are reported on a bid and asked price, the average of the
mean between the bid and asked price for the Stock on a given date; and (c) if
the Stock is not listed on a national securities exchange nor traded on the
over-the-counter market, such value as the Committee, in good faith, shall
determine.
"1934 Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute.
"Option Date" means, with respect to any Stock Option, the date on which
the Stock Option is awarded under the 1999 Plan.
"Participant" means any regular full-time employee of the Company or any
Subsidiary (meaning an employee who works 30 hours or more per week) who is
selected by the Committee to participate in the 1999 Plan.
"Permitted Transferees" means a member of an optionee's immediate family,
trusts for the benefit of such immediate family members, and partnerships in
which the optionee and/or such immediate family members are the only partners,
provided that no consideration is provided for the transfer. Immediate family
members shall include an optionee's spouse, descendants (children, grandchildren
and more remote descendants), and shall include step-children and relationships
arising from legal adoption.
"Related Company" means any corporation during any period in which it is a
Subsidiary, or during any period in which it directly or indirectly owns 50% or
more of the total combined voting power of all classes of stock of the Company
that are entitled to vote.
"Restricted Period" has the meaning ascribed to it in Part V.
"Restricted Stock" has the meaning ascribed to it in Part V.
"Retirement" means (i) termination of employment in accordance with the
retirement procedures set by the Company from time to time; (ii) termination of
employment because a participant becomes Disabled; or (iii) termination of
employment voluntarily with the consent of the Company (of which the Board shall
be the sole judge).
"Stock" means NEON Systems, Inc. Common Stock.
"Stock Appreciation Right" means the right of a holder of a Stock Option to
receive Stock or cash as described in Part IV.
"Stock Option" means the right of a Participant to purchase Stock pursuant
to an Incentive Stock Option or Non-Qualified Option awarded pursuant to the
provisions of the 1999 Plan.
"Subsidiary" means any corporation during any period of which 50% or more
of the total combined voting power of all classes of stock entitled to vote is
owned, directly or indirectly, by the Company.
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4. ADMINISTRATION. The authority to manage and control the operation and
administration of the 1999 Plan shall be vested in the Board. Subject to the
provisions of the 1999 Plan, the Board will have authority to select employees
to receive awards of Stock Options, with or without tandem Stock Appreciation
Rights, Restricted Stock and/or Performance Units, to determine the time or
times of receipt, to determine the types of awards and the number of shares
covered by the awards, to establish the terms, conditions, performance criteria,
restrictions, and other provisions of such awards, to determine the number and
value of Performance Units awarded and earned, and to amend, modify or suspend
awards. In making such award determinations, the Board may take into account
the nature of services rendered by the respective employee, his or her present
and potential contribution to the Company's success and such other factors as
the Board deems relevant. The Board is authorized to interpret the 1999 Plan,
to establish, amend, and rescind any rules and regulations relating to the 1999
Plan, to determine the terms and provisions of any agreements made pursuant to
the 1999 Plan, to modify such agreements, and to make all other determinations
that may be necessary or advisable for the administration of the 1999 Plan.
With respect to persons subject to Section 16 of the 1934 Act, transactions
under the 1999 Plan are intended to comply with all applicable conditions of
Rule 16b-3 or its successor rule or statute under the 1934 Act. To the extent
any provision of the 1999 Plan or action by the Board of Directors or the
Committee fails to so comply, it shall be deemed null and void, to the extent
permitted by law.
The Board may delegate any or all of its authority, powers and discretion
under this 1999 Plan to the Committee, and the Board may revest any or all such
authority, powers and discretion in itself at any time. If the 1999 Plan is
delegated, the Committee shall consist solely of two or more Non-Employee
Directors (as defined in Rule 16b-3 under the 1934 Act) until such time as such
other requirements are imposed by applicable law. If appointed, the Committee
shall function as follows: A majority of the Committee shall constitute a
quorum, and the acts of a majority of the members present at any meeting at
which a quorum is present, or acts approved in writing by all members of the
Committee, shall be the acts of the Committee, unless provisions to the contrary
are embodied in the Company's Bylaws or resolutions duly adopted by the Board.
All actions taken and decisions and determinations made by the Board or the
Committee pursuant to the Plan shall be binding and conclusive on all persons
interested in the Plan. No member of the Board or the Committee shall be liable
for any action or determination taken or made in good faith with respect to the
Plan.
To the extent that the Board determines that it is desirable to qualify
Stock Options granted hereunder as "performance-based compensation" within the
meaning of Section 162(m) of the Code, the 1999 Plan shall be administered
by a committee of two or more "outside directors" within the meaning of
Section 162(m) of the Code.
5. PARTICIPATION. Subject to the terms and conditions of the 1999 Plan,
the Board shall determine and designate, from time to time, the full-time
employees of the Company and/or its Subsidiaries who will participate in the
1999 Plan. In the discretion of the Board, a Participant may be awarded Stock
Options with or without tandem Stock Appreciation Rights, Restricted Stock or
Performance Units or any combination thereof, and more than one award may be
granted to a Participant. Except as otherwise agreed to by the Company and the
Participant, any award under the 1999 Plan shall not affect any previous award
to the Participant under the 1999 Plan or any other plan maintained by the
Company or its Subsidiaries.
6. SHARES SUBJECT TO THE 1999 PLAN. The shares of Stock with respect to
which awards may be made under the 1999 Plan shall be either authorized and
unissued shares or issued and outstanding shares (including, in the discretion
of the Board, shares purchased in the market). Subject to the provisions of
paragraph I.10, the number of shares of Stock available under the 1999 Plan for
the grant of Stock Options with or without tandem Stock Appreciation
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Rights, Performance Units and Restricted Stock shall not exceed 2,000,000 shares
in the aggregate. If, for any reason, any award under the 1999 Plan or any
portion of the award, shall expire, terminate or be forfeited or cancelled, or
be settled in cash pursuant to the terms of the 1999 Plan and, therefore, any
such shares are no longer distributable under the award, such shares of Stock
shall again be available for award under the 1999 Plan. The maximum number of
shares of Stock with respect to which options or rights may be granted each
calendar year to each employee shall be 100,000.
