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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 000-22043
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NEW ERA OF NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 84-1234845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE GREENWOOD PLAZA
6550 GREENWOOD PLAZA BOULEVARD
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)
Registrant's Telephone Number, including area code: (303) 694-3933
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past (90) days. Yes [X] No [ ]
The number of shares of the issuer's Common Stock outstanding as of October
31, 2000 was 36,364,536.
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INDEX
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements.................................. 3
Consolidated Balance Sheets........................... 3
Consolidated Statements of Operations................. 4
Consolidated Statements of Cash Flows................. 5
Notes to Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk........................................... 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................... 26
Item 2. Changes in Securities................................. 26
Item 3. Defaults Upon Senior Securities....................... 26
Item 4. Submission of Matters to a Vote of Security Holders... 26
Item 5. Other Information..................................... 26
Item 6. Exhibits and Reports on Form 8-K...................... 26
Signatures.......................................................... 27
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NEW ERA OF NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 1999
--------------- ---------------
(UNAUDITED)
Current assets:
Cash and cash equivalents ................................... $ 22,622,813 $ 49,796,989
Restricted cash ............................................. 12,985 --
Short-term investments in marketable securities ............. 6,208,533 7,682,786
Accounts receivable, net of allowance for uncollectible
accounts of $4,057,000 and $1,885,000, respectively ...... 61,687,477 38,492,822
Unbilled revenue ............................................ 2,256,140 3,251,144
Third-party software purchased for resale, at cost .......... 3,600,770 1,508,600
Prepaid expenses and other .................................. 6,962,704 4,622,594
Note receivable--related party .............................. -- 19,666,135
--------------- ---------------
Total current assets ................................ 103,351,422 125,021,070
--------------- ---------------
Property and equipment:
Computer equipment and software ............................. 25,568,437 17,023,054
Furniture, fixtures and equipment ........................... 6,124,532 4,345,324
Leasehold improvements ...................................... 6,400,935 3,273,280
--------------- ---------------
38,093,904 24,641,658
Less--accumulated depreciation .............................. (12,629,755) (7,126,379)
--------------- ---------------
Property and equipment, net ................................. 25,464,149 17,515,279
Long-term investments in marketable securities ................ 35,553,029 37,335,205
Restricted long-term investments in marketable securities ..... 7,000,000 --
Intangible assets, net ........................................ 200,347,924 170,565,822
Deferred income taxes, net .................................... 11,968,095 7,700,765
Nonmarketable investment securities, at cost .................. 8,900,000 --
Other assets, net ............................................. 977,470 1,382,354
--------------- ---------------
Total assets ........................................ $ 393,562,089 $ 359,520,495
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 12,203,033 $ 6,118,010
Accrued liabilities ......................................... 21,146,753 15,823,393
Accrued restructuring charges ............................... 1,463,155 3,288,582
Current portion of deferred revenue ......................... 19,786,210 13,570,715
--------------- ---------------
Total current liabilities ........................... 54,599,151 38,800,700
Deferred revenue .............................................. 259,750 78,437
--------------- ---------------
Total liabilities ................................... 54,858,901 38,879,137
--------------- ---------------
Stockholders' equity:
Common stock, $.0001 par value, 200,000,000 shares
authorized; 36,481,836 and 34,051,573 shares issued;
36,321,836 and 34,031,573 shares outstanding,
respectively ............................................. 3,648 3,405
Additional paid-in capital .................................. 434,204,719 389,199,732
Accumulated deficit ......................................... (84,938,160) (66,329,148)
Accumulated other comprehensive loss ........................ (5,009,720) (1,885,256)
Treasury stock, 160,000 and 20,000 shares of common stock,
at cost, respectively .................................... (4,211,883) (347,375)
Deferred stock-based compensation ........................... (1,345,416) --
--------------- ---------------
Total stockholders' equity .......................... 338,703,188 320,641,358
--------------- ---------------
Total liabilities and stockholders' equity .......... $ 393,562,089 $ 359,520,495
=============== ===============
See notes to consolidated financial statements.
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NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Revenues:
Software licenses ......................... $ 32,299,302 $ 12,427,211 $ 84,732,697 $ 38,659,632
Software maintenance ...................... 6,040,477 4,076,947 16,890,131 10,875,673
Professional services ..................... 16,838,589 15,361,745 46,565,826 38,082,549
--------------- --------------- --------------- ---------------
Total revenues .................... 55,178,368 31,865,903 148,188,654 87,617,854
--------------- --------------- --------------- ---------------
Cost of revenues:
Cost of software licenses ................. 550,043 508,506 1,635,255 915,620
Cost of software maintenance and
professional services................... 13,601,143 11,730,107 37,106,012 28,248,135
--------------- --------------- --------------- ---------------
Total cost of revenues ............ 14,151,186 12,238,613 38,741,267 29,163,755
--------------- --------------- --------------- ---------------
Gross profit ................................ 41,027,182 19,627,290 109,447,387 58,454,099
--------------- --------------- --------------- ---------------
Operating expenses:
Sales and marketing ....................... 22,404,166 16,077,806 59,301,024 39,323,721
Research and development .................. 10,915,261 9,403,413 31,293,606 25,613,850
General and administrative ................ 4,188,133 4,623,186 12,269,265 11,578,765
Restructuring charges ..................... -- 7,445,107 -- 7,445,107
Stock-based compensation and related
payroll taxes ........................... 1,267,849 -- 1,880,068 --
Amortization of intangibles and
other acquisition-related charges ....... 9,413,313 32,308,784 26,352,525 37,361,081
--------------- --------------- --------------- ---------------
Total operating expenses .......... 48,188,722 69,858,296 131,096,488 121,322,524
--------------- --------------- --------------- ---------------
Loss from operations ........................ (7,161,540) (50,231,006) (21,649,101) (62,868,425)
Other income, net ........................... 985,440 1,736,447 3,645,089 5,679,659
--------------- --------------- --------------- ---------------
Loss before income taxes .................... (6,176,100) (48,494,559) (18,004,012) (57,188,766)
Benefit (provision) for income taxes ........ (199,999) 13,560,632 (605,000) 16,014,282
--------------- --------------- --------------- ---------------
Net loss .................................... $ (6,376,099) $ (34,933,927) $ (18,609,012) $ (41,174,484)
=============== =============== =============== ===============
Net loss per common share, basic
and diluted ............................... $ (0.18) $ (1.06) $ (0.52) $ (1.30)
=============== =============== =============== ===============
Weighted average shares of common stock
outstanding, basic and diluted ............ 36,093,032 33,008,293 35,473,234 31,709,627
=============== =============== =============== ===============
See notes to consolidated financial statements.
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NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2000 1999
-------------- --------------
Cash flows from operating activities:
Net loss ................................................. $ (18,609,012) $ (41,174,484)
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization .......................... 30,780,275 15,683,723
Minority interest share of losses ...................... -- (12,720)
Stock-based compensation, exclusive of payroll taxes ... 1,509,375 --
Benefit for deferred income taxes, net ................. (4,138,714) (16,701,289)
Charge in lieu of income taxes ......................... 4,113,032 --
Loss on asset disposition .............................. 40,910 --
Acquisition charges paid with common stock ............. -- 8,268,759
Noncash restructuring charges .......................... -- 831,477
Changes in assets and liabilities--
Accounts receivable, net ............................... (20,662,254) (5,405,839)
Unbilled revenue ....................................... 33,269 (734,196)
Prepaid expenses and other ............................. (1,109,122) (3,123,470)
Other assets, net ...................................... 590,771 913,549
Accounts payable ....................................... 3,635,223 (2,129,335)
Accrued liabilities .................................... (5,124,999) (5,341,150)
Accrued restructuring charges .......................... (1,825,248) 4,906,384
Deferred revenue, current and long-term ................ 6,396,808 530,112
-------------- --------------
Net cash used in operating activities ......... (4,369,686) (43,488,479)
-------------- --------------
Cash flows from investing activities:
Investments in marketable securities--
Purchases of short-term investments .................... (31,996,694) (11,937,580)
Sales of short-term investments ........................ 33,988,024 19,066,968
Purchases of long-term investments ..................... (11,384,516) (33,474,451)
Sales of long-term investments ......................... 6,083,227 6,515,033
Purchases of nonmarketable investment securities ....... (5,000,000) --
Purchases of developed software and other intangibles .... (1,007,518) (4,170,321)
Business combinations, net of cash acquired .............. (29,318,869) (38,822,641)
Purchases of property and equipment ...................... (13,104,249) (7,969,471)
Collection of note receivable--related party ............. 25,409,735 --
Advances on note receivable--related party ............... (5,743,600) (16,504,094)
-------------- --------------
Net cash used in investing activities ......... (32,074,460) (87,296,557)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuances of common stock .................. 12,682,467 5,869,837
Purchases of treasury stock .............................. (3,864,508) (347,375)
-------------- --------------
Net cash provided by financing activities ..... 8,817,959 5,522,462
Effect of exchange rate changes on cash .................... 452,011 389,378
-------------- --------------
Net decrease in cash and cash equivalents .................. (27,174,176) (124,873,196)
Cash and cash equivalents, beginning of period ............. 49,796,989 174,173,008
-------------- --------------
Cash and cash equivalents, end of period ................... $ 22,622,813 $ 49,299,812
============== ==============
Supplemental cash flow information:
Cash paid during the period for--
Interest ............................................... $ 13,154 $ 29,678
============== ==============
Taxes .................................................. $ 1,220,317 $ 882,073
============== ==============
Supplemental disclosures of noncash transactions:
Common stock issued for business combinations ............ $ 26,000,000 $ 75,721,687
============== ==============
Accrued business combination costs ....................... $ 17,321 $ 255,099
============== ==============
Stock-based compensation charged to additional
paid-in capital ........................................ $ 652,228 $ --
============== ==============
Restricted stock grants changed to deferred
compensation ........................................... $ 1,545,000 $ --
============== ==============
Restructuring charge--option reimbursement ............... $ -- $ 480,979
============== ==============
Common stock issued for acquisition charges .............. $ -- $ 8,268,759
============== ==============
Restructuring charge--loss on asset disposition .......... $ -- $ 350,498
============== ==============
See notes to consolidated financial statements.
