UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
|
Annual Report Pursuant to Section 13 or 15(d)
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of The Securities Exchange Act of 1934
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For
the fiscal year ended June 30, 1999 or
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¨
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Transition Report Pursuant to Section 13 or 15(d)
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of The Securities Exchange Act of 1934
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For
the transition period from
to
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Commission File Number: 000-26757
NetIQ CORPORATION
(Exact name of registrant as specified in its
charter)
| Delaware
|
|
77-0405505
|
| (State or other
jurisdiction
|
|
(I.R.S. Employer
|
| of
incorporation or organization)
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|
Identification
No.)
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5410 Betsy Ross Drive, Santa Clara, CA 95054
(Address of principal executive offices) (Zip Code)
(408) 330-7000
(Registrant’s telephone number, including
area code)
Securities registered pursuant to Section 12(b) of
the Act:
None
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past
90 days. Yes ¨
No x
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this
Form 10-K. x
As of
September 20, 1999, the aggregate market value of Registrant’s
voting stock held by non-affiliates was approximately $287,648,000
based upon the closing sales price of the Common Stock as reported
on the Nasdaq Stock Market on such date. Shares of Common Stock held
by officers, directors and holders of more than ten percent of the
outstanding Common Stock have been excluded from this calculation
because such persons may be deemed to be affiliates. The
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of
September 20, 1999, the Registrant had outstanding 15,385,405 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant’s Proxy Statement for its 1999 Annual Meeting of
Shareholders (Part III). Certain sections of Registrant’s
definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders to be held on
November 11, 1999, are incorporated by reference in Part III of this
Form 10-K to the extent stated herein.
This
report on Form 10-K includes 54 pages with the list of Exhibits
located on page 34.
NetIQ
Corporation
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JUNE 30, 1999
PART I
General
NetIQ Corporation was incorporated in California in June
1995. In July 1999 we reincorporated in the state of Delaware.
Our principal executive offices are located at 5410 Betsy Ross
Drive, Santa Clara, California 95054, and our telephone number
is (408) 330-7000. Our Web address is www.netiq.com.
Overview
We develop applications management software that enables
businesses to optimize the performance and availability of their
Windows NT-based systems and applications. As use of Windows NT
in highly complex computing environments, including the
Internet, continues to expand, businesses are increasingly
relying on Windows NT-based systems and applications for
critical business functions. These applications include
Microsoft Exchange Server, Lotus Domino/Notes, Oracle, Citrix
WinFrame, Microsoft Internet Information Server and Microsoft
SQL Server. As a result, these businesses are facing new
challenges in managing their highly complex Windows NT
environments in order to maintain required service levels,
ensure continuous uptime and reduce support costs. Our NetIQ
AppManager Suite enables businesses to address these
challenges by centrally managing the performance of their highly
complex Windows NT environments, helping ensure availability
through automated monitoring, correction and reporting features
and lower the total cost of ownership. We believe that
AppManager’s comprehensive functionality and ease of
use resulting from the utilization of familiar Microsoft
technology and standards offer a superior solution for managing
diverse Windows NT-based systems and applications in highly
complex computing environments.
Products
AppManager
AppManager consists of fully integrated product
modules known as “AppManagers” that provide
comprehensive functionality for managing Windows NT-based
systems and the popular applications that run on Windows NT.
AppManager has broad functionality that enables information
technology professionals to rapidly detect problems, identify
the underlying source of the problems, implement corrective
measures and generate focused management reports through an
automated process. AppManager also provides more than 500
pre-packaged “Knowledge Scripts,” or business rules
and policies, that initiate corrective action and record the
most relevant statistics that need to be monitored at specified
thresholds and intervals. Information technology professionals
can easily customize these Knowledge Scripts or develop their
own to meet organization-specific requirements.
AppManager utilizes and builds upon leading
Microsoft technologies and standards, protocols and application
programming interfaces. As a result, AppManager looks,
feels and operates in much the same manner as Microsoft Windows
NT products, helping information technology professionals adopt
and use AppManager more easily than system management
solutions that have been adapted from solutions for non-Windows
platforms. Furthermore, as new and emerging Windows NT standards
and product features develop, we intend to incorporate these
standards and features into AppManager.
AppManager’s architecture scales easily to
accommodate growth in the number of Windows NT servers and
Windows NT-based applications that organizations deploy in their
computing environments. Many of our customers gradually adopt
and rollout Windows NT throughout their enterprise on a
server-by-server basis, and deploy additional Windows NT-based
applications on an application-by-application basis. As
customers increase their use of Windows NT-based systems and
applications, our architecture scales to accommodate this growth
and continues to enable information technology professionals to
manage their server base from a centralized console.
The following table summarizes the functionality of our
Windows NT-based AppManager.