7. COMPLIANCE WITH APPLICABLE LAWS AND WITHHOLDING OF TAXES.
Notwithstanding any other provision of the 1999 Plan, the Company shall have no
liability to issue any shares of Stock under the 1999 Plan unless such issuance
would comply with all applicable laws and the applicable requirements of any
securities exchange or similar entity. Prior to the issuance of any shares of
Stock under the 1999 Plan, the Company may require a written statement that the
recipient is acquiring the shares for investment and not for the purpose or with
the intention of distributing the shares. All awards and payments under the
1999 Plan are subject to withholding of all applicable taxes, which withholding
obligations may be satisfied, with the consent of the Board, through the
surrender of shares of Stock which the Participant already owns, or to which a
Participant is otherwise entitled under the 1999 Plan. The Company shall have
the right to deduct from all amounts paid in cash in consequence of the exercise
of a Stock Option or Stock Appreciation Right or in connection with an award of
Restricted Stock or Performance Units under the 1999 Plan any taxes required by
law to be withheld with respect to such cash payments. Where an employee or
other person is entitled to receive shares of Stock pursuant to the exercise of
a Stock Option or a Stock Appreciation Right or with respect to an award of
Performance Units pursuant to the 1999 Plan, the Company shall have the right to
require the employee or such other person to pay to the Company the amount of
any taxes that the Company is required to withhold with respect to such shares,
or, in lieu thereof, to retain, or sell without notice, a sufficient number of
such shares to cover the amount required to be withheld. Upon the disposition
(within the meaning of Code Section 424(c)) of shares of Stock acquired pursuant
to the exercise of an Incentive Stock Option prior to the expiration of the
holding period requirements of Code Section 422(a)(1), the employee shall be
required to give notice to the Company of such disposition and the Company shall
have the rght to require the employee to pay to the Company the amount of any
taxes that are required by law to be withheld with respect to such disposition.
Upon termination of the Restricted Period with respect to an award of Restricted
Stock (or such earlier time, if any, as an election is made by the employee
under Code Section 83(b), or any successor provisions thereto, to include the
value of such shares in taxable income), the Company shall have the right to
require the employee or other person receiving shares of Stock in respect of
such Restricted Stock award to pay to the Company the amount of taxes that the
Company is required to withhold with respect to such shares of Stock or, in lieu
thereof, to retain or sell without notice a sufficient number of shares of Stock
held by it to cover the amount required to be withheld. The Company shall have
the right to deduct from all dividends paid with respect to Restricted Stock the
amount of taxes that the Company is required to withhold with respect to such
dividend payments.
8. TRANSFERABILITY. Incentive Stock Options with or without tandem Stock
Appreciation Rights, Performance Units, and, during the period of restriction,
Restricted Stock awarded under the 1999 Plan are not transferable except as
designated by the Participant by will or by the laws of descent and
distribution. Incentive Stock Options may be exercised during the lifetime of
the Participant only by the Participant or his guardian or legal representative.
If
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provided in the option agreement, Non-Qualified Stock Options with or without
tandem Stock Appreciation Rights may be transferred by a Participant to
Permitted Transferees, and may be exercised either by the Participant, his
guardian or legal representative and as otherwise permitted under the laws of
descent and distribution, or by a Permitted Transferee.
9. EMPLOYEE AND STOCKHOLDER STATUS. The 1999 Plan does not constitute a
contract of employment, and selection as a Participant will not give any
employee the right to be retained in the employ of the Company or any
Subsidiary. No award under the 1999 Plan shall confer upon the holder thereof
any right as a stockholder of the Company prior to the date on which he fulfills
all service requirements and other conditions for receipt of shares of Stock.
If the redistribution of shares is restricted pursuant to paragraph I.7,
certificates representing such shares may bear a legend referring to such
restrictions.
10. ADJUSTMENTS TO NUMBER OF SHARES SUBJECT TO THE 1999 PLAN. In the
event of any change in the outstanding shares of Stock of the Company by reason
of any stock dividend, split, spinoff, recapitalization, merger, consolidation,
combination, extraordinary dividend, exchange of shares or other similar change,
the aggregate number of shares of Stock with respect to which awards may be made
under the 1999 Plan, the terms and the number of shares of any outstanding Stock
Options, Stock Appreciation Rights, Restricted Stock and Performance Units, and
the purchase price of a share of Stock under Stock Options, may be equitably
adjusted by the Board in its sole discretion.
11. BUSINESS COMBINATIONS. In addition to the rights and obligations of
the Committee to modify, adjust or accelerate exercisability of outstanding
options, in the event that, while any options, Stock Appreciation Rights,
Restricted Shares or Performance Units are outstanding under the 1999 Plan,
there shall occur (a) a merger or consolidation of the Company with or into
another corporation in which the Company shall not be the surviving corporation
(for purposes of this paragraph 11, the Company shall not be deemed the
surviving corporation in any such transaction if, as the result thereof, it
becomes a wholly-owned subsidiary of another corporation), (b) a dissolution of
the Company, or (c) a transfer of all or substantially all of the assets or
shares of stock of the Company in one transaction or a series of related
transactions to one or more other persons or entities (any of the foregoing
events as described in (a)-(c) above, a "Change of Control") then, with respect
to each option, Stock Appreciation Right and share of Restricted Stock
outstanding immediately prior to the consummation of such transaction and
without the necessity of any action by the Committee:
(i) If provision is made in writing in connection with such
transaction for the continuance and/or assumption of the options, rights,
Restricted Shares and Performance Units granted under the 1999 Plan, or the
substitution for such options, rights, Restricted Shares and Performance
Units of new options, rights, Restricted Shares and Performance Units, with
appropriate adjustment as to the number and kind of shares or other
securities deliverable with respect thereto, the options, rights,
Restricted Shares and Performance Units granted under the 1998 Plan, or the
new options, rights, Restricted Shares and Performance Units substituted
therefor, shall continue, subject to such adjustment, in the manner and
under the terms provided in the respective agreements.
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(ii) In the event provision is not made in connection with such
transaction for the continuance and/or assumption of the options, rights,
Restricted Shares and Performance Units granted under the 1999 Plan, or for
the substitution of equivalent options, rights and awards, then (A) each
holder of an outstanding option shall be entitled, immediately prior to the
effective date of such transaction, to purchase the full number of shares
that he or she would otherwise have been entitled to purchase during the
entire remaining term of the option; (B) the holder of any right shall be
entitled, immediately prior to the effective date of such transaction, to
exercise such right to the extent the related option is or becomes
exercisable at such time in accordance with its terms; (C) the recipient of
any Performance Unit shall be entitled, immediately prior to the effective
date of such transaction, to receive all remaining values under such unit;
(D) all restrictions on any award of Restricted Shares shall lapse, and (E)
any restriction or risk of forfeiture imposed under the 1999 Plan shall
lapse immediately prior to the effective date of such transaction. The
unexercised portion of any option or right shall be deemed cancelled and
terminated as of the effective date of such transaction.