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NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated interim financial statements have been
prepared by New Era of Networks, Inc. (the "Company"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. These financial statements
should be read in conjunction with our audited consolidated financial statements
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 1999. The consolidated results of operations for the three and nine months
ended September 30, 2000 are not necessarily indicative of the results to be
expected for any subsequent period or for the entire fiscal year ending December
31, 2000.
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments that are of a normal and
recurring nature and that are necessary for a fair presentation of the financial
position and results of operations for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Certain reclassifications have been made to prior period
financial statements to conform to the September 30, 2000 presentation.
2. BUSINESS COMBINATIONS
Software-Engineering, Computing and Consulting GmbH
In April 2000, we acquired all of the outstanding capital stock of
Software-Engineering, Computing and Consulting GmbH ("Secco"), a German
corporation. Secco is a provider of enterprise application integration and
e-Business professional services in Germany.
The aggregate consideration paid by the Company was approximately
$15,000,000, of which $12,000,000 was paid in cash and approximately $3,000,000
was paid through the issuance of 86,925 shares of our common stock. The fees and
expenses related to the acquisition are estimated to be approximately $445,000.
In August 2000, 13,000 additional shares of our common stock were issued and
approximately $182,000 in cash was paid to the former shareholders of Secco
based on the market price of our stock at a certain measurement date subsequent
to closing. The acquisition was accounted for under the purchase method of
accounting and, accordingly, the assets, liabilities and operating results of
Secco have been included in the accompanying consolidated financial statements
from April 1, 2000.
Upon the finalization of the purchase price allocation, we anticipate
recording a deferred tax liability and corresponding increase to goodwill as
values assigned to the software products and other intangibles are not
amortizable for tax purposes.
PaperFree Systems, Inc.
In March 2000, we acquired all of the outstanding capital stock of PaperFree
Systems, Inc. ("PaperFree"), a Delaware corporation. PaperFree is a provider of
integration solutions concentrating on the payor-side of the healthcare market.
The aggregate consideration paid by the Company was approximately
$40,000,000, of which $20,000,000 was paid in cash and approximately $20,000,000
was paid through the issuance of 283,881 shares of our common stock. The fees
and expenses related to the acquisition are estimated to be approximately
$245,000. In June and August 2000, an aggregate of 425,301 additional shares of
our common stock were issued to the former shareholders of PaperFree based on
the market price of our common stock at certain
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measurement dates. The acquisition was accounted for under the purchase method
of accounting and, accordingly, the assets, liabilities and operating results of
PaperFree have been included in the accompanying consolidated financial
statements from March 24, 2000.
An independent valuation of PaperFree's net assets will be performed to
assist in the allocation of the purchase price. Upon the finalization of the
purchase price allocation, we anticipate recording a deferred tax liability and
corresponding increase to goodwill as values assigned to the software products
and other intangibles are not amortizable for tax purposes.
SLI International AG
In August 2000, we issued 75,519 shares of common stock to the former
shareholders of SLI International AG ("SLI") upon the achievement of certain
performance targets provided for in the April 15, 1999 agreement for our
acquisition of SLI. These shares were recorded as an additional $3,000,000 of
purchase price based on the fair value of these shares at the time they were
earned.
3. INVESTMENTS IN NONMARKETABLE SECURITIES
During the third quarter of 2000, we invested $5.0 million and committed to
invest an additional $3.9 million in equity securities of five companies with
technologies or products that are complementary to our own. As described in Note
7, these investee companies also purchased software from us for their internal
use or for resale, as well as software support and other professional services.
The investee companies are in early stages of development and are focused on
various e-Business applications and solutions. These arrangements are a part of
our strategy to broaden the scope and uses of our products and to access
additional vertical markets and customers. The early-stage nature of the
investees may also create opportunities for us to benefit from future
appreciation in the value of our investments; however, there can be no assurance
we will realize any gains from these investments or that subsequent impairments
in the values of these securities will not occur.
No public market existed for any securities of these investees at the time
of our investment or our commitment to invest, nor is there any assurance that a
public market will ever exist. Consequently, these investments will be accounted
for under the cost method because our ownership interests are less than 20% and
we do not have the ability to exercise significant influence over their
operations. Our initial cost is equal to the estimated fair value of the
securities at the time of purchase, as evidenced by concurrent independent
third-party investments in such companies. We will closely monitor the success
of these investees in executing their business plans. Future impairments, if
any, will be recognized as they become apparent. If and when any of these
investments become publicly-traded and meet the criteria for
"available-for-sale" securities pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," they will be accounted for accordingly. Otherwise, future
appreciation will be recognized only upon sale or other disposition of the
securities.
4. NET LOSS PER COMMON SHARE
Under SFAS No. 128 "Earnings Per Share", basic earnings or loss per common
share is determined by dividing net income or loss from continuing operations
available to common shareholders by the weighted average number of common shares
outstanding during each period. Diluted earnings per common share includes the
effects of potentially issuable common stock, but only if dilutive. The treasury
stock method, using the average price of the Company's common stock for the
period, is applied to determine dilution from options and warrants.
5. COMPREHENSIVE LOSS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" ("SFAS 130"). The purpose of SFAS 130 is to
report a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. The only items of other comprehensive
income reported by the Company are the cumulative translation adjustment and
unrealized loss on marketable securities available for sale. The Company's
comprehensive income for the three and nine months ended September 30, 2000 and
1999 was as follows.
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net loss for the period .................................... $ (6,376,099) $(34,933,927) $(18,609,012) $(41,174,484)
Change in cumulative translation adjustment ................ (2,464,414) 562,846 (3,571,061) 183,533
Unrealized gains (losses) on marketable securities:
Change in unrealized loss on marketable securities ....... 279,690 (23,531) 372,428 (490,271)
Reclassification adjustment for realized losses included
in net loss for the period ............................. -- -- 74,169 --
------------ ------------ ------------ ------------
Comprehensive loss ......................................... $ (8,560,823) $(34,394,612) $(21,733,476) $(41,481,222)
============ ============ ============ ============
6. RESTRICTED CASH AND RESTRICTED INVESTMENTS IN MARKETABLE SECURITIES
We have leased two buildings and a parking structure in Englewood, Colorado
from Greenwood Plaza Partners, LLP ("GPP") for use as our principal corporate
headquarters and at September 30, 2000, had subleased all unused excess
capacity. GPP is principally owned by our Chief Executive Officer and Chairman
of the Board.
Through April 2000, we had funded approximately $25.4 million toward a
short-term loan to GPP for construction of the leased facilities. In May 2000,
GPP obtained interim (five-year) financing from a third-party lender and repaid
the loan from us in full. Terms of the interim financing require that we
maintain up to $8.3 million of cash or investments with the lender, including
$1.3 million restricted for the purpose of paying tenant improvement expenses
and leasing commissions. At September 30, 2000, the restricted cash balance was
approximately $7.0 million. The restricted cash represents one source of
collateral to the lender in recognition that we have a long-term master lease
for the entire facility.
We leased and occupied completed portions of the facilities from August 1999
through April 2000. The lease for the entire completed facility commenced May 1,
2000. The facilities include approximately 200,000 rentable square feet of space
and 720 parking spaces in the garage. Rent paid to GPP for the three and
nine-month periods ended September 30, 2000 was approximately $1.0 million and
$2.2 million, respectively. Sublease income of $407,000 and $429,000 for the
respective periods has been netted against rent expense in the accompanying
financial statements. We are also responsible for all taxes, insurance,
utilities, repairs and maintenance of the facilities during the lease term. The
initial term is ten years from May 1, 2000, and is renewable at our option for
two successive five-year periods at then prevailing market rental rates.
7. CONCURRENT TRANSACTIONS
During the third quarter of 2000, the Company established several strategic
relationships through private equity investments and other transactions
described below. As indicated in Note 3, concurrent with our commitments to
invest in the private equity offerings of five early-stage e-Business companies,
the investees purchased from us software, support and professional services.
During the quarter, we also sold software and support services to three other
software and service vendors and concurrently committed to acquire software
and/or services from them.
The above transactions effectively include nonmonetary sales of our software
and services for equity securities of the investees and for software and
services of other vendors. We believe that APB Opinion No. 29, "Accounting for
Nonmonetary Transactions" ("APB 29"), as interpreted by EITF Issues 86-29 and
00-08, requires that we account for each of the transactions described above
(and summarized below) at fair value. With respect to our license agreements,
all other revenue recognition criteria were satisfied with respect to the amount
of license revenue recognized during the quarter.
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The impact of these transactions on our consolidated financial statements as
of and for the quarter ended September 30, 2000, is summarized in the following
table:
SOFTWARE AND OTHER
SERVICES FOR NONMONETARY
EQUITY TRANSACTIONS
------------ ------------
(AMOUNTS IN THOUSANDS)
License revenues recognized .... $ 4,641 $ 5,374
Deferred revenues .............. 1,274 778
Accounts receivable ............ 2,883 5,652
Software for resale and
Prepaid services .............. -- 6,730
Nonmarketable securities ....... 8,900 --
Accrued liabilities ............ 3,900 5,130
Net cash used during quarter ... 1,968 1,100
The fair values of equity securities purchased by us were based on
concurrent or recent purchases of substantially similar securities of the
investees by independent third parties. The values of our software license
arrangements were based on similar monetary transactions with other customers.