Server or
Product
Category
|
|
NetIQ
Products
(Year Introduced)
|
|
Representative
Functionality
|
| Windows NT
Operating Systems
|
|
AppManager for
Ÿ
Microsoft Windows NT (1996)
Ÿ
Microsoft Cluster Server (1997)
Ÿ
Windows NT Server, Terminal Server
Edition (1998)
Ÿ
Citrix WinFrame (1998)
Ÿ
Microsoft Windows Load Balance Service (1999)
|
|
Ÿ
Identifies CPU bottlenecks and terminates
runaway processes
Ÿ
Checks if key services are down and auto starts
Ÿ
Tracks disk space utilization
Ÿ
Determines if running low on DHCP leases
Ÿ
Resets terminal server session
Ÿ
Reboots downed Windows NT server
|
|
|
|
| Messaging
Servers
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|
AppManager for
Ÿ
Microsoft Exchange Server (1996)
Ÿ
Lotus Domino/Notes (1997)
Ÿ
Microsoft Message Queue Server (1997)
|
|
Ÿ
Monitors e-mail connectivity and
response time
Ÿ
Reports on e-mail traffic flow
Ÿ
Identifies top senders and receivers of e-mail
Ÿ
Monitors e-mail space usage
|
|
|
|
| Internet/Web
Servers
|
|
AppManager
for
Ÿ
Microsoft Internet Information Server
(1996)
Ÿ
Microsoft Commercial Internet System
News Server (1997)
Ÿ
Microsoft Proxy Server (1998)
Ÿ
Microsoft Site Server (1999)
Ÿ
Microsoft Site Server, Commerce Edition (1999)
|
|
Ÿ
Monitors connection to URLs
Ÿ
Examines contents of URLs and checks for
changes
Ÿ
Monitors the availability of a web server
Ÿ
Displays HTTP connections
Ÿ
Detects unauthorized login attempts
Ÿ
Detects if an Internet port or IP address can
be accessed
|
|
|
|
| Database
and Application Servers
|
|
AppManager
for
Ÿ
Microsoft SQL Server (1996)
Ÿ
Microsoft Transaction Server (1997)
Ÿ
Oracle (1998)
Ÿ
SAP R/3 (1999)
|
|
Ÿ
Identifies SQL statements utilizing most
amount of system resources
Ÿ
Monitors database space usage
Ÿ
Tracks locking conditions
Ÿ
Truncates transaction log if running out of space
|
|
|
|
| Hardware
Management Tools
|
|
AppManager
for
Ÿ
Compaq Insight Manager (1997)
Ÿ
HP TopTools for Servers (1998)
Ÿ
Dell OpenManage (1998)
Ÿ
NEC ESMPro* (1998)
Ÿ
IBM NetFinity (1999)
|
|
Ÿ
Monitors computer temperature
Ÿ
Detects if UPS battery is running low
Ÿ
Reports error status of network interface cards
Ÿ
Monitors system voltage
Ÿ
Tracks asset information such as serial numbers
|
|
|
|
|
Third-Party Tools
|
|
AppManager for
Ÿ
Microsoft Systems Management Server (1996)
Ÿ
Microsoft SNA Server (1999)
Ÿ
CA ARCServe (1999)
Ÿ
Seagate Backup Exec (1999)
Ÿ
Legato Networker (1999)
|
|
Ÿ
Detects if software distribution has failed
Ÿ
Checks status of tool’s services and auto- restart
Ÿ
Monitors SNA connections
Ÿ
Determines if backup job has failed
|
|
|
|
“
Connector” to Management
Frameworks
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|
AppManager Connector for
Ÿ
Tivoli Enterprise (1998)
Ÿ
CA Unicenter TNG (1998)
Ÿ
HP OpenView Network Node Manager (1998)
Ÿ
Cabletron Spectrum (1999)
|
|
Ÿ
Receives events from AppManager
Ÿ
Invokes AppManager console from within
framework
Ÿ
Distributes AppManager software
|
|
|
|
| Console
Products
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AppManager for
Ÿ
Operator Console (1996)
Ÿ
Developer Console (1996)
Ÿ
Web Access Console (1997)
|
|
Ÿ
Views and acknowledges events
Ÿ
Generates service level agreement reports
Ÿ
Edits pre-defined Knowledge Scripts
Ÿ
Displays performance metrics
|
*
|
Available only with the
Japanese edition of the NetIQ AppManager Suite.
|
We also provide a localized
version of our AppManager products for the
Japanese market.
AppManager ’s
architecture is comprised of the following tiers:
|
Ÿ
|
AppManager Console.
The console is an easy-to-use
graphical user interface program that displays systems
and applications as resource icons within a familiar
Microsoft Explorer-type tree view. The console is used
to centrally define and control the execution of
Knowledge Scripts, business rules and policies. The
Knowledge Scripts run as Visual Basic for Applications
scripts that collect performance data, monitor for
events and initiate corrective actions.
|
|
Ÿ
|
Web Console.
The Web console is an optional
program that lets users monitor their entire Windows NT
environment from a Web browser.
|
|
Ÿ
|
Repository Server.
The repository server is a
Microsoft SQL Server database that stores performance
and availability management data. The repository server
allows for custom reporting and provides over 165
standardized reports for users to choose from. These
standardized reports focus on summarizing inventory,
performance and event data collected by
AppManager for both Windows NT-based systems and
applications, and are designed to help information
technology personnel determine if they are meeting
their required service levels.
|
|
Ÿ
|
Management Server.
The management server is a
program that manages event-driven communication between
the repository and the agent programs.
|
|
Ÿ
|
Agent.
The agent is an easy-to-use and
easy-to-deploy program that receives requests from the
management server to either run or stop a Knowledge
Script. After receiving a request, the agent program
communicates back any system events and exceptional
data collected by the running Knowledge Scripts. Users
can centrally “push” the AppManager
agents to remote systems for easy deployment.
|
Sales, Marketing and
Distribution
Field and Inside Sales
We market our software and
services through our field sales organization located at
our headquarters facility in Santa Clara, California, our
domestic field offices in Boston, Chicago, Dallas,
Denver, New York and Washington, D.C., and our
international field offices in London, Munich, Singapore,
Sydney and Tokyo. Most of our field sales offices include
a territory manager and one or more systems engineers.
The territory manager and system engineer concentrate on
Fortune 1000-sized accounts that have at least 100
Windows NT servers. Channel sales representatives focus
on managing sales activities of our regional channel
partners and branch sales offices of our national
reseller partners. Typically, our sales process will
include an initial sales presentation in person or over
the phone, a product demonstration, a product evaluation
period, a closing meeting and a purchase process.
Generally the sales process includes licensing our
products to potential customers on a trial basis. Our
sales process typically takes 90 to 180 days, but this
process can be longer for large, enterprise-wide sales.
Our field sales organization is
complemented by an inside sales organization with offices
at our Santa Clara, California headquarters and in our
London and Sydney field offices. Our inside sales
organization typically handles orders from customers who
have fewer than 100 Windows NT servers that are not
processed or sold through the channel, or at times in
concert with our channel partners. Our inside sales
personnel also handle sales lead qualification, help
recruit regional channel partners and distribute leads to
the field sales organization or channel partners.
Value Added Resellers, System Integrators,
Distributors and Original Equipment Manufacturers
We have implemented a channel
partner program, our NetIQ Partner Network, that provides
training, certification, technical support, priority
communications regarding upcoming activities and products
and joint sales and marketing activities. In North
America, Tech Data is the primary distributor of our
product and our sole U.S. distributor as of the date of
this Report, and, as of June 30, 1999, we had over 50
third party channel partners who purchase our products
through Tech Data. We sell our products to Tech Data
based upon previously-negotiated prices. Tech Data, in
turn, resells our products to their resellers at
previously-negotiated
prices. Our agreement with Tech Data is for successive
one-year terms that expire each June, but is subject to
automatic one-year renewals unless either party provides
a termination notice prior to the renewal date. Either
party to the distribution agreement may terminate the
contract upon 30 days written notice to the other party.