12. AGREEMENT WITH COMPANY. At the time of any awards under the 1999
Plan, the Board will require a Participant to enter into an agreement with the
Company in a form specified by the Board, agreeing to the terms and conditions
of the 1999 Plan and to such additional terms and conditions, not inconsistent
with the 1999 Plan, as the Board may, in its sole discretion, prescribe.
13. AMENDMENT AND TERMINATION OF 1999 PLAN. Subject to the following
provisions of this paragraph 13, the Board may at any time and in any way amend,
suspend or terminate the 1999 Plan. No amendment of the 1999 Plan and, except
as provided in paragraph I.10, no action by the Board shall, without further
approval of the stockholders of the Company, increase the total number of shares
of Stock with respect to which awards may be made under the 1999 Plan,
materially increase the benefits accruing to Participants under the 1999 Plan or
materially modify the requirements as to eligibility for participation in the
1999 Plan, if stockholder approval of such amendment is a condition of
Securities and Exchange Commission Rule 16b-3 or its successor rule or statute,
the Code or any exchange or market system on which the Stock is listed at the
time such amendment is adopted. No amendment, suspension or termination of the
1998 Plan shall alter or impair any Stock Option with or without tandem Stock
Appreciation Right, share of Restricted Stock or Performance Unit previously
awarded under the 1999 Plan without the consent of the holder thereof.
II. INCENTIVE STOCK OPTIONS
1. DEFINITION. The award of an Incentive Stock Option under the 1999
Plan entitles the Participant to purchase shares of Stock at a price fixed at
the time the option is awarded, subject to the following terms of this Part II.
2. ELIGIBILITY. The Board shall designate the Participants to whom
Incentive Stock Options, as described in section 422(b) of the Code or any
successor section thereto, are to be awarded under the 1999 Plan and shall
determine the number of option shares to be offered to each of them. Incentive
Stock Options may be awarded only to employees. In no event shall the
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aggregate Fair Market Value (determined at the time the option is awarded) of
Stock with respect to which Incentive Stock Options are exercisable for the
first time by an individual during any calendar year (under all plans of the
Company and all Related Companies) exceed $100,000.
3. PRICE. The purchase price of a share of Stock under each Incentive
Stock Option shall be determined by the Board, provided, however, that in no
event shall such price be less than the greater of (a) 100% of the Fair Market
Value of a share of Stock as of the Option Date (or 110% of such Fair Market
Value if the holder of the option owns stock possessing more than 10% of the
combined voting power of all classes of stock of the Company or any Subsidiary)
or (b) the par value of a share of Stock on such date. To the extent provided
by the Board, the full purchase price of each share of Stock purchased upon the
exercise of any Incentive Stock Option shall be paid in cash or in shares of
Stock (valued at Fair Market Value as of the day of exercise), or in any
combination thereof, at the time of such exercise and, as soon as practicable
thereafter, a certificate representing the shares so purchased shall be
delivered to the person entitled thereto.
4. EXERCISE. Each Incentive Stock Option shall become and be exercisable
at such time or times and during such period or periods, in full or in such
installments as may be determined by the Board at the Option Date. In addition,
if permitted by the Board or the terms of the agreement evidencing such Stock
Option, Participants may elect to pay the purchase price of shares of Stock
purchased upon the exercise of Incentive Stock Options in cash or through the
actual or constructive delivery at the time of such exercise of shares of Stock
(valued at Fair Market Value as of the day of exercise) owned by the
Participant, or any combination thereof, equivalent to the purchase price of
such Incentive Stock Options. A Participant's payment of the purchase price in
connection with the exercise of an Incentive Stock Option through delivery of
shares of Stock (the "ISO Stock") that were acquired through the exercise of an
Incentive Stock Option and that have not been held for more than one year will
be considered a disposition (within the meaning of Code Section 424(c)) of the
ISO Stock, resulting in the disqualification of the ISO Stock from treatment as
an incentive stock option under Code Section 422, and the Participant's
recognition of ordinary income. Participants should consult with their tax
advisors prior to electing to exercise an Incentive Stock Option by this
method.
5. OPTION EXPIRATION DATE. The "Expiration Date" with respect to an
Incentive Stock Option or any portion thereof awarded to a Participant under the
1999 Plan means the earliest of:
(a) the date that is 10 years after the date on which the Incentive
Stock Option is awarded (or, if the Participant owns stock possessing more
than 10% of the combined voting power of all classes of stock of the
Company or any Subsidiary, the date that is five years after the date on
which the Incentive Stock Option is awarded);
(b) the date established by the Board at the time of the award;
(c) the date that is one year after the Participant's employment with
the Company and all Related Companies is terminated by reason of the
Participant becoming Disabled or by reason of the Participant's death; or
(d) the date that is ninety (90) days after the Participant's
employment with the Company and all Related Companies is terminated by
reasons other than death or becoming Disabled.
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All rights to purchase shares of Stock pursuant to an Incentive Stock Option
shall cease as of such option's Expiration Date.
III. NON-QUALIFIED STOCK OPTIONS
1. DEFINITION. The award of a Non-Qualified Stock Option under the 1999
Plan entitles the Participant to purchase shares of Stock at a price fixed at
the time the option is awarded, subject to the following terms of this Part III.
2. ELIGIBILITY. The Board shall designate the Participants to whom
Non-Qualified Stock Options are to be awarded under the 1999 Plan and shall
determine the number of option shares to be offered to each of them.
3. PRICE. The purchase price of a share of Stock under each
Non-Qualified Stock Option shall be determined by the Board; provided,
however, that in no event shall such price be less than 50% of the Fair
Market Value of a share of Stock as of the Option Date.
4. EXERCISE. Each Non-Qualified Stock Option shall become and be
exercisable at such time or times and during such period or periods, in full
or in such installments as may be determined by the Board at the Option Date.