Prepaid professional services to be provided to us are valued at the same rates
charged to us for prior engagements. For each of the other nonmonetary
transactions reflected in the above table, monetary consideration was at least
25% of the total fair value of the transaction.
8. STOCKHOLDERS' EQUITY
In August 1999, the Board of Directors authorized the repurchase of up to
the lesser of 10% of our outstanding shares of common stock or stock repurchase
expenditures of $30,000,000. The following table summarizes actual purchases:
NUMBER OF AVERAGE COST TOTAL
QUARTER OF PURCHASE SHARES PER SHARE COST
------------ ------------ ------------
Third quarter 1999 ........ 20,000 $ 17.37 $ 347,375
Second quarter 2000 ....... 40,000 29.01 1,160,335
Third quarter 2000 ........ 100,000 27.04 2,704,173
------------ ------------ ------------
Total treasury shares ..... 160,000 $ 26.32 $ 4,211,883
============ ============ ============
During the third quarter of 2000, we issued restricted stock grants to two
senior executives. As both the strike price and number of shares were known at
the date of grant, they will be accounted for as fixed awards under APB Opinion
No. 25. Accordingly, deferred stock-based compensation has been recognized as a
charge to equity and is being amortized over the vesting terms of the awards.
9. RESTRUCTURING CHARGES
In July 1999, our management and Board of Directors approved restructuring
plans that included initiatives to integrate the operations of recently acquired
companies, consolidate redundant facilities, and reduce overhead. Total accrued
restructuring costs of approximately $7,450,000 were recorded in the third
quarter of 1999 related to these initiatives. With the exception of one facility
relocation, all restructuring efforts were finalized by March 2000. Management
expects the remaining restructuring efforts to be completed by December 31,
2000.
The restructuring included approximately $3,301,000 related to the cost of
involuntary employee separation benefits related to approximately 150 employees
worldwide. Employee separation benefits include severance, medical and other
benefits. Employee separations affected the majority of business functions, job
classes and geographies, with a majority of the reductions occurring in North
America and Europe. The restructuring also provided for approximately $4,149,000
associated with the closure and consolidation of office space, principally in
North America and Europe.
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The accrued restructuring costs and amounts charged against the provision as
of September 30, 2000 were as follows:
ACCRUAL AT APPROXIMATE ACCRUAL AT
DECEMBER 31, YEAR-TO-DATE SEPTEMBER 30,
1999 SPENDING 2000
----------- ------------ ------------
(AMOUNTS IN THOUSANDS)
Employee separations ................... $ 660 $ 248 $ 412
Facility closure costs ................. 2,628 1,577 1,051
----------- ----------- -----------
Total accrued restructuring costs .. $ 3,288 $ 1,825 $ 1,463
=========== =========== ===========
10. STOCK OPTION BONUS PROGRAM
Effective July 1, 2000, we implemented a stock option bonus program to
further encourage ownership of our stock by employees. Under this program,
participating employees must make an irrevocable election at the beginning of a
plan period (generally, each calendar quarter) to receive stock options in lieu
of cash for either a fixed percentage or a specified dollar amount of
commissions and/or bonuses they may earn for that period. The number of option
shares awarded on the last day of each plan period is equal to four times the
cash compensation foregone divided by the period-end market price of our common
stock. The employee's strike price is equal to 85% of the market price of our
common stock on the last day of the plan period. Specific named executive
officers may receive options equal to five times the cash compensation foregone,
but their strike price is equal to 100% of the period-end market price. The
options are fully vested when awarded on the last day of the each plan period.
Stock-based compensation is recorded for the intrinsic value of the options
awarded under the provisions of APB Opinion No. 25. For the quarter ended
September 30, 2000, options to purchase 249,583 shares at $13.60 per share and
52,465 shares at $16.00 per share were awarded under this program, the aggregate
intrinsic value of which was approximately $600,000.
11. 401k PROGRAM
In July 2000, we adopted an employer match in shares of our common stock
equal to 25% of each participant's calendar year 401k contributions. The number
of shares is determined by the lower of the daily annual average closing market
price of the Company's common stock or the closing market price at the end of
the calendar year. The Company records stock-based compensation at the end of
each quarter equal to the greater of 25% of participants' voluntary
contributions or the number of shares issuable, based on the year-to-date
average market price, times the period end market price. A final accounting will
be made as of December 31 of each year for that year's contribution.
12. SEGMENT INFORMATION
In the fourth quarter of 1998, we adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are components of an enterprise for which
separate financial information is available and is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and assess performance of the segments of an enterprise. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers products and services in
different markets.
We classify our business activities into three operating segments: The
Americas; Europe and Asia Pacific; and Corporate and Other. Information
regarding our operations in these three operating segments, which are managed
separately, is set forth below. The accounting policies of the operating
segments are the same as those described in the summary of significant
accounting policies included in our Annual Report on Form 10-K for consolidated
results. There are no significant intersegment sales or transfers between the
segments for the periods presented.
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THREE MONTHS ENDED SEPTEMBER 30, 2000 THREE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------- ----------------------------------------------
EUROPE EUROPE
THE AND ASIA CORPORATE THE AND ASIA CORPORATE
AMERICAS PACIFIC AND OTHER TOTAL AMERICAS PACIFIC AND OTHER TOTAL
--------- --------- --------- -------- --------- --------- --------- --------
(AMOUNTS IN THOUSANDS)
Total revenues ................... $ 27,156 $ 15,519 $ 12,503 $ 55,178 $ 17,334 $ 11,568 $ 2,964 $ 31,866
Total cost of revenues ........... 4,425 6,513 3,213 14,151 4,387 4,287 3,565 12,239
--------- --------- --------- -------- --------- --------- --------- --------
Gross profit ..................... 22,731 9,006 9,290 41,027 12,947 7,281 (601) 19,627
Selling and marketing ............ 9,371 6,664 6,369 22,404 6,982 5,144 3,952 16,078
Research and development ......... -- -- 10,915 10,915 -- -- 9,404 9,404
General and administrative ....... -- -- 4,188 4,188 -- -- 4,623 4,623
--------- --------- --------- -------- --------- --------- --------- --------
Operating profit (loss) before
acquisition-related charges
and stock-based compensation
and related payroll taxes ...... 13,360 2,342 (12,182) 3,520 5,965 2,137 (18,580) (10,478)
Restructuring charges ............ -- -- -- -- -- -- 7,445 7,445
Amortization of intangibles ...... -- -- 9,414 9,414 -- -- 32,308 32,308
Stock-based compensation and
related taxes .................. -- -- 1,268 1,268 -- -- -- --
--------- --------- --------- -------- --------- --------- --------- --------
Operating profit (loss) .......... 13,360 2,342 (22,864) (7,162) 5,965 2,137 (58,333) (50,231)
Other income, net ................ -- -- 986 986 -- -- 1,737 1,737
--------- --------- --------- -------- --------- --------- --------- --------
Net income (loss) before taxes ... 13,360 2,342 (21,878) (6,176) 5,965 2,137 (56,596) (48,494)
Benefit (provision) for income
taxes .......................... -- -- (200) (200) -- -- 13,560 13,560
--------- --------- --------- -------- --------- --------- --------- --------
Net income (loss) after taxes .... $ 13,360 $ 2,342 $ (22,078) $ (6,376) $ 5,965 $ 2,137 $ (43,036) $(34,934)
========= ========= ========= ======== ========= ========= ========= ========
NINE MONTHS ENDED SEPTEMBER 30, 2000 NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------- -------------------------------------------
EUROPE EUROPE
THE AND ASIA CORPORATE THE AND ASIA CORPORATE
AMERICAS PACIFIC AND OTHER TOTAL AMERICAS PACIFIC AND OTHER TOTAL
--------- --------- --------- --------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS)
Total revenues .................... $ 73,610 $ 37,017 $ 37,561 $ 148,188 $ 51,458 $ 29,166 $ 6,994 $ 87,618
Total cost of revenues ............ 13,883 12,979 11,879 38,741 12,599 11,855 4,710 29,164
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit ...................... 59,727 24,038 25,682 109,447 38,859 17,311 2,284 58,454
Selling and marketing ............. 25,856 16,302 17,143 59,301 20,046 10,838 8,440 39,324
Research and development .......... -- -- 31,293 31,293 -- -- 25,614 25,614
General and administrative ........ -- -- 12,269 12,269 -- -- 11,579 11,579
--------- --------- --------- --------- --------- --------- --------- ---------
Operating profit (loss) before
acquisition-related charges
and stock-based compensation
and related payroll taxes ...... 33,871 7,736 (35,023) 6,584 18,813 6,473 (43,349) (18,063)
Restructuring charges ............. -- -- -- -- -- -- 7,445 7,445
Amortization of intangibles ....... -- -- 26,353 26,353 -- -- 37,361 37,361
Stock-based compensation and
related taxes ................... -- -- 1,880 1,880 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Operating profit (loss) ........... 33,871 7,736 (63,256) (21,649) 18,813 6,473 (88,155) (62,869)
Other income, net ................. -- -- 3,645 3,645 -- -- 5,680 5,680
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) before taxes .... 33,871 7,736 (59,611) (18,004) 18,813 6,473 (82,475) (57,189)
Benefit (provision) for income
taxes ........................... -- -- (605) (605) -- -- 16,014 16,014
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) after taxes ..... $ 33,871 $ 7,736 $ (60,216) $ (18,609) $ 18,813 $ 6,473 $ (66,461) $ (41,175)
========= ========= ========= ========= ========= ========= ========= =========
13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. To the extent
our stock-based compensation awards are or become subject to "variable
accounting" because of FIN 44, we expect that significant periodic fluctuations
in the price of our common stock may cause the application of FIN 44 to have a
material impact on stock-based compensation reported in our future results of
operations.