We have also established a network of value added
resellers and system integrators in Europe, Latin America
and the Asia-Pacific region who perform marketing, sales
and technical support functions in their country or
region. Each value added reseller may distribute our
products directly to the customer and/or through other
resellers. We had 25 channel partners outside of North
America as of June 30, 1999. In addition, we have worked
with NEC, Fujitsu and Hitachi to develop branded Japanese
versions of
AppManager that each of these original
equipment manufacturers markets, sells and supports.
Marketing
We have a number of marketing
programs designed to inform customers about the
capabilities and benefits of our AppManager
products. Our marketing efforts include participation in
industry trade shows, technical conferences and
technology seminars, preparation of competitive analyses,
sales training, publication of technical and educational
articles in industry journals, advertising, public
relations, and analyst and press tours.
Relationships with Developers of Windows NT-Based
Systems and Applications
We have relationships with
developers of Windows NT-based systems and applications
including Citrix, Compaq, Computer Associates, Dell
Computer, Hewlett-Packard, IBM, including both its Lotus
and Tivoli subsidiaries, Microsoft and Oracle. As part of
these relationships, we often develop joint marketing
programs with these software and hardware vendors. Our
relationship with Microsoft is an example of this type of
product-based relationship. Microsoft is a customer of
ours. Microsoft’s information technology group
selected AppManager to monitor the performance and
availability of its worldwide Windows NT environment, as
well as to centrally monitor its Windows NT-based
applications server infrastructure. Microsoft also
currently distributes our AppManager Agent for
WMI on its current version of Windows 2000 operating
system software. Recently, Microsoft has permitted one of
our engineers to work with its Windows NT development
group at its Redmond, Washington headquarters. Microsoft
also contracts for one of our engineers to provide
support for Microsoft’s use of our products. Another
example of our product-based relationships is our
relationship with Compaq, whose service organization is a
worldwide reseller of AppManager.
International Sales
International sales did not
account for any of our revenue in fiscal 1997, but
represented 10% of total revenue in fiscal 1998 and 20%
of total revenue in fiscal 1999. We anticipate that as we
expand our international sales efforts, the percentage of
revenue derived from international sources will continue
to increase. Currently, a majority of our international
business is conducted in U.S. dollars. However, as we
expand our international operations, we expect that our
international business will increasingly be conducted in
foreign currencies. Fluctuations in the value of foreign
currencies relative to the U.S. dollar have caused, and
we expect such fluctuation to increasingly cause,
currency transaction gains and losses. We cannot predict
the effect of exchange rate fluctuations upon future
quarterly and annual operating results. We may experience
currency losses in the future. To date, we have not
adopted a hedging program to protect us from risks
associated with foreign currency fluctuations.
Customer Support
Our technical support
organization provides ongoing technical support for our
customers and for prospective customers during the period
in which a prospective customer evaluates our
AppManager. We offer technical support services 24
hours a day, seven days a week via our Internet site,
telephone, e-mail, a support Web site and fax. Customers
are notified about the availability of regular
maintenance and enhancement releases via Internet-based
e-mail. Customers typically purchase the first year of
software maintenance and support together with the
initial product license. Thereafter, customers are
entitled to receive software updates, maintenance
releases and technical support for an additional annual
maintenance fee.
We also offer training courses
for the implementation and administration of our
products. Product training is provided on a periodic
basis at our headquarters in Santa Clara, California, at
the offices of members of our NetIQ Partner Network and
also at customer sites throughout the United States and
Europe.
Our professional services group
provides product training, consulting and implementation
services for a fee in order to assist customers in
maximizing the benefits of our products. A significant
focus of our professional services group is also to train
and support partners who are members of the NetIQ Network
Partner channel program in how to provide AppManager
-related services and support to customers.
Research and
Development
Our research and development
organization is responsible for the design, development
and release of our products. The group is organized into
development, quality assurance, product management,
documentation, and localization disciplines. Members from
each discipline form separate product teams that work
closely with sales, marketing and customer support to
better understand market needs and user requirements.
Additionally, we have a well-developed information
feedback loop with our customers to respond to and
address their changing system and application management
requirements. When appropriate, we also utilize third
parties to expand the capacity and technical expertise of
our internal research and development team. On occasion,
we have licensed third-party technology which we believe
shortens time to market without compromising competitive
position or product quality.
We have made substantial
investments in research and development. Our research and
development expenses were $1.0 million, $2.2 million and
$4.3 million in fiscal 1997, 1998 and 1999, respectively.
The dollar increase in fiscal 1998 and fiscal 1999 was
due primarily to increased staffing and the purchasing of
additional hardware and software for development and
testing purposes.
Competition
The market for applications
management software for optimizing the performance and
availability of Windows NT-based systems and applications
is new, rapidly evolving and highly competitive, and we
expect competition in this market to persist and
intensify. New products for this market are frequently
introduced and existing products are continually
enhanced. We may not be able to compete successfully
against current and/or future competitors and such
inability would materially adversely affect our business,
future quarterly and annual operating results and
financial condition.
Existing Competition. We
currently face competition from a number of sources,
including:
|
Ÿ
|
Providers of network
and systems management framework products such as IBM,
Computer Associates and Hewlett-Packard
|
|
Ÿ
|
Providers of
performance and availability management solutions such
as BMC Software
|
|
Ÿ
|
Customers’
internal information technology departments that
develop or integrate system and application monitoring
tools for their particular needs
|
Intellectual Property
Our success is heavily dependent
upon proprietary technology. We rely primarily on a
combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual
provisions to protect our proprietary rights. These laws
and procedures provide only limited protection. We have
applied for patents relating to our engineering work.
Three patents have been issued or approved for issuance.