To the extent provided by the Board, the full purchase price of each share of
Stock purchased upon the exercise of any Non-Qualified Stock Option shall be
paid in cash or in shares of Stock (valued at Fair Market Value as of the day
of exercise), or in any combination thereof, at the time of such exercise
and, as soon as practicable thereafter, a certificate representing the shares
so purchased shall be delivered to the person entitled thereto. In addition,
if permitted by the Board or the terms of the agreement evidencing such Stock
Option, Participants may elect to pay the purchase price of shares of Stock
purchased upon the exercise of Non-Qualified Stock Options in cash or through
the constructive delivery at the time of such exercise of shares of Stock
(valued at Fair Market Value as of the day of exercise) owned by the
Participant, or any combination thereof, equivalent to the purchase price of
such Non-Qualified Stock Options, and, as soon as practicable thereafter, a
certificate representing the net number of shares so purchased shall be
delivered to the person entitled thereto. Participants also may elect to
pay, if permitted by the Board or the terms of the agreement evidencing such
Stock Option, the purchase price, in whole or in part, of shares of Stock
purchased upon the exercise of Non-Qualified Stock Options through the
Company's withholding of shares of Stock (valued at Fair Market Value as of
the day of exercise) that would otherwise by issuable upon exercise of such
options equivalent to the purchase price of such Non-Qualified Stock Options
and, as soon as practicable thereafter, a certificate representing the net
number of shares so purchased shall be delivered to the person entitled
thereto. In addition, if permitted by the Board or the terms of the
agreement evidencing such Stock Option, Participants may elect to pay the
purchase price of shares of Stock purchased upon the exercise of
Non-Qualified Stock Options by (a) delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to promptly deliver
to the Company the amount of sale or loan proceeds required to pay the
exercise price; (b) authorizing the Company to retain from the total number
of Shares as to which the Stock Option is exercised that number of Shares
having a Fair Market Value on the date of exercise; or (c) any
combination of the methods of payment described in this paragraph.
5. OPTION EXPIRATION DATE. The "Expiration Date" with respect to a
Non-Qualified Stock Option or any portion thereof awarded to a Participant under
the 1999 Plan means the earliest of:
(a) the date established by the Board at the time of the award;
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(b) the date that is one year after the Participant's employment with
the Company and all Related Companies is terminated by reason of the
Participant becoming Disabled or by reason of the Participant's death; or
(c) the date that is one (1) year after the Participant's employment
with the Company and all Related Companies is terminated by reasons other
than death or becoming Disabled.
All rights to purchase shares of Stock pursuant to a Non-Qualified Stock Option
shall cease as of such option's Expiration Date.
IV. STOCK APPRECIATION RIGHTS
1. DEFINITION. A Stock Appreciation Right is an award that may be
granted in tandem with a Non-Qualified Stock Option or Incentive Stock Option,
and entitles the holder to receive an amount equal to the difference between the
Fair Market Value of the shares of Stock at the time of exercise of the Stock
Appreciation Right and the option price, subject to the applicable terms and
conditions of the tandem options and the following provisions of this Part IV.
2. ELIGIBILITY. The Board may, in its discretion, award the holders of
any Incentive Stock Options or Non-Qualified Stock Options awarded under the
1999 Plan a Stock Appreciation Right under this Part IV concurrent with, or
subsequent to, the award of the Stock Option.
3. EXERCISE. A Stock Appreciation Right may be exercised under the
applicable terms and conditions of the Incentive Stock Option or Non-Qualified
Stock Option with respect to which the Stock Appreciation Right is awarded. A
Stock Appreciation Right shall entitle the holder of a Stock Option to receive,
upon the exercise of the Stock Appreciation Right, shares of Stock (valued at
their Fair Market Value at the time of exercise), cash or a combination thereof,
in the discretion of the Board, in an amount equal in value to the excess of the
Fair Market Value of the shares of Stock subject to the Stock Appreciation Right
as of the date of such exercise over the purchase price of the Stock Option.
The exercise of a Stock Appreciation Right will result in the surrender of the
related Incentive Stock Option or Non-Qualified Stock Option and, unless
otherwise provided by the Board in its sole discretion, the exercise of a Stock
Option will result in the surrender of a related SAR, if any.
4. EXPIRATION DATE. The "Expiration Date" with respect to a Stock
Appreciation Right shall be determined by the Board, and shall be not later than
the Expiration Date for the related Stock Option. If neither the right nor the
related Stock Option is exercised before the end of the day on which the right
ceases to be exercisable, such right shall be deemed exercised as of such date
and payment shall be made to the holder in cash.
V. RESTRICTED STOCK
1. DEFINITION. Restricted Stock awards are grants of Stock to
Participants, the vesting of which is subject to a required period of employment
and any other conditions established by the Board.
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2. ELIGIBILITY. The Board shall designate the Participants to whom
Restricted Stock is to be awarded and the number of shares of Stock that are
subject to the award.
3. TERMS AND CONDITIONS OF AWARDS. All shares of Restricted Stock
awarded to Participants under the 1999 Plan shall be subject to the following
terms and conditions and to such other terms and conditions, not inconsistent
with the 1999 Plan, as shall be prescribed by the Board in its sole discretion
and as shall be contained in the Agreement referred to in Part I, paragraph 12.
(a) Restricted Stock awarded to Participants may not be sold,
assigned, transferred, pledged or otherwise encumbered, except as
hereinafter provided, for a period of 10 years or such shorter period as
the Board may determine, but not less than one year, after the time of the
award of such stock (the "Restricted Period"). Except for such
restrictions, the Participant as owner of such shares shall have all the
rights of a stockholder, including but not limited to the right to vote
such shares and, except as otherwise provided by the Board, the right to
receive all dividends paid on such shares.
(b) The Board may in its discretion, at any time after the date of
the award of Restricted Stock, adjust the length of the Restricted Period
to account for individual circumstances of a Participant or group of
Participants, but in no case shall the length of the Restricted Period be
less than one year.
(c) Except as otherwise determined by the Board in its sole
discretion, a Participant whose employment with the Company and all Related
Companies terminates prior to the end of the Restricted Period for any
reason shall forfeit all shares of Restricted Stock remaining subject to
any outstanding Restricted Stock Award.
(d) Each certificate issued in respect of shares of Restricted Stock
awarded under the 1999 Plan shall be registered in the name of the
Participant and, at the discretion of the Board, each such certificate may
be deposited in a bank designated by the Board. Each such certificate
shall bear the following (or a similar) legend:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions
(including forfeiture) contained in the NEON Systems, Inc. 1999
Long-Term Incentive Plan and an agreement entered into between
the registered owner and NEON Systems, Inc. A copy of such plan
and agreement is on file in the office of the Secretary of NEON
Systems, Inc., 14100 Southwest Freeway, Suite 500, Sugar Land,
Texas 77478.