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In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), and amended it in March 2000. NEON is required to adopt the provisions of
SAB 101 in the fourth quarter of 2000. We are currently reviewing the provisions
of SAB 101 and have not fully assessed the impact of its adoption; however, we
do not currently expect that the adoption of SAB 101 will have a material impact
on our financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 was
to be effective for all fiscal quarters of fiscal years beginning after June 15,
1999. SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133" ("SFAS 137") was issued. SFAS 137 deferred the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000. In
June 2000, SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133" ("SFAS
138") was issued. SFAS 138 addresses a limited number of issues causing
difficulties in the implementation of SFAS 133 and is required to be adopted
concurrent with SFAS 133. The Company has not engaged in hedging activities and
does not believe that the adoption of SFAS 133 and SFAS 138 will have a material
impact on the Company's financial position or results of operations.
14. LITIGATION
The Company and certain of its executive officers are defendants in a
consolidated class action lawsuit alleging violation of the federal securities
laws. This action was filed in federal court in Colorado in July 1999. The
complaint asserts claims on behalf of purchasers of the Company's securities
from April 21, 1999 through July 6, 1999. The complaint alleges that the Company
and the other defendants made material misrepresentations and omissions
regarding the Company's business and prospects, causing harm to purchasers of
the Company's securities. The complaint does not specify the amount of damages
sought. The Company believes this class action lawsuit is without merit. The
Company intends to deny all material allegations and to defend itself
vigorously. An adverse judgment or settlement in this lawsuit could have a
material adverse effect on the Company's financial condition or results of
operations. The ultimate outcome of this action cannot be presently determined.
Accordingly, no provision for any liability or loss that may result from
adjudication or settlement thereof has been made in the accompanying
consolidated financial statements.
In January 2000, the Company and VIE Systems, Inc. were named as defendants
in a lawsuit filed by New Paradigm Software Corp. ("New Paradigm") in U.S.
District Court for the Southern District of New York. The complaint alleges
breach of contract, interference with contract and unjust enrichment, and seeks
compensatory and punitive damages as well as rescission. In July 2000, the Court
granted the Company's motion to dismiss the Plaintiff's claims of unjust
enrichment and for rescission. The Company believes the lawsuit is without
merit. The Company intends to deny all material allegations and to defend itself
vigorously. An adverse judgment or settlement in the lawsuit could have a
material adverse effect on the Company's financial condition or results of
operations. The ultimate outcome of the action cannot be presently determined.
Accordingly, no provision for any liability or loss that may result from
adjudication or settlement thereof has been made in the accompanying
consolidated financial statements.
The Company is involved in a declaratory judgment action in Federal District
Court for the State of Colorado and a trademark dilution case in Texas District
Court for Bend County against NEON Systems, Inc. over the use of the trademark
NEON. An adverse judgment or settlement, particularly in the Texas action, may
result in increased costs and expenses and may have an adverse effect on our
business. The Texas damage action was filed in June 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this Report on Form 10-Q contains certain trend analysis
and other forward-looking statements. Words such as "anticipate," "believe,"
"plan," "estimate," "expect," "seek," and "intend," and words of similar import
are intended to identify such forward-looking statements. These statements are
not guarantees of future performance and are subject to business and economic
risks and uncertainties that are difficult to predict. Therefore, our actual
results of operations may differ materially from those expressed or forecasted
in the forward-looking statements as a result of a number of factors, including,
but not limited to, those set forth in this discussion under "Factors That May
Affect Future Results" and other risks detailed from time to time in reports
filed with the Securities and Exchange Commission. In addition, the discussion
of our results of operations should be read in conjunction with matters
described in detail in our 1999 Form 10-K Report.
OVERVIEW
We began operations in January 1994 to develop, market and support
enterprise software for application integration. In 1994 and 1995 our Company
was in the development stage and was principally focused on product development
and assembling its management team and infrastructure. Software license revenues
were not significant until the commercial release of our NEONet software in
January 1996. Since that time, a substantial portion of our revenues has been
attributable to licenses of NEONet and follow-on products such as MQIntegrator
and e-Biz Integrator and related services. In December 1997, we entered into a
license agreement with IBM for the joint development of a product designed to
integrate IBM's MQSeries product with certain of our products. Under the terms
of the amended agreement, both NEON and IBM began selling the resulting
MQIntegrator or MQSeries Integrator products and other NEON adapter products.
In June 1997, we completed our initial public offering and issued 6,348,000
shares of common stock, and received net proceeds of approximately $34.3
million. In May and December 1998, we completed follow-on offerings and issued
4,757,000 and 4,780,000 shares of our common stock, respectively, and received
net proceeds of approximately $50.6 million and $153.7 million, respectively.
RECENT ACQUISITIONS AND INVESTMENTS
In April 2000, we acquired all of the outstanding capital stock of
Software-Engineering, Computer and Consulting GmbH ("Secco"). Secco is a
provider of enterprise application integration ("EAI") and e-Business
professional services in Germany. The aggregate purchase price of Secco was $15
million, of which $12 million was paid in cash and $3 million was paid through
the issuance of 86,925 shares of our common stock. In August 2000, 13,000
additional shares of our common stock were issued and approximately $182,000 in
cash was paid to the former shareholders of Secco based on the market price of
our stock at a certain measurement date subsequent to closing. The acquisition
was accounted for under the purchase method of accounting.
In March 2000, we acquired all of the outstanding capital stock of PaperFree
Systems, Inc. ("PaperFree"). PaperFree is a provider of integration solutions
concentrating on the payor-side of the healthcare market. The aggregate purchase
price of PaperFree was $40 million, of which, approximately $20 million was paid
in cash and $20 million was paid through the issuance of 283,881 shares of
common stock. In June and August 2000, an aggregate of 425,301 additional shares
of our common stock were issued to the former shareholders of PaperFree based on
the market price of our common stock at certain measurement dates subsequent to
closing. The acquisition was accounted for under the purchase method of
accounting.
In August 2000, we issued 75,519 shares of common stock to the former
shareholders of SLI International AG upon achievement of certain performance
targets. These shares were recorded as additional purchase price based on the
fair value of these shares at the time they were earned.
As described more fully in Note 3 to our consolidated financial statements,
during the third quarter of 2000, we invested or committed to invest a total of
approximately $8.9 million in five early-stage e-Business companies. These
nonmarketable investment securities are accounted for under the cost method, as
our ownership is less than 20% and we do not have the ability to exercise
significant influence over the operating and financial policies of the
investees. These arrangements, and other strategic partnerships described in
Note 7 to our condensed consolidated financial statements, are part of our
strategy to broaden the scope and uses of our products and to access additional
vertical markets and customers. We may make similar, additional investments in
the future. Management believes the early-stage nature of these investees may
create opportunities for us to benefit from future appreciation in the value of
our investments; however, there is significant risk that the investees may not
be successful in executing their business plans and all or part of our
investments may become impaired.
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RESULTS OF OPERATIONS FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
1999
The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to total revenues:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Revenues:
Software licenses ................................ 59% 39% 57% 44%
Software maintenance ............................. 11 13 11 12
Professional services ............................ 30 48 32 44
--------- --------- --------- ---------
Total revenues ................... 100 100 100 100
Cost of revenues:
Cost of software licenses(1) ..................... 2 4 2 2
Cost of software maintenance and professional
services(2) .................................... 59 60 58 58
--------- --------- --------- ---------
Total cost of revenues .......... 26 38 26 33
--------- --------- --------- ---------
Gross profit .................... 74 62 74 67
Operating expenses:
Sales and marketing .............................. 41 50 40 45
Research and development ......................... 20 30 21 29
General and administrative ....................... 8 15 8 13
Restructuring charges ............................ -- 23 -- 9
Stock-based compensation and related payroll taxes 2 -- 1 --
Amortization of intangibles and other
acquisition-related charges .................... 17 101 18 42
--------- --------- --------- ---------
Total operating expenses ........ 88 219 88 138
--------- --------- --------- ---------
Loss from operations ............................... (14) (157) (14) (71)
Other income, net .................................. 2 5 3 6
--------- --------- --------- ---------
Loss before income taxes ........................... (12) (152) (11) (65)
Benefit (provision) from income taxes .............. (1) 42 (1) 18
--------- --------- --------- ---------
Net loss ........................................... (11)% (110)% (12)% (47)%
========= ========= ========= =========
Excluding stock-based compensation, restructuring
and acquisition-related charges:
Profit (loss) from operations .................... 6% (33)% 4% (21)%
========= ========= ========= =========
Net income (loss) before income taxes ............ 8% (27)% 7% (14)%
========= ========= ========= =========
Net income (loss) if taxed at a 35% rate ......... 5% (18)% 4% (9)%
========= ========= ========= =========
(1) As a percentage of software licenses revenue.
(2) As a percentage of software maintenance and professional services revenue.
REVENUES
Our total revenues grew by 73% to $55.2 million for the quarter ended
September 30, 2000 from $31.9 million for the quarter ended September 30, 1999.
The revenue mix between software licenses, software maintenance, and
professional services was 59%, 11% and 30%, respectively, for the third quarter
of 2000 compared to 39%, 13% and 48%, respectively, for the same quarter last
year. For the first nine months of 2000, total revenues grew by 69% to $148.2
million from $87.6 million for the same period in 1999. The revenue mix between
software licenses, software maintenance, and professional services was 57%, 11%
and 32%, respectively, for the first nine months of 2000 compared to 44%, 12%
and 44%, respectively, for the corresponding period last year. The increase in
total revenues for the three and nine-month periods ended September 30, 2000,
compared to the corresponding periods last year, was primarily from growth in
software license revenues resulting from increases to our direct sales force,
expansion of our indirect channel partnerships, expanded product offerings and
the acquisition of two companies.