We license technology that helps
AppManager Suite run our applications management
modules from Summit Software on a non-exclusive,
worldwide basis. Our AppManager product modules
for Windows NT,
Windows NT Workstation and Super Console incorporate Summit
Software technology. Under the terms of our license
agreement, we pay limited royalties to Summit. We license
this technology on a year-to-year basis which is
automatically renewed each August and, in the event our
license agreement for this technology is terminated, we
may continue to sell our
AppManager Suite with the
Summit technology for a period of 24 months following the
termination of the licensing agreement. Our license is
terminable upon 60 days notice in the event a default
under the licensing agreement occurs, including our
failure to pay royalty fees on a timely basis or any
other material breach by us of the license agreement.
Employees
As of June 30, 1999, we had 133
employees, 43 of whom were engaged in research and
development, 66 in sales and marketing, 10 in customer
support and 14 in finance and administration. None of our
employees is represented by a collective bargaining
agreement. We have not experienced any work stoppages and
consider our relations with our employees to be good.
Our principal administrative,
sales, marketing, customer support and research and
development facility is located at our headquarters
facility in Santa Clara, California. We currently occupy
approximately 23,000 square feet of office space in the
Santa Clara facility under the terms of a lease expiring
in July 2003. Our current facility will not be adequate
to meet our needs for the next 12 months and we are
currently evaluating additional space in the local area.
We believe that suitable additional facilities will be
available as needed on commercially reasonable terms. We
also lease space for sales and marketing offices in
Boston, Denver, New York City, Dallas, and Washington,
D.C. and have international field offices in Sydney,
London, Munich, and Tokyo.
ITEM 3.
LEGAL PROCEEDINGS
In September 1996, Compuware
Corporation filed a complaint against us alleging
misappropriation of trade secrets, copyright
infringement, unfair competition and other claims.
Compuware asserted these claims after a number of prior
Compuware employees founded our company or later joined
us as officers and employees. A settlement of these
claims was reached in January 1999 and final
documentation was entered into and the claims dismissed
in March 1999. Prior to reaching a settlement with
Compuware, we incurred significant expenses related to
the litigation, primarily relating to legal fees, and
management attention was partially diverted to this
litigation matter. As part of the settlement in March
1999, Compuware loaned us $5.0 million, subordinated to
our bank credit facility, with interest at 6% per year.
Additionally, as part of the settlement in March 1999, we
issued Compuware a warrant to purchase 280,025 shares of
common stock at 90% of the per share sale price of shares
sold to investors in our initial public offering.
Compuware exercised the warrant in full upon the closing
of our initial public offering at $11.70 per share using
the initial offering price of $13.00 per share. Pursuant
to the completion of our initial public offering we paid
approximately $1.8 million to satisfy a portion of our
principal and interest obligation to Compuware, and the
remaining $3.3 million loan obligation was forgiven in
connection with Compuware’s exercise of the warrant.
Additionally, as part of our settlement agreement, we
agreed not to recruit personnel from Compuware until
after December 31, 1999, or release any systems
management software for managing UNIX systems on or
before December 31, 1999.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
On June 22, 1999, the
stockholders of the Company gave their written consent to
various resolutions effecting the reincorporation of the
Company from California into Delaware, including
resolutions approving and authorizing the merger of the
Company’s California predecessor company with and
into the Company. The stockholders also approved and
authorized the Company to enter into indemnification
agreements with the Company’s officers and
directors, the approval of a reverse two-for-three stock
split, and the amendment and restatement of the Company
’s Certificate of Incorporation.
PART II
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON
EQUITY AND RELATED SHAREHOLDER MATTERS
The Company’s Common Stock
has been traded on the Nasdaq National Market under the
trading symbol “NTIQ” since the Company’s
initial public offering in July 1999. Prior to July 1999,
there was no established public trading market for the
Company’s Common Stock.
The approximate number of holders
of the shares of NetIQ Corporation’s Common Stock
was 161 as of September 20, 1999. This number does not
include shareholders whose shares are held in trust by
other entities.
We have never declared or paid
any cash dividends on shares of our Common Stock. We
intend to retain any future earnings for future growth
and do not anticipate paying any cash dividends in the
foreseeable future.
Recent Sales of
Unregistered Securities
Between July 1, 1996, and June
30, 1999, the Company issued and sold 1,264,493 shares of
unregistered Common Stock upon the exercise of
outstanding options under its 1995 Stock Option Plan. The
consideration paid in exchange for such Common Stock
varied based on the deemed fair market value of the
options at the time of grant. The sale of these shares
was deemed to be exempt from registration under the
Securities Act of 1933, as amended (the Securities Act),
in reliance on Rule 701 promulgated under Section 3(b) of
the Securities Act, as transactions not involving a
public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as
provided under Rule 701. Each recipient of such shares
had adequate access, through his or her relationship with
the Company, to information about the Company. In May
1997, the Company sold 2,733,321 shares of Series B
Preferred Stock at a per share purchase price of $3.00.
The sale of these shares was deemed exempt from
registration under the Securities Act, in reliance on
Section 4(2) thereof, as transactions not involving a
public offering.
In June 1999, we issued 26,667
shares of common stock to a third party, valued at the
deemed fair market value of $12.00 per share, in exchange
for services rendered in connection with development of a
new product module. The sale of these shares was deemed
exempt from registration under the Securities Act, in
reliance on Section 4(2) thereof, as transactions not
involving a public offering.
Use of Proceeds
In July 1999, the Company
completed the sale of 3 million shares of its Common
Stock at a per share price of $13.00 in a firm commitment
underwritten public offering. The offering was
underwritten by Credit Suisse First Boston, BancBoston
Roberston Stephens and Hambrecht & Quist LLC. In
August 1999, an over-allotment option granted by the
Company to the underwriters for the purchase of up to
450,000 additional shares of the Company’s Common
Stock was exercised in full by the underwriters.
The Company received aggregate
gross proceeds of $44.85 million in connection with its
initial public offering. Of such amount, approximately
$3.1 million was paid to the underwriters in connection
with underwriting discounts, and approximately $1.3
million was paid by the Company in connection with
offering expenses, including legal, accounting, printing,
filing and other fees. The net proceeds to the Company
after deduction of such commissions and expenses were
approximately $40.4 million. There were no direct or
indirect payments to officers or directors of the Company
or any other person or entity. None of the offering
proceeds have been used for the construction of plants,
building or facilities or other purchase or installation
of machinery or equipment, for the purchase of real
estate, or for the acquisition of other businesses.