(e) At the end of the Restricted Period for Restricted Stock, such
Restricted Stock will be transferred free of all restrictions to a
Participant (or his or her legal representative, beneficiary or heir).
4. SUBSTITUTION OF CASH. The Board may, in its discretion, substitute
cash equal to the Fair Market Value (determined as of the date of distribution)
of Stock otherwise required to be distributed to a Participant in accordance
with Part V, paragraph 3.
-10-
<PAGE>
VI. PERFORMANCE UNITS
1. DEFINITION. Performance Units are awards to Participants who may
receive value for the units at the end of a Performance Period. The number of
units earned, and value received for them, will be contingent on the degree to
which the performance measures established at the time of the initial award are
met.
2. ELIGIBILITY. The Board shall designate the Participants to whom
Performance Units are to be awarded, and the number of units to be the subject
of such awards.
3. TERMS AND CONDITIONS OF AWARDS. For each Participant, the Board will
determine the timing of awards; the number of units awarded; the value of units,
which may be stated either in cash or in shares of Stock; the performance
measures used for determining whether the Performance Units are earned; the
performance period during which the performance measures will apply; the
relationship between the level of achievement of the performance measures and
the degree to which Performance Units are earned; whether, during or after the
performance period, any revision to the performance measures or performance
period should be made to reflect significant events or changes that occur during
the performance period; and the number of earned Performance Units that will be
paid in cash and/or shares of Stock.
4. PAYMENT. The Board will compare the actual performance to the
performance measures established for the performance period and determine the
number of units to be paid and their value. Payment for units earned shall be
wholly in cash, wholly in Stock or in a combination of the two, in a lump sum or
installments, and subject to vesting requirements and such other conditions as
the Board shall provide. The Board will determine the number of earned units to
be paid in cash and the number to be paid in Stock. For Performance Units
valued when awarded in shares of Stock, one share of Stock will be paid for each
unit earned, or cash will be paid for each unit earned equal to either (a) the
Fair Market Value of a share of Stock at the end of the Performance Period or
(b) the Fair Market Value of the Stock averaged for a number of days determined
by the Board. For Performance Units valued when awarded in cash, the value of
each unit earned will be paid in its initial cash value, or shares of Stock will
be distributed based on the cash value of the units earned divided by (a) the
Fair Market Value of a share of Stock at the end of the Performance Period or
(b) the Fair Market Value of a share of Stock averaged for a number of days
determined by the Board.
5. RETIREMENT, DEATH OR TERMINATION. A Participant whose employment with
the Company and Related Companies terminates during a performance period because
of Retirement or death shall be entitled to the prorated value of earned
Performance Units, issued with respect to that performance period, at the
conclusion of the performance period based on the ratio of the months employed
during the period to the total months of the performance period. If the
Participant's employment with the Company and Related Companies terminates
during a performance period for any reason other than Retirement or death, the
Performance Units issued with respect to that performance period will be
forfeited on the date his employment with the Company and Related Companies
terminates. Notwithstanding the foregoing provisions of this Part VI, if a
Participant's employment with the Company and Related Companies terminates
before the end of the Performance Period with respect to any Performance Units
awarded to him, the Board may determine that the Participant will be entitled to
receive all or any portion of the units that he or she would otherwise receive,
and may accelerate the determination and payment
-11-
<PAGE>
of the value of such units or make such other adjustments as the Board, in its
sole discretion, deems desirable.
-12-
<PAGE>
Exhibit 10.21
SERVICE AGREEMENT
ENTERED INTO AS OF
DECEMBER 18, 1998
AND EFFECTIVE AS OF
MARCH 31, 1998
BY AND BETWEEN
NEON SYSTEMS, INC
AND
PEREGRINE/BRIDGE TRANSFER CORPORATION
<PAGE>
SERVICE AGREEMENT
THIS SERVICE AGREEMENT (the "AGREEMENT"), is entered into by and between
PEREGRINE/BRIDGE TRANSFER CORPORATION, a Delaware corporation ("PBTC"), and NEON
SYSTEMS, INC., a Delaware corporation ("SERVICE MANAGER") on December 18, 1998
and to be effective as of March 31, 1998 (the "EFFECTIVE DATE").
RECITAL
Service Manager has been providing certain services for PBTC, and each of
Service Manager and PBTC desires to evidence and formalize their agreements with
respect to these services.
ARTICLE 1
ENGAGEMENT OF SERVICE MANAGER
SECTION 1.1 GENERAL ENGAGEMENT. PBTC engages Service Manager as an
independent contractor to provide certain services described in this Agreement
relating to the business operations of PBTC, including without limitation with
respect to its management, record-keeping, marketing and development and other
business and operations. PBTC and Service Manager may from time to time agree
to expand or reduce the scope of services to be provided hereunder and either
party, upon request of the other, shall execute a schedule or amend any existing
schedule that evidences the scope of services then being provided hereunder.
Service Manager shall in good faith provide the services set forth in this
Agreement in accordance with normal and prudent practices and shall have the
authority to take all actions necessary or appropriate to fulfill its
obligations.
ARTICLE 2
SERVICE MANAGER DUTIES
SECTION 2.1 SERVICES. Service Manager will provide the following
services for PBTC, as and to the extent requested by PBTC:
(a) SENIOR MANAGEMENT. Provide PBTC with the time and attention of
its senior management as shall be necessary to assist PBTC in the
development and implementation of its product development and
market strategies.
(b) ACCOUNTING SERVICES. Perform all normal and customary
accounting functions for PBTC and maintain all necessary books
and records in connection therewith; and monitor the actual
monthly income and expenses of PBTC, collect revenues and pay
operating expenses, compare actual results to the relevant
operating budgets, and report to PBTC.
(c) RISK MANAGEMENT SERVICES. Assist PBTC in review of the insurable
risks of PBTC and the determination of levels of insurance
coverage; develop, administer and implement a risk management
program for PBTC; procure insurance coverage in accordance with
PBTC's instructions; and subject to
<PAGE>
PBTC's guidelines and approval, oversee the investigation and
resolution of all casualty and liability claims brought by or
against PBTC.
(d) TAX SERVICES. Prepare all state and federal income tax returns
for PBTC; prepare all sales tax filings and state unemployment
tax filings; and coordinate with PBTC and oversee any challenges,
disputes and audits of any income, sales or unemployment taxes.