Software license revenues increased 160% to $32.3 million for the quarter
ended September 30, 2000 from $12.4 million for the quarter ended September 30,
1999. Software license revenues increased 119% to $84.7 million for the
nine-month period ended September 30, 2000 from $38.7 million for the nine-month
period ended September 30, 1999. The increase in software license revenue
reflected growth in our indirect channel revenues, expansion of our direct sales
force and new product offerings. Indirect channel revenues increased as a
percentage of total license revenues to 37% for the quarter ended September 30,
2000 from 32% for the same period of 1999. An arrangement with IBM, which
provides for a fixed minimum royalty, is payable in each quarter of 2000 and
followed by a variable royalty which is payable on a one quarter lag basis. The
growth in license revenue is also due to sales of
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new products such as e-Biz Integrator, e-Biz 2000 and adapters sold by both our
direct sales force and indirect channel partners. We expect that future software
license revenue will reflect continued strength in the direct and indirect
channels, as well as include an increasing amount of software license revenue
from the sale of the NEON e-Biz platforms and adapters.
License revenues for the quarter ended September 30, 2000 include revenues
from strategic partners in which we have made private equity investments or from
whom we have purchased, or committed to purchase software and services as
described in Note 7 to our consolidated financial statements included elsewhere
in this Form 10-Q report.
Software maintenance revenues increased 46% to $6.0 million for the quarter
ended September 30, 2000 from $4.1 million for the quarter ended September 30,
1999. Software maintenance revenues increased 55% to $16.9 million for the
nine-month period ended September 30, 2000 from $10.9 million for the nine-month
period ended September 30, 1999. The increase during both the three and
nine-month periods ended September 30, 2000, compared to the corresponding
period last year, was primarily a result of our growing installed base of
customers and the growing installed base of indirect IBM MQSeries Integrator
customers.
Professional services revenue consists of revenue for consulting and
training services, which are generally contracted for on a time and materials
basis. These revenues grew 9% to $16.8 million for the quarter ended September
30, 2000 from $15.4 million for the quarter ended September 30, 1999.
Professional services revenue grew 22% to $46.6 million for the nine-month
period ended September 30, 2000 from $38.1 million for the nine-month period
ended September 30, 1999. The increase was primarily due to higher revenue from
consulting, which is the largest component of services, although training
revenue also increased during the quarter and nine-month period. The increase in
consulting revenue was primarily due to prior periods' direct license fee
revenue growth, which resulted in more demand for our implementation services
and growth from acquisitions.
COST OF REVENUES
Cost of revenues consists of costs of software licenses and costs of
software maintenance and professional services. As a percentage of total
revenues, total cost of revenues remained constant at 26% for both the three and
nine months ended September 30, 2000.
Cost of software licenses includes royalty payments to third parties for
jointly developed products, software purchased from third parties for resale,
documentation and software replication and delivery expenses. The total dollar
amount incurred for the cost of license fees increased 8% to $550,000 for the
quarter ended September 30, 2000 from $509,000 for the quarter ended September
30, 1999. For the nine-month period, the total dollar amount for the cost of
software licenses increased 74% to $1.6 million from $916,000 for the same
period last year. Although it increased in absolute dollars, cost of licenses
remain consistent as a percentage of software license revenue.
Cost of software maintenance and professional services includes the
personnel and related overhead costs for services, including consulting,
training and customer support, as well as fees paid to third parties for
subcontracted services. Cost of software maintenance and professional services
remained approximately the same percentage of associated software maintenance
and professional services revenues, 59% and 60%, respectively, for the quarters
ended September 30, 2000 and 1999. For both the nine-month periods ended
September 30, 2000 and 1999, the cost of software maintenance and professional
services amounted to 58% of the associated software maintenance and professional
services revenues.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expense consists of personnel, commissions and related
overhead, and advertising and costs for sales and marketing activities. Sales
and marketing expense increased to $22.4 million for the quarter ended September
30, 2000 from $16.1 million for the quarter ended September 30, 1999,
representing 41% and 50% of total revenues, respectively. Sales and marketing
expense increased to $59.3 million for the nine-month period ended September 30,
2000 from $39.3 million for the corresponding period last year, representing 40%
and 45% of total revenues, respectively. The increase in absolute dollars for
both the quarter and nine-month period was primarily the result of expanded
advertising, promotional and branding activities. We expect to continue to
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expand the direct sales force and professional marketing staff, further increase
our international presence, and continue to develop our indirect sales channels
and increase promotional activity. Accordingly, we expect sales and marketing
expense to continue to grow in absolute dollars.
Research and Development
Research and development expense includes personnel and related overhead
costs for product development, enhancements, upgrades, quality assurance and
testing. Research and development expense increased to $10.9 million for the
quarter ended September 30, 2000 from $9.4 million for the quarter ended
September 30, 1999, representing 20% and 30% of total revenues, respectively.
Research and development expense increased to $31.3 million for the nine-month
period ended September 30, 2000 from $25.6 million for the nine-month period
ended September 30, 1999, representing 21% and 29% of total revenues,
respectively. The increase was primarily due to the use of contract services in
a number of research and development projects. We anticipate that future
research and development expenses will continue to increase in the second half
of 2000 as we are continuing our ongoing product enhancements in e-Business and
Portal products.
General and Administrative
General and administrative expense includes personnel and related overhead
costs for the support and administrative functions. General and administrative
expense decreased to $4.2 million for the quarter ended September 30, 2000 from
$4.6 million for the quarter ended September 30, 1999, representing 8% and 15%
of total revenues, respectively. General and administrative expense increased to
$12.3 million for the nine-month period ended September 30, 2000 from $11.6
million for the nine-month period ended September 30, 1999, representing 8% and
13% of total revenues, respectively. The total dollar amount of expense
increased primarily due to an increase in personnel to facilitate expansion of
our operations. General and administrative expenses as a percentage of total
revenues decreased primarily due to elimination of redundant personnel and
facility costs in the third quarter of 1999.
Restructuring Charges
Management and the board of directors approved a restructuring plan in July
1999 to address expense-sharing opportunities created largely due to the
consolidation of duplicate facilities and redundant positions from recent
acquisitions.
The restructuring charge of $7.5 million includes $3.3 million of expenses
related to employee separation benefits for approximately 150 employees
worldwide. The separations have affected all business functions, job
classifications and geographic areas with most of the reductions in North
America and Europe. The charge also includes $4.2 million of costs for closure
and consolidation of office space primarily in North America and Europe.
Stock-based Compensation and Related Payroll Taxes
Stock-based compensation and related payroll taxes reflect the noncash
compensation expense associated with restricted stock grants, our stock option
bonus program, our 401k program which provides for a match in our common stock,
and payroll taxes associated with the exercise of taxable employee option
grants. See Notes 10 and 11 to our consolidated financial statements for
descriptions of our stock option bonus program and 401k program.
Amortization of Intangibles and Other Acquisition-related Charges
For the three and nine-month periods ended September 30, 2000 and 1999,
amortization of intangibles and other acquisition related charges included
primarily amortization of goodwill and other intangible assets related to our
acquisition activities. The allocation of purchase price has been determined by
independent appraisals of net assets acquired. These assets are being amortized
over estimated useful lives which range from three to 10 years. In July and
August 1999, we agreed with the former equityholders of Microscript and Convoy,
respectively, to provide additional consideration to more closely reflect the
value agreed upon in the original purchase negotiations. Accordingly,
approximately $16.6 million in cash was paid to the former equityholders of
Microscript and 618,225 shares of our common stock, valued at $8.3 million, was
issued to the former Convoy equityholders. These acquisition charges were
reflected in our financial statements for the third quarter of 1999 as a
one-time charge to net income.
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OTHER INCOME, NET
Other income, net includes interest income earned on cash, cash equivalents,
short-term and long-term marketable securities, interest expense, foreign
currency gains and losses, and other nonoperating income and expenses. Other
income, net decreased to approximately $985,000 for the quarter ended September
30, 2000 from $1.7 million for the quarter ended September 30, 1999. Other
income, net decreased to $3.6 million for the nine-month period ended September
30, 2000 from $5.7 million for the nine-month period ended September 30, 1999.
The decrease was primarily due to the reduction in invested cash balances
resulting from cash used for acquisitions and purchases of other noncurrent
assets.
BENEFIT (PROVISION) FROM INCOME TAXES
The provision for income taxes for the nine months ended September 30, 2000
consists of state and foreign taxes projected to be payable with respect to
income for the period attributable to those jurisdictions. We presently expect
to pay no federal income taxes for year 2000 based on projected taxable income,
including deductions related to stock options exercised during the year. We
estimate our effective tax rate for the year, exclusive of state and foreign
taxes currently payable, will be zero. We currently expect to increase the
valuation allowance during 2000 to offset any projected increases in our net
deferred tax assets that exceed the current tax provision computed on income
exclusive of deductions from the exercise of stock options. The tax benefit of
such stock option deductions is recorded as an increase to shareholders' equity.
The valuation allowance against our deferred tax assets increased to
approximately $24.4 million at December 31, 1999. A portion of the valuation
allowance, $6.9 million, relates to tax loss carryforwards of purchased
businesses. If these deferred tax assets are realized, the benefit will reduce
goodwill arising from prior acquisitions. An additional portion of the
allowance, $9.2 million, relates to stock option compensation deductions
included in our net operating loss carryforwards. If and when we determine to
reverse that portion of the valuation allowance, the benefit will be added to
paid-in capital, rather than being shown as a reduction of future income tax
expense. The same treatment will apply to any portion of our net operating loss
attributable to our stock option deductions generated during the year 2000. The
remaining $8.3 million valuation allowance relates to certain deductions for
acquisition costs. The valuation allowance has increased over the amount
reported in earlier quarters based on actual tax returns filed for 1999.