Approximately, $1.8 million of
the proceeds were paid to Compuware Corporation in
partial repayment of the Company’s indebtedness to
Compuware. The remaining portion of the our indebtedness
to Compuware, in
the amount of approximately $3.3 million, was forgiven in
exchange for the issuance by the Company of 280,025
shares of the Company’s Common Stock to Compuware
upon the exercise (in full) of a warrant issued to
Compuware in March 1999. The loan was made and the
warrant was issued to Compuware in connection with the
settlement of a lawsuit filed by Compuware against the
Company.
Approximately, $340,000 of the
proceeds was paid to a bank in full repayment of the
Company’s long-term debt for equipment purchases.
The Company currently is
investing the net offering proceeds for future use as
additional working capital. Such remaining net proceeds
may be used for potential strategic investments or
acquisitions that complement the Company’s products,
services, technologies or distribution channels.
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
|
|
|
Year Ended June 30,
|
|
|
|
1996
|
|
1997
|
|
1998
|
|
1999
|
|
|
|
(In thousands, except per share data)
|
|
Consolidated Statements of Operations Data:
|
|
Software license revenue
|
|
$—
|
|
|
$
369
|
|
|
$6,603
|
|
|
$18,433
|
|
| Service
revenue
|
|
—
|
|
|
19
|
|
|
467
|
|
|
3,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
—
|
|
|
388
|
|
|
7,070
|
|
|
21,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of
software license revenue
|
|
—
|
|
|
9
|
|
|
235
|
|
|
755
|
|
| Cost of
service revenue
|
|
—
|
|
|
46
|
|
|
407
|
|
|
1,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
—
|
|
|
55
|
|
|
642
|
|
|
2,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
—
|
|
|
333
|
|
|
6,428
|
|
|
19,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
Sales and marketing
|
|
77
|
|
|
1,238
|
|
|
5,748
|
|
|
11,685
|
|
|
Research and development
|
|
665
|
|
|
1,003
|
|
|
2,192
|
|
|
4,344
|
|
|
General and administrative
|
|
264
|
|
|
479
|
|
|
1,611
|
|
|
2,983
|
|
|
Stock-based compensation
|
|
—
|
|
|
10
|
|
|
250
|
|
|
1,928
|
|
|
Settlement of litigation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
1,006
|
|
|
2,730
|
|
|
9,801
|
|
|
21,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss
from operations
|
|
(1,006
|
)
|
|
(2,397
|
)
|
|
(3,373
|
)
|
|
(1,750
|
)
|
|
Interest income, net
|
|
97
|
|
|
116
|
|
|
262
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss
|
|
$(909
|
)
|
|
$(2,281
|
)
|
|
$(3,111
|
)
|
|
$(1,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic
and diluted net loss per share (1)
|
|
$(1.55
|
)
|
|
$(1.62
|
)
|
|
$(1.34
|
)
|
|
$(0.47
|
)
|
| Shares
used to compute basic and diluted net loss per share (1)
|
|
587
|
|
|
1,411
|
|
|
2,325
|
|
|
3,476
|
|
| Pro
forma basic and diluted net loss per share (2)
|
|
|
|
|
|
|
|
|
|
|
$(0.15
|
)
|
| Shares
used to compute pro forma basic and diluted net loss
per share (2)
|
|
|
|
|
|
|
|
|
|
|
10,876
|
|
|
Conosolidated Balance Sheet Data:
|
| Cash
and cash equivalents
|
|
32
|
|
|
7,748
|
|
|
3,358
|
|
|
9,634
|
|
| Working
capital
|
|
1,755
|
|
|
7,493
|
|
|
4,314
|
|
|
4,443
|
|
| Total
assets
|
|
2,255
|
|
|
8,202
|
|
|
8,205
|
|
|
18,354
|
|
|
Long-term obligations, net of current portion
|
|
—
|
|
|
—
|
|
|
—
|
|
|
205
|
|
| Total
stockholders’ equity
|
|
1,880
|
|
|
7,787
|
|
|
4,939
|
|
|
5,799
|
|
(1)
|
See Note 6 to the
Consolidated Financial Statements for the determination
of shares used in computing basic and diluted net loss
per share.
|
(2)
|
See Note 1 to the
Consolidated Financial Statements for the determination
of shares used in computing pro forma basic and diluted
net loss per share.
|
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We develop applications
management software that enables businesses to optimize
the performance and availability of their Windows
NT-based systems and applications.
From our incorporation in June
1995 until the first sales of AppManager in
February 1997, we were principally engaged in
development-stage activities, including product
development, sales and marketing efforts and recruiting
qualified management and other personnel. Our total
revenue has grown from $388,000 in 1997, to $7.1 million
in 1998 and to $21.6 million in 1999. This rapid revenue
growth reflects our relatively early stage of
development, and we do not expect revenue to increase at
the same rate in the future.
Operating expenses grew from $2.7
million in 1997 to $9.8 million in 1998 and to $21.3
million in 1999. Our operating expenses increased as we
expanded our operations, including growing our employee
base from 14 at June 30, 1996 to 133 at June 30, 1999.
Our operating expenses, which include charges for
stock-based compensation and a charge for settlement of
litigation in 1999, together with cost of revenue have
exceeded revenue in every quarter since inception. This
reflects our strategy to make the investments necessary
to capture market share and grow revenue as quickly as
possible, while maintaining a high level of fiscal
control, product quality and customer satisfaction. Our
cumulative losses have resulted in an accumulated deficit
of $7.9 million at June 30, 1999.
We have derived the large
majority of our revenue from software licenses. We also
derive revenue from sales of annual maintenance service
agreements and, to a lesser extent, consulting and
training services. Service revenue has increased in
recent periods as license revenue has increased and as
the size of our installed base has grown. We expect
service revenue to increase as a percentage of total
revenue in the future and, as a consequence, our cost of
service revenue to increase in absolute dollars and as a
percentage of total revenue. The pricing of the
AppManager Suite is based on the number of systems
and applications managed, although volume and enterprise
pricing is also available. Our customers typically
purchase one year of product software maintenance with
their initial license of our products. Thereafter,
customers are entitled to receive software updates,
maintenance releases and technical support for an annual
maintenance fee equal to a fixed percentage of the
current list price of the licensed product.