(e) HUMAN RESOURCES. Provide Service Manager's standard human
resource services including implementation and oversight of
interview and hiring guidelines and services; implementation and
oversight of employment policies and procedures; conduct of
periodic employee reviews; and to the extent permitted by
applicable law and governmental regulations, employee benefits in
accordance with Service Manager's standard benefits.
(f) REGULATORY COMPLIANCE REVIEW. Assist PBTC in assuring compliance
with applicable governmental regulations (including without
limitation labor and employment regulations and the Americans
With Disabilities Act); and implementing a program to monitor
continuing compliance with governmental regulations.
(g) FINANCING SERVICES. From time to time, upon PBTC's request and
in accordance with PBTC's business plan, Service Manager shall
act as PBTC's agent in financing or refinancing indebtedness.
Service Manager shall:
(i) monitor existing financing;
(ii) negotiate and finalize existing financing renewals as
required;
(iii) monitor and negotiate any equity partner requirements on
behalf of PBTC;
(iv) negotiate any required refinancing; and
(v) negotiate any required restructuring/workout of existing
financing (debt or equity).
(h) FACILITIES. Make available to PBTC such facilities as NEON
shall have available from time to time and, upon PBTC's
request, assist PBTC in obtaining such facilities as PBTC
shall require.
Although Service Manager shall make recommendations to PBTC concerning terms and
conditions of any financing or refinancing and the lender(s) to provide the same
and shall negotiate the terms thereof and shall assist in consummating the
transactions, PBTC shall have the sole authority to execute the requisite
agreements therefor.
SECTION 2.2 LEGAL SERVICES. Service Manager is authorized to engage
attorneys and other advisors as necessary to provide legal services in
connection with the day-to-day operation of PBTC, including enforcement of
contracts; review of contracts, leases and other documents; and implementing and
defending legal actions.
SECTION 2.3 RETENTION OF THIRD PARTIES. Service Manager is
authorized and empowered, as PBTC's agent, to engage and enter into contracts
with third parties to provide the services referred to
2
<PAGE>
in this Article 2, and may delegate performance of its duties to third parties,
including Service Manager's subsidiaries and affiliates. Without limiting the
generality of the foregoing, the services of third parties which may be engaged
include tax services, brokerage services, data processing services, consulting
services and legal services. Service Manager shall not engage or enter into a
contract with an Affiliate (defined below) unless the compensation payable to
the Affiliate for such services does not exceed that which would be payable to a
comparably qualified third party service provider that is not affiliated with
Service Manager. For the purposes of this Agreement, an "AFFILIATE" of any
person shall mean any other person that is directly or indirectly controlling,
controlled by, or under common control with that person, where the term
"control" means the possession, directly or indirectly, of the actual power to
direct the affairs of the controlled person.
SECTION 2.4 BOOKS, RECORDS AND REPORTS.
(a) BOOKS AND RECORDS. Service Manager shall maintain at its
principal place of business, or at such other location as
it may reasonably designate, a complete and accurate set
of files, books and records of all business activities
and operations conducted by Service Manager with respect
to PBTC. All financial records shall be kept in
accordance with sound accounting principles and
practices, with such modifications as PBTC may request or
approve. During the Term (defined below) and during the
one (1) year period following the expiration or
termination of this Agreement, PBTC and its duly
authorized agents may, at reasonable times, examine,
inspect, audit, and copy Service Manager's books,
records, files, and reports pertaining to PBTC.
(b) QUARTERLY REPORTS. Service Manager shall make available
to PBTC, within 45 days after the end of each calendar
quarter, reports detailing the operation of PBTC which
shall be in the format reasonably requested by PBTC.
(c) ANNUAL REPORTS. Service Manager shall, within ninety (90)
days after the end of each calendar year, make available
to PBTC the following reports and statements, having been
prepared in accordance with sound accounting principles
(as modified at PBTC's request and with PBTC's approval):
(i) a balance sheet and statements of income and
expenses as of the end of such year; and
(ii) a cash flow statement for such year.
(d) SPECIAL REPORTS. Service Manager shall also, at PBTC's
expense, provide any other reports, summaries, statements
or schedules reasonably requested by PBTC.
ARTICLE 3
PBTC DUTIES
SECTION 3.1 INFORMATION AND COOPERATION. PBTC shall (i) furnish
Service Manager with all information in PBTC's possession reasonably necessary
to enable Service Manager to
3
<PAGE>
perform its duties, and (ii) otherwise cooperate with, and assist Service
Manager in, performance of Service Manager's duties hereunder.
SECTION 3.2 APPROVAL POLICY. PBTC has delivered to Service Manager a
list of those parties empowered to approve matters requiring PBTC's approval
under this Agreement. PBTC may revise such list from time to time by delivering
written notice to Service Manager. PBTC shall cooperate with Service Manager in
granting or withholding approvals required under this Agreement in a timely
manner.
SECTION 3.3 FUNDING. PBTC shall provide all funds required to enable
Service Manager to perform its duties hereunder and for Service Manager's
compensation.
ARTICLE 4
COMPENSATION
SECTION 4.1 SERVICE FEE. For performing its servicing and
administration duties, PBTC shall pay to Service Manager a fee equal to a
reasonable cost allocation of all salaries, cost and overhead of Service Manager
for the time devoted by Service Manager and its agents and employees to
performing the duties and services herein described (the "SERVICE FEE"). Until
otherwise agreed upon by the parties and set forth in an amendment to this
Agreement, the Service Fee shall be $23,995 per month. The Service Fee shall be
payable in arrears on or before the twentieth (20th) day of each calendar month
in respect of the services provided during the preceding month. To the extent
such Service Fee is not timely paid, Service Manager may offset such overdue
amount against amounts owing by it under any other agreement to PBTC.
SECTION 4.2 REIMBURSABLE EXPENSES. Without duplication of the items
included in the allocation determination for the Service Fee, PBTC shall
reimburse Service Manager for all expenses incurred by Service Manager in
performing its duties hereunder, including, without limitation, expenses of
third parties engaged pursuant to this Agreement; travel and other out-of-pocket
expenses; and filing or other fees paid to third parties. Service Manager shall
not be reimbursed for legal fees and expenses relating to the negotiation and
preparation of this Agreement.