NET LOSS
We reported a net loss of $6.4 million, or $0.18 per share and $18.6
million, or $0.52 per share for the three and nine months ended September 30,
2000, respectively. The loss includes acquisition-related charges and
stock-based compensation and related payroll taxes of approximately $10.7
million and $28.2 million for the three and nine months ended September 30,
2000, respectively. Excluding these charges and assuming a 35% tax rate, we
generated a net income of approximately $2.9 million, or $0.08 per diluted share
for the three months ended September 30, 2000 and $6.6 million, or $0.17 per
diluted share for the nine months ended September 30, 2000. We reported a net
loss of $34.9 million, or $1.06 per share and $41.2 million, or $1.30 per share
for the three and nine months ended September 30, 1999, respectively. The loss
includes restructuring and acquisition-related charges of approximately $39.8
million and $44.8 million for the three and nine months ended September 30,
1999, respectively. Excluding these charges and assuming a 35% tax rate, we
generated a net loss of approximately $5.7 million, or $0.17 per diluted share
for the three months ended September 30, 1999 and $8.0 million, or $0.25 per
diluted share for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had cash, cash equivalents, and short-term and
long-term investments in marketable securities of $71.4 million, which
represented a decrease of $23.4 million from December 31, 1999.
As of September 30, 2000, our principal sources of liquidity consisted of
$64.4 million of unrestricted cash, cash equivalents and short-term and
long-term investments in marketable securities compared with $94.8 million at
December 31, 1999. No amounts were outstanding under our $3.0 million lines of
credit during the nine-month periods ended September 30, 2000 or 1999. The
Company had working capital of $48.8 million at September 30, 2000 compared with
$86.2 million at December 31, 1999. Included in determining such amounts are
short-term deferred revenue and customer deposits of $19.8 million at September
30, 2000 and $13.6 million at December 31, 1999. The majority of short-term
deferred revenue represents annual support payments billed to customers, which
is recognized ratably as revenue over the support service period. Without the
short-term deferred revenue and customer deposits, working capital would have
been $68.6 million at September 30, 2000 and $99.8 million at December 31, 1999.
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We used $4.4 million in cash for operating activities during the nine-month
period ended September 30, 2000 compared to $43.5 million during the nine-month
period ended September 30, 1999. The improvement in operating cash flow was due
mainly to improved operating results, exclusive of noncash charges. As a result
of the significant growth in revenues, our accounts receivable, net increased to
$61.7 million at September 30, 2000 compared to $38.5 million at December 31,
1999. However, cash provided from a $6.4 million increase in deferred revenue
partially offset the effect on operating cash flows from the increase in
receivables.
We used $32.1 million in cash for investing activities for the nine-month
period ended September 30, 2000 compared to $87.3 million for the nine-month
period ended September 30, 1999. In the nine months ended September 30, 2000, we
continued to invest cash in business combinations. Cash outlays for acquisitions
in the first nine months of 2000 resulted from the PaperFree and Secco
acquisitions with net cash investments of approximately $29.3 million. We also
invested $5.0 million of cash and committed to invest an additional $3.9 million
in nonmarketable securities of five early-stage e-business companies. During the
first nine months of 2000 and 1999, we purchased furniture, fixtures and
equipment necessary to support our expanding operations. During 1999 and the
first quarter of 2000, we funded approximately $25.4 million in a short-term
construction loan to Greenwood Plaza Partners, LLP ("GPP") for construction of
two buildings and a parking structure. GPP is principally owned by the Company's
Chief Executive Officer and Chairman of the Board. We have leased the buildings
from GPP for use as our principal corporate headquarters. In May 2000, GPP
obtained interim financing from a third-party lender and repaid in full the
related party note receivable. Terms of the new financing require the Company to
maintain a restricted cash balance of up to $8.3 million with the lender as one
source of collateral for the loan, as the Company is the sole tenant. At
September 30, 2000, the restricted cash balance was approximately $7.0 million.
The amount of the restricted cash balance may be reduced to $5 million, in
accordance with the terms of the agreement, upon completion of tenant
improvements and subleasing.
Financing activities provided $8.8 million in cash during the first nine
months of 2000 compared to $5.5 million for the same period last year. For both
periods, this cash was primarily from exercises of common stock options and the
Employee Stock Purchase Plan. The 2000 amount was net of approximately $3.9
million used to repurchase 140,000 shares of our common stock held as treasury
shares.
We believe that our existing balances of cash, cash equivalents and
long-term investments in marketable securities will be sufficient to meet our
anticipated working capital and capital expenditure needs at least for the next
12 months. Thereafter, we may require additional sources of funds to continue to
support our business. There can be no assurance that such capital, if needed,
will be available or will be available on terms acceptable to us.
IN-PROCESS RESEARCH AND DEVELOPMENT
During fiscal year 1998, we acquired Century Analysis, Inc. ("CAI"), and MSB
Consultants ("MSB"). In-process research and development ("IPR&D") projects
acquired from MSB were completed during fiscal year 1999. Information regarding
the completion of the MSB IPR&D projects is included in the Form 10-K for the
year ended 1999. Detailed descriptions of these projects were included in our
10-K for the year ended 1998. As of the end of the second quarter of 2000 all of
the CAI IPR&D projects are finished and have been fully incorporated into NEON's
product development. The timeline and expectations for the completion of these
projects did not differ materially from what was anticipated at the time of the
purchase and these projects were released as planned. Further, the revenue and
costs associated with these projects did not materially differ from the initial
valuation.
FOREIGN CURRENCY RISK
We operate wholly owned subsidiaries located in England, France,
Switzerland, Germany, Australia, Japan, Malaysia, Hong Kong and Singapore.
Transactions of these operations are typically denominated in local currency,
thereby creating exposure to changes in exchange rates. The changes in foreign
exchange rates may positively or negatively affect our sales, gross margins and
stockholders' equity. We do not believe that reasonably possible near-term
changes in exchange rates will result in a material effect on our future
earnings, fair values or cash flows and, therefore, have chosen not to enter
into foreign currency hedging instruments. There can be no assurance that this
approach will be successful, especially in the event of significant, sudden and
adverse changes in foreign exchange rates relative to the United States dollar.
See Item 3, "Quantitative and Qualitative Disclosures about Market Risk."
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of
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various modifications to the terms of previously fixed stock options or awards;
and the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or January
12, 2000. To the extent our stock-based compensation awards are or become
subject to "variable accounting" because of FIN 44, we expect that significant
periodic fluctuations in the price of our common stock may cause the application
of FIN 44 to have a material impact on stock-based compensation reported in our
future results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), and amended it in March 2000. NEON is required to adopt the provisions of
SAB 101 in the fourth quarter of 2000. We are currently reviewing the provisions
of SAB 101 and have not fully assessed the impact of its adoption; however, we
do not currently expect that the adoption of SAB 101 will have a material impact
on our financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 was
to be effective for all fiscal quarters of fiscal years beginning after June 15,
1999. SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133" ("SFAS 137") was issued. SFAS 137 deferred the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000. In
June 2000, SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133" ("SFAS
138") was issued. SFAS 138 addresses a limited number of issues causing
difficulties in the implementation of SFAS 133 and is required to be adopted
concurrent with SFAS 133. The Company has not engaged in hedging activities and
does not believe that the adoption of SFAS 133 and SFAS 138 will have a material
impact on the Company's financial position or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
As described by the following factors, past financial performance should not
be considered a reliable indicator of future performance and investors should
not use historical trends to anticipate results or trends in future periods.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE TO
MAINTAIN OUR HISTORICAL GROWTH RATES.
Although we have had significant revenue growth in recent quarters, such
growth rates may not be sustainable, and you should not use these past results
to predict future operating margins and results. Our quarterly operating results
have fluctuated significantly in the past and may vary significantly in the
future. Our future operating results will depend on many factors, including the
following:
o the continued growth of the e-Business Integration and Enterprise
Application Integration ("EAI") software markets;
o the size of the orders for our products, and the timing of such orders;
o potential delays in our implementations at customer sites;
o continued development of indirect distribution channels;
o increased demand for our products;
o the timing of our product releases;
o competition;
o the effects of global economic uncertainty on capital expenditures for
software.
Quarterly revenues and operating results depend upon the volume and timing
of customer contracts received during a given quarter, and the percentage of
each contract which we are able to recognize as revenue during each quarter,
each of which is difficult to forecast. In addition, as is common in the
software industry, a substantial portion of our revenues in a given quarter
historically have been recorded in the third month of that quarter, with a
concentration of such revenues in the last two weeks of the third month.
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If this trend continues, any failure or delay in the closing of orders during
the last part of a quarter will have a material adverse effect on our business.
As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock price may decline.
SOFTWARE LICENSE REVENUE GROWTH IS DEPENDENT ON OUR RELATIONSHIP WITH IBM
AND OTHER PARTNERS.
Our revenue growth in 1999 and in the first nine months of 2000 reflected
strong sales of MQIntegrator, and MQSeries Integrator and our adapter libraries
through IBM's distribution and reseller channel. Revenue from indirect channel
partners, including IBM, BEA Systems, Hewlett-Packard, Logica and others,
accounted for approximately 32% and 37% of software license revenues in the
third quarters of 1999 and 2000, respectively. We expect that IBM and our other
partners will account for a material percentage of our software license revenue
for the remainder of 2000. Any delay or shortfall in such revenues from our
partners could have a material adverse effect on our business and operating
results.
IF OUR SALES CYCLE IS LONGER THAN WE ANTICIPATE, OUR OPERATING RESULTS MAY
SUFFER.