Cost of service revenue, as a
percentage of service revenue, has declined from 242% in
1997 to 87% in 1998 and 40% in 1999. Cost of software
license revenue has increased from 2% in 1997 to 4% in
1998 and 1999. Although service revenue has increased as
a percentage of total revenue from 5% in 1997 to 7% in
1998 to 15% in 1999, the declining cost of service
revenue has resulted in an increase in overall gross
margin from 86% in 1997 to 91% in 1998 and 1999. We
anticipate that service revenue will increase as a
percentage of total revenue in the future as customers
continue to renew maintenance service contracts and, if
we are unable to reduce the costs of service revenue, our
margins may decline.
We sell our products through both
our direct sales force, which includes our field and
inside sales personnel, as well as through indirect
channels, such as distributors, value-added resellers and
original equipment manufacturers. To date, the majority
of our sales have resulted from the efforts of our field
and inside sales personnel. However, revenue through our
third-party channel partners represented approximately
10% of total revenue in 1998 and 30% of total revenue in
1999, and our strategy is to increase sales through
third-party channel partners. Two customers accounted for
45% and 12% of total revenue in 1997. During both 1998
and 1999, no single customer accounted for more than 10%
of our total revenue. International sales did not account
for any of our revenue in 1997, but represented 10% of
total revenue in 1998 and 20% of total revenue in 1999.
We anticipate that as we expand our international sales
efforts, the percentage of revenue derived from
international sources will continue to increase.
Generally, we sell perpetual
licenses and recognize revenue in accordance with
generally accepted accounting principles upon meeting
each of the following criteria:
|
Ÿ
|
execution of a written
purchase order, license agreement or contract;
|
|
Ÿ
|
delivery of software
and authorization keys;
|
|
Ÿ
|
the license fee is
fixed and determinable;
|
|
Ÿ
|
collectibility of the
proceeds within six months is assessed as being
probable; and
|
|
Ÿ
|
vendor-specific
objective evidence exists to allocate the total fee to
elements of the arrangement.
|
Vendor-specific objective
evidence is based on the price generally charged when an
element is sold separately, or if not yet sold
separately, is established by authorized management. All
elements of each order are valued at the time of revenue
recognition. For sales made through our distributors,
resellers and original equipment manufacturers, we
recognize revenue at the time these partners report to us
that they have sold the software to the end user and
after all revenue recognition criteria have been met.
In September 1996, Compuware
Corporation filed a complaint against us alleging
misappropriation of trade secrets, copyright
infringement, unfair competition and other claims.
Compuware asserted these claims after a number of prior
Compuware employees founded our company or later joined
us as officers and employees. A settlement of these
claims was reached in January 1999 and final
documentation was entered into and the claims dismissed
in March 1999. Prior to reaching a settlement with
Compuware, we incurred significant expenses related to
the litigation, primarily relating to legal fees, and
management attention was partially diverted to this
litigation matter. As part of the settlement in March
1999, Compuware loaned us $5.0 million, subordinated to
our bank credit facility, with interest at 6% per year.
Additionally, as part of the settlement in March 1999, we
issued Compuware a warrant to purchase 280,025 shares of
common stock at 90% of the per share sale price of shares
sold to investors in our initial public offering.
Compuware exercised the warrant in full upon the closing
of our initial public offering at $11.70 per share using
the initial offering price of $13.00 per share. Pursuant
to the completion of our initial public offering we paid
approximately $1.8 million to satisfy our obligation to
Compuware, and the remaining $3.3 million loan obligation
was forgiven in connection with Compuware’s exercise
of the warrant. Additionally, as part of our settlement
agreement, we agreed not to recruit personnel from
Compuware until after December 31, 1999, or release any
systems management software for managing UNIX systems on
or before December 31, 1999.
Historical Results of
Operations
The following table sets forth
our historical results of operations expressed as a
percentage of total revenue for fiscal 1997 and 1998 and
1999.
|
|
|
Percentage of Total Revenue
Year Ended June 30,
|
|
|
|
1997
|
|
1998
|
|
1999
|
|
Consolidated Statements of Operations Data:
|
|
Software license revenue
|
|
95
|
%
|
|
93
|
%
|
|
85
|
%
|
| Service
revenue
|
|
5
|
|
|
7
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
100
|
|
|
100
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of
software license revenue
|
|
2
|
|
|
3
|
|
|
4
|
|
| Cost of
service revenue
|
|
12
|
|
|
6
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
14
|
|
|
9
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
| Gross
profit
|
|
86
|
|
|
91
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
Sales and marketing
|
|
319
|
|
|
81
|
|
|
54
|
|
|
Research and development
|
|
259
|
|
|
31
|
|
|
20
|
|
|
General and administrative
|
|
123
|
|
|
23
|
|
|
14
|
|
|
Stock-based compensation
|
|
3
|
|
|
4
|
|
|
9
|
|
|
Settlement of litigation
|
|
—
|
|
|
—
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
704
|
|
|
139
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
| Loss
from operations
|
|
(618
|
)
|
|
(48
|
)
|
|
(9
|
)
|
|
Interest income, net
|
|
30
|
|
|
4
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss
|
|
(588
|
)%
|
|
(44
|
)%
|
|
(8
|
)%
|
|
|
|
|
|
|
|
|
|
|
| Cost of
software license revenue, as a percentage of software
license revenue
|
|
2
|
%
|
|
4
|
%
|
|
4
|
%
|
|
| Cost of
service revenue, as a percentage of service revenue
|
|
242
|
%
|
|
87
|
%
|
|
40
|
%
|
Comparison of Fiscal
Years Ended June 30, 1998 and 1999
Our total revenue increased from
$7.1 million in fiscal 1998, to $21.6 million in fiscal
1999, representing growth of 205%. During this same
period, our software license revenue increased from $6.6
million to $18.4 million, representing growth of 179%.