SECTION 4.3 ADDITIONAL SERVICES. If PBTC requests Service Manager to
perform services other than those required hereunder, such additional services,
if performed, shall be compensated separately on terms agreed upon by Service
Manager and PBTC prior to the performance of such services, which terms shall
not be (i) less favorable to Service Manager than the terms under which
qualified unaffiliated persons are then performing such services for comparable
organizations, or (ii) less favorable to PBTC than the terms under which PBTC
could obtain such services from qualified unaffiliated third persons.
SECTION 4.4 EMERGENCY EXPENDITURES. In case of an emergency, Service
Manager may make expenditures without PBTC's prior written approval if, in the
reasonable judgment of Service Manager, such expenditures are necessary to
prevent damage or material diminution in value to PBTC or to preserve the health
or safety of any person. Service Manager shall inform PBTC of any such
expenditures as soon as reasonably practicable but in no event later than the
end of the next business day succeeding the date upon which such expenditures
are made.
4
<PAGE>
ARTICLE 5
LIABILITY INSURANCE AND RISK ALLOCATION
SECTION 5.1 LIABILITY INSURANCE. Service Manager shall, at PBTC's
expense, maintain comprehensive general liability, automobile liability,
workers' compensation and other insurance to protect the interests of Service
Manager and PBTC as their interests may appear in connection with the
performance of this Agreement in accordance with the coverage, amounts and
deductibles agreed upon by PBTC and Service Manager.
SECTION 5.2 EVIDENCE OF INSURANCE. Upon request, Service Manager
shall provide to PBTC certificates of insurance or other proof evidencing the
insurance coverage required under this Article 5.
SECTION 5.3 MUTUAL WAIVER OF SUBROGATION. Each party waives on behalf
of the insurers of such party's property any and all claims or rights of
subrogation of any such insurer against the other party hereto for loss or
damage to any property so insured.
SECTION 5.4 INDEMNIFICATION.
(a) PARTIES' INDEMNITIES. Subject to Section 5.3, Service
Manager shall indemnify and defend PBTC and PBTC's
directors, officers and employees from and against any
and all loss, cost, damage, liability and expense,
including reasonable counsel fees, incurred by PBTC,
resulting from Service Manager's gross negligence,
willful misconduct, fraud or breach of this Agreement.
Except for the matters against which Service Manager has
afforded PBTC indemnity in accordance with the preceding
sentence and subject to Section 5.3, PBTC shall indemnify
and defend Service Manager and Service Manager's
directors, officers and employees from and against any
and all loss, cost, damage, liability and expense,
including reasonable counsel fees, incurred by Service
Manager and resulting from Service Manager's performance
of its duties and obligations in accordance with this
Agreement, including those which arise from Service
Manager's negligence. The provisions of this
Section 5.4(a) are not in lieu of, but are in addition
to, any other rights and obligations of an indemnified
party.
(b) NOTICE. Upon receipt by any party entitled to
indemnification under Section 5.4(a) (an "INDEMNIFIED
PARTY") of a complaint, claim or other notice of any
loss, damage or liability giving rise to a claim for
indemnification under Section 5.4(a), such Indemnified
Party shall promptly notify the party from whom
indemnification is sought (the "INDEMNIFYING PARTY"), but
failure to provide such notice shall not relieve the
Indemnifying Party from its duty to indemnify unless the
Indemnifying Party is materially prejudiced by such
failure and had no actual knowledge of such complaint,
claim or other notice.
(c) INDEMNIFICATION RIGHTS. With respect to any claim made
or threatened against any party for which such party is
or may be entitled to indemnification hereunder, the
Indemnifying Party shall have the right, upon reasonable
prior notice, in its sole discretion and at its sole
expense, but
5
<PAGE>
subject to the right of any insurance company having an
interest in the outcome of such claim to exercise any
rights it may have under any applicable insurance
coverage, to (i) participate in the investigation,
defense and settlement of such claims and (ii) control
the defense of such claim, including the right to
designate counsel and to control all negotiations,
litigation, arbitration, settlements, compromises and
appeals of any such claim, provided that the Indemnifying
Party shall have advised the Indemnified Party that such
party is entitled to be fully indemnified with respect
to' such claim. The Indemnified Party and the
Indemnifying Party shall cooperate and act in good faith
in the conduct of the defense of any claims to be
indemnified hereunder.
(d) SURVIVAL. The terms and provisions of this Section 5.4
shall survive the expiration or termination of this
Agreement.
ARTICLE 6
TERM
SECTION 6.1 TERM. This Agreement shall commence on the Effective
Date and continue unless terminated by either party giving written notice of
termination to the other at least thirty (30) days prior to the effective
termination date, unless otherwise agreed upon by the parties (the "TERM"). The
Term is subject to earlier termination as provided below.
SECTION 6.2 DUTIES ON TERMINATION OR EXPIRATION.
(a) SERVICE MANAGER'S DUTIES. Upon termination or expiration
of this Agreement, Service Manager shall within fifteen
(15) days thereafter deliver to PBTC complete copies of
all books and records of PBTC and all funds in possession
of Service Manager belonging to PBTC. Service Manager
shall also be available for a period of not less than
thirty (30) days following termination or expiration to
consult with PBTC concerning the services provided by
Service Manager under this Agreement; Service Manager
shall not receive a fee for such consultation, but shall
be reimbursed for all costs incurred in connection
therewith.
(b) PBTC'S DUTIES. PBTC shall, within five (5) days
following the end of the Term compensate Service Manager
for all fees and reimbursements due hereunder through the
date of termination or expiration.
6
<PAGE>
ARTICLE 7
MISCELLANEOUS
SECTION 7.1 ASSIGNMENT: CHANGE OF OWNERSHIP INTEREST. Service
Manager may not, without the prior written consent of PBTC, assign this
Agreement. Service Manager may, however, from time to time delegate its duties
to Affiliates. Subject to the foregoing, this Agreement shall be binding upon,
and inure to the benefit of, Service Manager and PBTC and their respective
successors and assigns, and all references in this Agreement to "Service
Manager" and "PBTC" shall include the respective successors and assigns of such
parties permitted under this Agreement.
SECTION 7.2 NOTICES. Any notice provided for permitted to be given
hereunder shall be in writing and may be given by (i) depositing in the U.S.
Mail, first class postage prepaid and certified with return receipt requested;
(ii) reputable delivery service; or (iii) facsimile transmission with
confirmation of receipt. Notice shall be effective upon the earlier of refusal
of receipt by addressee or actual receipt at the address of the intended
addressee. The addresses of the parties, until changed by notice given as
provided herein, shall be as follows:
PBTC: Peregrine/Bridge Transfer Corporation
c/o 14100 Southwest Freeway
Suite 500
Sugar Land, Texas 77478
Telecopy Number: (281) 242-3880
Service Manager: NEON Systems, Inc.