Although our sales cycles have shortened in the e-Business marketplace,
historically our customers typically have taken a long time to evaluate our
products. Therefore the timing of license revenue is difficult to predict. A
sale of our products to a customer typically involves a significant technical
evaluation and a commitment of capital and other resources by the customer. This
evaluation process frequently results in a sales cycle that lasts several
months. Additional delays are caused by customers' internal procedures to
approve large capital expenditures and to test, implement and accept new
technologies that affect key operations within their organization. Our operating
expense levels are relatively fixed in the short-term and are based in part on
expectations of future revenues. Consequently, any delay in the recognition of
revenue due to a longer sales cycle caused by these factors could result in
operating losses.
WE HAVE A SHORT OPERATING HISTORY AND A HISTORY OF OPERATING LOSSES.
An investor in our common stock must evaluate the risks, uncertainties,
expenses and difficulties frequently encountered by early stage companies in
rapidly evolving markets. We have had only a limited operating history upon
which an evaluation of our Company and its prospects can be based. Prior to
1996, we recorded only nominal product revenue and, including
acquisition-related charges, we have not been profitable on an annual basis. At
September 30, 2000, our Company had an accumulated deficit of approximately
$84.9 million (which includes acquisition-related charges and stock-based
compensation and related taxes). To address these risks and uncertainties, we
must do the following.
o successfully implement our sales and marketing strategy;
o expand our direct sales channels;
o further develop our indirect distribution channels;
o respond to competition;
o continue to attract and retain qualified personnel;
o continue to develop and upgrade our products and technology more rapidly
than competitors;
o commercialize our products and services with future technologies.
We may not successfully implement any of our strategies or successfully
address these risks and uncertainties. Even if we accomplish these objectives we
may not be profitable in the future.
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INABILITY TO INTEGRATE ACQUIRED COMPANIES MAY INCREASE THE COSTS OF RECENT
ACQUISITIONS.
We may from time to time acquire companies with complementary products and
services in the application integration or other related software markets.
Between September 1997 and May 2000, we acquired ten companies. These
acquisitions will expose us to increased risks and costs, including the
following:
o assimilating new operations, systems, technology and personnel;
o diverting financial and management resources from existing operations.
We may not be able to generate sufficient revenues from any of these
acquisitions to offset the associated acquisition costs. We will be required to
continually re-evaluate the realizability of acquired intangibles, and future
impairment charges may be required if projected cash flows are significantly
lower than expected at the date of these acquisitions. We will also be required
to maintain uniform standards of quality and service, controls, procedures and
policies. Our failure to achieve any of these standards may hurt relationships
with customers, employees, and new management personnel. In addition, our future
acquisitions may result in additional stock issuances which could be dilutive to
our stockholders.
We may also evaluate joint venture relationships with complementary
businesses. Any joint venture we enter into would involve many of the same risks
posed by acquisitions, particularly those risks associated with the diversion of
resources, the inability to generate sufficient revenues, the management of
relationships with third parties, and potential additional expenses, any of
which could have a harmful effect on our business, financial condition and
results of operations.
OUR INVESTMENT STRATEGY COULD CAUSE FINANCIAL OR OPERATIONAL PROBLEMS.
As of September 2000 we had invested, or committed to invest, approximately
$8.9 million in early-stage, e-Business companies with technologies or products
complementary to our own, and we plan to continue making such investments in the
future. No public market existed for these securities at the time of our
investment and there is no assurance that such a public market will ever exist.
These investments may not result in any meaningful commercial benefit to us, and
our investments could lose all or a significant part of their value.
OUR FAILURE TO MANAGE GROWTH OF OPERATIONS MAY ADVERSELY AFFECT US.
We must plan and manage effectively in order to successfully offer products
and services and implement our business plan in a rapidly evolving market. We
continue to increase the scope of our operations domestically and
internationally and have grown our headcount substantially. For example, at
January 1, 1996, we had a total of 35 employees and at September 30, 2000 we had
a total of 1,140 employees. We may further expand domestically or
internationally through internal growth or through acquisitions of related
companies and technologies. This growth will continue to place a significant
strain on our management systems and resources.
For us to effectively manage our growth, we must continue to enact the
following measures:
o improve our operational, financial and management controls;
o improve our reporting systems and procedures;
o install new management and information control systems;
o expand, train and motivate our workforce.
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON OUR SUITE OF E-BUSINESS
AND EAI PRODUCTS.
A substantial majority of our revenues come from the NEON e-Business and EAI
suite of products and related services, and we expect this pattern to continue.
Accordingly, our future operating results will depend on the demand for our
suite of e-Business and EAI products and related services by future customers,
including new and enhanced releases that are subsequently introduced. There
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can be no assurance that the market will continue to demand our current products
or that we will be successful in marketing any new or enhanced products. If our
competitors release new products that are superior to our products in
performance or price, demand for our products may decline. A decline in demand
for NEON as a result of competition, technological change or other factors would
have a harmful effect on our business, financial condition and results of
operations.
FAILURE TO ADD CUSTOMERS OR EXPAND INTO NEW MARKETS MAY BE HARMFUL TO OUR
BUSINESS.
A significant portion of our revenue has come from a small number of large
purchasers. In the three months ended September 30, 2000 and 1999, excluding
royalties from IBM and other indirect channel partners, our top ten customers
accounted for 32% and 28% of total revenues, respectively. In the three months
ended September 30, 2000 and 1999, our largest customer, excluding royalties
from IBM and other indirect channel partners, accounted for approximately 7% and
5% of our total revenues, respectively. Historically, our revenues have been
derived primarily from sales to large banks and financial institutions. Sales to
large banks and financial institutions accounted for 18% of direct revenues in
the three months ended September 30, 2000 and approximately 27% of total
revenues in the three months ended September 30, 1999. Recently a growing
portion of our total revenues has been derived from sales of our products and
services to commercial customers seeking further e-Business enabling of their
information systems and operations. These customers or other customers may not
continue to purchase our products. Our failure to add new customers that make
significant purchases of our products and services would have a harmful effect
on our business, financial condition and results of operations.
While we have developed experience marketing our products to financial
institutions, we have less experience with other vertical market segments. New
market segments that we are currently targeting are likely to have significantly
different characteristics than the financial institutions segment. As a result,
we may change our pricing structures, sales methods, sales personnel, consulting
services and customer support. We may not be successful in selling our products
and services to the additional segments targeted. Our inability to expand sales
of our products and services into these additional markets would have a harmful
effect on our business, financial condition and results of operations.
OUR GROWTH IS DEPENDENT UPON THE SUCCESSFUL DEVELOPMENT OF OUR DIRECT AND
INDIRECT SALES CHANNELS.
Our sales are derived from both our direct sales force as well as our
indirect sales channels. We support our customers with our internal technical
and customer support staff. We will continue to rely on our ability to recruit
and train additional sales people and qualified technical support personnel. Our
ability to achieve significant revenue growth in the future will greatly depend
on our ability to recruit and train sufficient technical, customer and direct
sales personnel, particularly additional sales personnel focusing on the new
vertical market segments that we target. We have in the past and may in the
future experience difficulty in recruiting qualified sales, technical and
support personnel. Our inability to rapidly and effectively expand our direct
sales force and our technical and support staff could harm our business,
financial condition and results of operations.
We believe that future growth also will depend on developing and maintaining
successful strategic relationships with distributors, resellers, and systems
integrators. Our strategy is to continue to increase the proportion of customers
served through these indirect channels. We are currently investing, and plan to
continue to invest, significant resources to develop these indirect channels.
This could harm our operating results if these efforts do not generate license
and service revenues necessary to offset such investment.
Also, our inability to recruit and retain qualified distributors, resellers
and systems integrators could harm our results of operations. Another risk is
that because lower unit prices are typically charged on sales made through
indirect channels, increased indirect sales could harm our average selling
prices and result in lower gross margins.
THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We continue to expand our international operations, and these efforts
require significant management attention and financial resources. Each version
of our product also has to be localized within each country. We have committed
resources to the opening and integration of additional international sales
offices and the expansion of international sales and support channels. Our
efforts to develop and expand international sales and support channels may not
be successful. International sales are subject to a number of risks, including
the following:
o longer payment cycles;
o unexpected changes in regulatory requirements;
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o difficulties and expenses associated with complying with a variety of
foreign laws;
o import and export restrictions and tariffs;
o difficulties in staffing and managing foreign operations;
o difficulty in accounts receivable collection and potentially adverse tax
consequences;
o currency fluctuations;
o currency exchange or price controls;
o political and economic instability abroad.
Additionally, intellectual property may be more difficult to protect outside
of the United States. International sales can also be affected to a greater
extent by seasonal fluctuations resulting from the lower sales that typically
occur during the summer months in Europe and other parts of the world. In
addition, the market for our products is not as developed outside of North
America. We may not be able to successfully penetrate international markets or
if we do, there can be no assurance that we will grow these markets at the same
rate as in North America.
WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changes in customer demands
and evolving industry standards. Our existing products could be rendered
obsolete if we fail to keep up in any of these ways. We have also found that the
technological life cycles of our products are difficult to estimate, partially
because they may vary according to the particular application or vertical market
segment. We believe that our future success will depend upon our ability to
continue to enhance our current product line while we concurrently develop and
introduce new products that keep pace with competitive and technological
developments. These developments require us to continue to make substantial
product development investments.
Existing Products. We currently serve a customer base with a wide variety of
hardware, software, database, and networking platforms. To gain broad market
acceptance, we believe that we will have to support our products on a variety of
platforms. Our success will depend, among others, on the following factors:
o our ability to integrate our products with multiple platforms,
especially relative to our competition;
o the portability of our products, particularly the number of hardware
platforms, operating systems and databases that our products can source
or target;
o the integration of additional software modules under development with
existing products;
o our management of software development being performed by third-party
developers.