These increases were due primarily to increases in the
number of software licenses sold, reflecting increased
acceptance of our AppManager products and
expansion of our field and inside sales organizations and
our third-party channel partners. Service revenue
increased from $467,000 in fiscal 1998 to $3.1 million in
fiscal 1999, representing growth of 562%. This increase
was due primarily to maintenance fees associated with new
software licenses. Service revenue increased as a
percentage of total revenue due to the compounding effect
of our base of installed licenses and due to a
significant majority of our early customers renewing
their maintenance service agreements.
Cost of Revenue
Cost of Software License
Revenue. Our cost of software license
revenue includes the costs associated with software
packaging, documentation, such as user manuals and CDs,
and production, as well as non-employee commissions and
royalties. Our cost of software license revenue has
increased from $235,000, or 4% of software license
revenue, in fiscal 1998, to $755,000, or 4% of software
license revenue, in fiscal 1999. The increase in absolute
dollar amount was due principally to increases in
software license revenue.
Cost of Service Revenue.
Cost of service revenue consists primarily of
personnel costs and expenses incurred in providing
telephonic and on-site maintenance services and
consulting services. Costs associated with
training activities consist principally of allocated labor
and departmental expenses as well as training materials.
Cost of service revenue was $407,000 and $1,260,000 in
fiscal 1998 and fiscal 1999, respectively, representing
87% and 40% of related service revenue. The increase in
dollar amount of cost of service revenue is primarily
attributable to the growth in our installed customer
base. Cost of service revenue as a percent of service
revenue declined due primarily to economies of scale
achieved as our revenue and installed base have grown. We
expect service revenue to increase as a percentage of
total revenue as our installed license base grows and, as
a consequence, our cost of service revenue to increase in
absolute dollars and as a percentage of total revenue.
Operating Expenses
Sales and Marketing.
Our sales and marketing expenses consist primarily
of personnel costs, including salaries and employee
commissions, as well as expenses relating to travel,
advertising, public relations, seminars, marketing
programs, trade shows and lead generation activities.
Sales and marketing expenses increased from $5.7 million
in fiscal 1998, to $11.7 million in fiscal 1999. This
increase in dollar amount was due primarily to the hiring
of additional field sales, inside sales and marketing
personnel, which increased from 34 people to 66 people at
the end of each year, and expanding our sales
infrastructure and third-party channel partners, as well
as higher commissions. Sales and marketing expenses
represented 81% and 54% of total revenue for fiscal 1998
and fiscal 1999, respectively. The decline in sales and
marketing expenses as a percentage of total revenue was
principally the result of economies of scale resulting
from the increased number of sales transactions,
including follow-on sales to existing customers, as well
as the allocation of marketing expenses over a
substantially increased revenue base. We expect to
continue hiring additional sales and marketing personnel
and to increase promotion, advertising and other
marketing expenditures in the future. Accordingly, we
expect sales and marketing expenses will increase in
absolute dollars in future periods.
Research and Development.
Our research and development expenses consist
primarily of salaries and other personnel-related costs,
as well as facilities costs, consulting fees and
depreciation. These expenses increased from $2.2 million,
or 31% of total revenue, in fiscal 1998, to $4.3 million,
or 20%, of total revenue in fiscal 1999. This increase in
dollar amount resulted principally from increases in
engineering and technical writing personnel, which
increased from 30 people to 43 people at the end of each
year, together with increases in facility costs relating
to our new facility which we leased in July 1998. The
decline in research and development expenses as a
percentage of total revenue was due to the growth in
total revenue. To date, all research and development
costs have been expensed as incurred in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86
as our current software development process is
essentially completed concurrent with the establishment
of technological feasibility. We expect to continue to
devote substantial resources to product development such
that research and development expenses will increase in
absolute dollars in future periods and may increase
slightly in the near future as a percentage of total
revenue as a result of expenses related to a third party
development effort which will be incurred primarily over
the next several quarters.
General and Administrative.
Our general and administrative expenses
consist primarily of personnel costs for finance and
administration, information systems and human resources,
as well as professional services expenses such as legal
and accounting, and provision for doubtful accounts.
General and administrative expenses increased from $1.6
million in fiscal 1998, to $3.0 million in fiscal 1999,
representing 23% and 14% of total revenues, respectively.
The increase in dollar amount was due primarily to
increased staffing necessary to manage and support our
growth. General and administrative personnel increased
from 8 people at June 30, 1998, to 14 people at June 30,
1999. Legal expenses have been a significant cost in both
periods, amounting to $762,000 and $966,000 for fiscal
1998 and fiscal 1999, respectively. These legal costs
have principally been due to the Compuware litigation,
for which a settlement was reached in January 1999 and
final documentation was entered into and the claims
dismissed in March 1999. In addition, occupancy costs
charged to general and administrative expense increased
by $705,000 during the year as a result of the lease of
our new facility in July 1998. The decrease in general
and administrative expense as a percentage of total
revenue was due primarily to the growth in total revenue.
We believe that our general and administrative expenses
will increase in absolute dollars as we expand our
administrative staff, add new financial and accounting
software systems, and incur additional costs related to
being a public company, such as expenses related to
directors’ and officers’ liability insurance,
investor relations and stock administration programs and
increased professional fees.
Stock-Based Compensation.
During fiscal 1998 and fiscal 1999, we recorded
deferred stock-based compensation of $1.2 million and
$3.0 million, respectively, relating to stock option
grants to employees and non-employees. These amounts are
being amortized over the vesting periods of the granted
options, which is generally four years for employees.
During fiscal 1998 and fiscal 1999, we recognized
stock-based compensation expense of $250,000 and $1.9
million, respectively. At June 30, 1999, total deferred
stock-based compensation was $2.1 million. We expect to
amortize up to approximately $200,000 of deferred
stock-based compensation each quarter through June 30,
2003.
Settlement of Litigation.
During fiscal 1999 we recorded $364,000 of
expenses associated with the settlement of litigation
with Compuware. The expense relates to the warrants that
were exercised in connection with our initial public
offering of our common stock on July 29, 1999, at a
discount to the public offering price.
Interest Income, Net.
Interest income, net, represents interest
income earned on our cash and cash equivalent balances
and interest expense on our equipment loans and loan
subordinated to our bank line of credit. For fiscal 1998
and fiscal 1999, interest and other income, net, was
$262,000 and $108,000, respectively. The decline in
interest income, net is the result primarily of lower
cash and cash equivalent balances in fiscal 1999, coupled
with interest on the $5.0 million subordinated debt,
commencing in the quarter ended March 31, 1999. The
subordinated loan plus accrued interest was repaid
subsequent to the closing of our initial public offering.