14100 Southwest Freeway
Suite 500
Sugar Land, Texas 77478
Telecopy Number: (281) 242-3880
SECTION 7.3 SEVERABILITY. If any term or provision of this Agreement
or the application thereof to any person or circumstance shall be illegal,
invalid or unenforceable to any extent, the remainder of this Agreement, or the
application of that term or provision to persons or circumstances other than
those as to which it is held illegal, invalid or unenforceable, shall not be
affected thereby, and each term and provision of this Agreement shall be legal,
valid and enforceable to the fullest extent permitted by law.
SECTION 7.4 NO WAIVER OF DEFAULT. The failure by PBTC or Service
Manager to insist upon the strict performance of any one of the terms or
conditions of this Agreement or to exercise any right, remedy or election herein
contained or permitted by law shall not constitute or be construed as waiver or
relinquishment for the future of that term, condition, right, remedy or
election, which shall continue and remain in full force and effect. All rights
and remedies that PBTC or Service Manager may have at law, in equity or
otherwise for any breach of any term or condition of this Agreement shall be
distinct, separate and cumulative rights and remedies and no one of them shall
be deemed to be in exclusion of any other right or remedy of PBTC or Service
Manager.
SECTION 7.5 ENTIRE AGREEMENT AND MODIFICATION. This Agreement
constitutes the entire agreement between the parties with respect to the matters
herein contained and any agreement hereafter made shall be ineffective unless
made in writing and signed by the parties hereto. No
7
<PAGE>
provision of this Agreement shall be modified, waived or terminated except by an
instrument in writing signed by the party against whom such modification, waiver
or termination is to be enforced.
SECTION 7.6 GOVERNING LAW. This Agreement shall be governed by and
constructed in accordance with the laws of the State of Texas.
SECTION 7.7 ATTORNEYS' FEES. Should either party employ attorneys to
enforce the provisions hereof or to recover damages for the breach of this
Agreement, the non-prevailing party in any such action agrees to pay the
prevailing party all reasonable costs, damages and expenses, including
reasonable attorneys' fees, expended or incurred by the prevailing party in
connection therewith.
SECTION 7.8 RELATIONSHIP OF THE PARTIES. The relationship of PBTC
and Service Manager shall be that of principal and agent, and nothing contained
in this Agreement, nor any acts of the parties shall create the relationship of
a partnership or a joint venture, or cause the Service Manager to be responsible
in any way for the debts or obligations of PBTC or any other party.
SECTION 7.9 REPRESENTATIONS AND WARRANTIES.
(a) SERVICE MANAGER. Service Manager represents and warrants
to PBTC that (i) Service Manager is a corporation duly
organized, validly existing and in good standing under
the laws of the State of Delaware, and has all requisite
power and authority to carry on its business as now
conducted and to execute, deliver and perform this
Agreement; (ii) the execution, delivery and performance
by Service Manager of this Agreement is within its power,
has been authorized by all necessary corporate action and
does not contravene any provision of its organizational
documents; (iii) this Agreement has been duly executed
and delivered by a person authorized to do so on Service
Manager's behalf, and (iv) this Agreement constitutes the
valid and binding obligation of Service Manager.
(b) PBTC. PBTC represents and warrants to Service Manager
that (i) PBTC is a corporation, duly organized and
validly existing under the laws of the State of Delaware,
and has all requisite power and authority to carry on its
business as now conducted and to execute, deliver and
perform this Agreement; (ii) the execution, delivery and
performance by PBTC of this Agreement is within its
power, has been authorized by all necessary partnership
action and does not contravene any provision of its
organizational documents; (iii) this Agreement has been
duly executed and delivered by a person authorized to do
so on PBTC's behalf, and (iv) this Agreement constitutes
the valid and binding obligations of PBTC.
SECTION 7.10 CONFIDENTIALITY. PBTC and Service Manager shall keep
confidential all information obtained by one from the other in connection with
this Agreement. The parties shall not disclose such information to any person
(other than their respective agents, representatives and legal counsel), unless
specifically authorized in writing by the other party or if disclosure is
required by subpoena, court order, judicial decree or law, or is otherwise
required to enable Service Manager to perform its duties. This confidentiality
obligation shall not be binding on any party with respect
8
<PAGE>
to information in the public domain or information that enters the public domain
through no fault of that party. The provisions of this Section 7.10 shall
survive the expiration or termination of this Agreement.
SECTION 7.11 COUNTERPARTS. This Agreement may be executed in a number
of counterparts, each of which shall be deemed an original and all of which
shall constitute one and the same Agreement.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK.]
9
<PAGE>
Executed as of the day and year first above written and to be effective as
of March 31, 1998.
PBTC: PEREGRINE/BRIDGE TRANSFER CORPORATION,
A DELAWARE CORPORATION
By: /s/ Charles E. Noell, III
-------------------------
Name: Charles E. Noell, III
---------------------
SERVICE MANAGER: NEON SYSTEMS, INC.,
A DELAWARE CORPORATION
By: /S/ F. Joseph Backer
--------------------
Name: F. Joseph Backer
----------------
Title: President and Chief Executive Officer
--------------------------------------
10
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
NEON Systems, Inc.:
We consent to the use of our reports included herein and to the references to
our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
KPMG LLP
Houston, Texas
February 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY AS OF DECEMBER 31, 1998 AND
FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,510,841
<SECURITIES> 0
<RECEIVABLES> 4,029,301
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,327,624
<PP&E> 827,196
<DEPRECIATION> 430,313
<TOTAL-ASSETS> 9,902,209
<CURRENT-LIABILITIES> 6,324,029
<BONDS> 0
1,738,333
0
<COMMON> 26,823
<OTHER-SE> 1,813,024
<TOTAL-LIABILITY-AND-EQUITY> 9,902,209
<SALES> 0
<TOTAL-REVENUES> 13,668,846
<CGS> 0
<TOTAL-COSTS> 1,333,914
<OTHER-EXPENSES> 10,190,204
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,687
<INCOME-PRETAX> 2,188,651
<INCOME-TAX> 824,598
<INCOME-CONTINUING> 1,364,053
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,640,593
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.20
</TABLE>