Future Products. There can be no assurance that we will be successful in
developing and marketing future product enhancements or new products that
respond to technological changes, shifting customer preferences, or evolving
industry standards. We may experience difficulties that could delay these
products. If we are unable to develop and introduce new products or enhancements
of existing products in a timely manner or if we experience delays in the
commencement of commercial shipments of new products and enhancements, then
customers may forego purchases of our products and purchase those of our
competitors.
OUR FAILURE TO MAINTAIN CLOSE RELATIONSHIPS WITH KEY SOFTWARE VENDORS WILL
ADVERSELY AFFECT OUR PRODUCT OFFERING.
We believe that in order to provide competitive solutions for heterogeneous,
open computing environments, it is necessary to develop, maintain and enhance
close relationships with a wide range of vendors, including database, enterprise
resource planning, supply chain and electronic data interchange software
vendors, as well as hardware and operating system vendors. There can be no
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assurance that we will be able to maintain our existing relationships or develop
additional relationships with such vendors. Our failure to do so could adversely
affect the portability of our products to existing and new platforms and
databases and the timing of the release of new and enhanced products.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY
AFFECT US.
Our success and ability to compete is dependent in part upon our proprietary
technology. We rely on a combination of copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect our proprietary rights. We presently have three patents
and one patent application pending. Despite our efforts to protect our
proprietary rights, existing copyright, trademark and trade secret laws afford
only limited protection. In addition, the laws of certain foreign countries do
not protect our rights to the same extent as do the laws of the United States.
Attempts may be made to copy or reverse engineer aspects of our products or to
obtain and use information that we regard as proprietary. Accordingly, there can
be no assurance that we will be able to protect our proprietary rights against
unauthorized third-party copying or use. Any infringement of our proprietary
rights could materially adversely affect our future operating results.
Furthermore, policing the unauthorized use of our products is difficult and
litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on our
future operating results.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE.
The trading price of our common stock has fluctuated significantly since our
initial public offering in June 1997. In addition, the trading price of our
common stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by us or our competitors, developments with respect to patents or
proprietary rights, changes in financial estimates by securities analysts and
other events or factors. In addition, the stock market has experienced
volatility that has particularly affected the market prices of equity securities
of many high technology companies and that often has been unrelated or
disproportionate to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of our common stock.
OUR INABILITY TO ATTRACT AND RETAIN PERSONNEL MAY ADVERSELY AFFECT US.
Our success depends on the continued service of our key technical, sales and
senior management personnel. None of these persons are bound by an employment
agreement. The loss of any of our senior management or other key research,
development, sales and marketing personnel, particularly if lost to competitors,
could have a harmful effect on our future operating results. In particular
George F. (Rick) Adam, our Chief Executive Officer, would be difficult to
replace. Our future success will depend in large part upon our ability to
attract, retain and motivate highly skilled employees. We face significant
competition for individuals with the skills required to perform the services we
offer. We cannot assure that we will be able to retain sufficient numbers of
these highly skilled employees. Because of the complexity of the e-Business and
EAI software and Internet integration markets, we have in the past experienced a
significant time lag between the date on which technical and sales personnel are
hired and the time at which such persons become fully productive, and we expect
this pattern to continue.
INTELLECTUAL PROPERTY CLAIMS CAN BE COSTLY AND RESULT IN THE LOSS OF
SIGNIFICANT RIGHTS.
It is also possible that third parties will claim that we have infringed
their current or future products. We expect that e-Business and EAI software
developers will increasingly be subject to infringement claims as the number of
products in different industry segments overlap. Any claims, with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays, or require us to enter into royalty or licensing agreements,
any of which could have a harmful effect upon our operating results. There can
also be no assurance that such royalty or licensing agreements, if required,
would be available on terms acceptable to us, if at all. There can be no
assurance that legal action claiming patent infringement will not be commenced
against us, or that we would prevail in such litigation given the complex
technical issues and inherent uncertainties in patent litigation. In the event a
patent claim against us was successful and we could not obtain a license on
acceptable terms or license a substitute technology or redesign to avoid
infringement, our business, financial condition and results of operations would
be harmed.
GLOBAL ECONOMIC UNCERTAINTY MAY AFFECT THE CAPITAL EXPENDITURES OF OUR
CUSTOMERS.
The e-Business and EAI software and Internet integration markets could be
negatively impacted by certain industry factors, including global economic
difficulties and uncertainty, reductions in capital expenditures by large
customers, and increasing
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competition. These factors could in turn give rise to longer sales cycles,
deferral or delay of customer purchasing decisions, and increased price
competition. The presence of such factors in the e-Business and EAI software
market could harm our operating results.
ADOPTION OF THE EURO PRESENTS UNCERTAINTIES FOR OUR COMPANY.
In the first part of 1999, the new "Euro" currency was introduced in certain
European countries that are part of the European Monetary Union, or EMU. By
2002, all EMU countries are expected to be operating with the Euro as their
single currency. A significant amount of uncertainty exists as to the effect the
Euro will have on the marketplace generally and, additionally, all of the final
rules and regulations have not yet been defined and finalized by the European
Commission with regard to the Euro currency. We are currently assessing the
effect the introduction of the Euro will have on our internal accounting systems
and the sales of our products. We are not aware of any material operational
issues or costs associated with preparing our internal systems for the Euro.
However, we do utilize third-party vendor equipment and software products that
may or may not be EMU compliant. Although we are currently taking steps to
address the impact, if any, of EMU compliance for such third-party products, the
failure of any critical components to operate properly post-Euro could have a
harmful effect on the business, financial condition and results of operations of
our Company or require us to incur expenses to remedy such problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of operations, our financial position and cash flows
are subject to a variety of risks, which include market risks associated with
changes in foreign currency exchange rates, movements in interest rates and
equity price risk. We do not, in the normal course of business, use derivative
financial instruments for trading or speculative purposes. Uncertainties that
are either nonfinancial or nonquantifiable, such as political, economic, tax,
other regulatory or credit risks are not included in the following assessment of
our market risks.
FOREIGN CURRENCY EXCHANGE RATES
Operations outside of the U.S. expose us to foreign currency exchange rate
changes and could impact translations of foreign denominated assets and
liabilities into U.S. dollars and future earnings and cash flows from
transactions denominated in different currencies. During the first nine months
of 2000, 27% of our total revenue was generated from our international
operations, and the net assets of our foreign subsidiaries totaled 14% of
consolidated net assets as of September 30, 2000. Our exposure to currency
exchange rate changes is diversified due to the number of different countries in
which we conduct business. We operate outside the U.S. primarily through wholly
owned subsidiaries in England, France, Switzerland, Australia, Germany, Japan,
Malaysia, Hong Kong and Singapore. These foreign subsidiaries use local
currencies as their functional currency, as sales are generated and expenses are
incurred in such currencies. Foreign currency gains and losses will continue to
result from fluctuations in the value of the currencies in which we conduct our
operations as compared to the U.S. dollar, and future operating results will be
affected to some extent by gains and losses from foreign currency exposure. We
do not believe that possible near-term changes in exchange rates will result in
a material effect on our future earnings or cash flows and, therefore, have
chosen not to enter into foreign currency hedging instruments. There can be no
assurance that such approach will be successful, especially in the event of a
sudden and significant decline in the value of the U.S. dollar relative to
foreign currencies.
INTEREST RATES
Our exposure to market risk associated with changes in interest rates
relates primarily to our investments in marketable securities and our
related-party note receivable. Our investments, including cash equivalents,
consist of U.S., state and municipal bonds, as well as domestic corporate bonds,
with maturities of greater than 12 months. All short-term investments are
classified as available-for-sale as defined in SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and accordingly are carried
at market value. Our short-term investment objectives are safety, liquidity and
yield. Changes in interest rates could impact our anticipated interest income or
could impact the fair market value of our investments. However, we believe these
changes in interest rates will not cause a material impact on our financial
position, results of operations or cash flows.
EQUITY PRICE RISK
Our exposure to equity price risk relates to changes in the valuation of our
investments in privately held companies. As of September 30, 2000, we have
invested or committed to invest a total of $8.9 million among five investments,
the largest of which has a current carrying value of $2.5 million.
25
26
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in various civil litigation relating to
the conduct of its business, some of which are addressed elsewhere in this
report or in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 and Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2000 and June 30, 2000, as filed with the Securities and Exchange
Commission. While the outcome of any particular lawsuit cannot be predicted with
certainty, the Company believes that these matters will not have a material
adverse effect on its consolidated financial statements.
ITEM 2. CHANGES IN SECURITIES
In August 1999, the NEON Board of Directors authorized the repurchase of up
to the lesser of 10% of NEON's outstanding shares of common stock or stock
repurchase expenditures of $30,000,000. During the third quarter of 2000, we
repurchased an additional 100,000 shares.
In July 2000, the Company issued 13,000 shares of common stock in connection
with its acquisition of Software-Engineering, Computing and Consulting GmbH, a
German corporation. In August 2000, the Company issued 129,639 shares of common
stock to the former shareholders of PaperFree pursuant to the Plan and Agreement
of Reorganization dated March 21, 2000 between New Era of Networks, Inc. and
PaperFree Systems, Inc. In August 2000, the Company issued 75,519 shares of
common stock to the former shareholders of SLI International AG ("SLI") pursuant
to the Share Acquisition Agreement dated April 15, 1999 between New Era of
Networks, Inc. and SLI. The Company relied upon the exemptions from registration
provided by Rule 506 of Regulation D, and/or Section 4(2) under the Securities
Act of 1933, as amended, in the foregoing acquisitions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
EXHIBIT NO. DESCRIPTION
27.1 - Financial Data Schedule.
(b) Reports on Form 8-K
(1) None.
26
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ERA OF NETWORKS, INC.
(Registrant)
By: /s/ STEPHEN E. WEBB
-----------------------------
Stephen E. Webb,
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 2000
27
28
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27.1 -- Financial Data Schedule.