Income Taxes.
We incurred net operating losses in fiscal 1998 and
fiscal 1999, and consequently paid no federal, state or
foreign income taxes.
Comparison of Fiscal
Years Ended June 30, 1997 and 1998
The trends discussed in the
comparisons of operating results for fiscal 1998 and
fiscal 1999, generally apply to the comparison of results
of operation for fiscal 1997 and 1998, except for
differences discussed below.
Revenue
We began selling software
licenses for the AppManager Suite in February
1997, and our software license revenue increased from
$369,000 in fiscal 1997 to $6.6 million in fiscal 1998.
Service revenue increased from $19,000 in fiscal 1997 to
$467,000 in fiscal 1998, principally from increases in
new customer licenses.
Cost of Revenue
Cost of Software License
Revenue. Our cost of software license
revenue increased from $9,000, or 2% of software license
revenue, in fiscal 1997 to $235,000, or 4% of software
license revenue, in fiscal 1998. The increase in absolute
dollar amount was due principally to increases in the
number of software licenses sold, while the percentage
increase was due principally to an increase in our
reserve for product returns by $50,000 in fiscal 1998.
Cost of Service Revenue.
Our cost of service revenue increased from
$46,000 in fiscal 1997 to $407,000 in fiscal 1998. These
costs amounted to 242% and 87% of service revenue,
respectively. The decline in cost of service revenue as a
percentage of service revenue was due primarily to
economies of scale achieved as our revenue and installed
base have grown.
Operating Expenses
Sales and Marketing.
Our sales and marketing expenses increased $1.2
million in fiscal 1997 to $5.7 million in fiscal 1998.
The increase reflects the hiring of additional sales and
marketing personnel in connection with the building of
our direct, reseller and original equipment manufacturer
channels, and higher commissions associated with
increased sales volume. Our personnel in sales and
marketing increased from nine at June 30, 1997, to 34 at
June 30, 1998. Sales and marketing expenses accounted for
319% of total revenue in fiscal 1997 and 81% of total
revenue in fiscal 1998. The decrease as a percentage of
total revenue was due primarily to growth in our total
revenue.
Research and Development.
Research and development expenses increased
from $1.0 million in fiscal 1997, to $2.2 million in
fiscal 1998. The increase in each of these periods was
due primarily to increases in personnel in each period.
Our personnel in research and development increased from
14 at June 30, 1997, to 30 at June 30, 1998. Research and
development expenses accounted for 259% of total revenue
in fiscal 1997 and 31% of total revenue in fiscal 1998.
The decrease as a percentage of total revenue was due
primarily to growth in our total revenue.
General and Administrative.
General and administrative expenses
increased from $479,000 in fiscal 1997 to $1.6 million in
fiscal 1998. These costs, which represented 123% of total
revenue in fiscal 1997 and 23% of total revenue in 1998,
were the result of increases in personnel,
facility-related costs and legal expenses. Our personnel
in general and administrative positions increased from
two at June 30, 1997, to eight at June 30, 1998. Legal
expenses were $186,000 in fiscal 1997 and $762,000 in
fiscal 1998, and related principally to the Compuware
litigation that commenced in September 1996 for which a
settlement was reached in January 1999 and final
documentation was entered into and the claims dismissed
in March 1999. The decrease as a percentage of total
revenue was the result of growth in our total revenue.
Stock-Based Compensation.
In fiscal 1998, we recorded deferred
stock-based compensation of $1.2 million in connection
with stock option grants and amortized $250,000 of this
amount as an expense for that year.
Interest Income, Net.
We recognized interest income, net, of $116,000
and $262,000 in fiscal 1997 and fiscal 1998,
respectively. These amounts are the result of investments
made out of cash balances in excess of operating
requirements, which resulted from our two preferred stock
financings in September 1995 and May 1997.
Income Taxes.
We incurred net operating losses in fiscal 1997 and
fiscal 1998, and consequently paid no significant amounts
for federal, state or foreign income taxes.
Effects of Recent
Accounting Pronouncements
In June 1997, the Financial
Accounting Standards Board, or FASB, issued SFAS No. 130,
Reporting Comprehensive Income, which requires an
enterprise to report, by major components and as a single
total, the change in its net assets during the period
from nonowner sources; and SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information
, which establishes annual and interim reporting
standards for an enterprise’s business segments and
related disclosures about its products, services,
geographic areas and major customers. Our comprehensive
loss was equal to our net loss for all periods presented.
We currently operate in one reportable segment under SFAS
No. 131.
In June 1998, FASB issued SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities, which defines derivatives,
requires that all derivatives be carried at fair value,
and provides for hedge accounting when certain conditions
are met. SFAS No. 133 is effective for us in fiscal 2001.
Although we have not fully assessed the implications of
SFAS No. 133, we do not believe that adoption of this
statement will have a material impact on our financial
position, results of operations or cash flows.
In December 1998, the American
Institute of Certified Public Accountants issued
Statement of Position (“SOP”) 98-9 which
provides certain amendments to SOP 97-2 Software
Revenue Recognition , and is effective for our fiscal
year beginning July 1, 1999. We do not believe that
adoption of this statement will have a material impact on
our financial position, results of operations or cash
flows.
Liquidity and Capital
Resources
We have funded our operations to
date primarily through private sales of preferred equity
securities, totaling $11.0 million and, to a lesser
extent, through capital equipment leases and sales of
common stock and option exercises. As of June 30, 1999,
we had $9.6 million in cash and cash equivalents,
including $5.0 million from the proceeds of our loan from
Compuware in March 1999.
Our operating activities resulted
in net cash outflows of $2.0 million and $3.9 million in
fiscal 1997 and fiscal 1998, respectively, and cash
inflows of $2.0 million in fiscal 1999. Sources of cash
during these periods were principally from increases in
deferred revenue, accrued compensation and other
liabilities. Uses of cash in these periods were
principally from net losses and increases in accounts
receivable and prepaid expenses.
Our investing activities, after
excluding the purchase and maturity of temporary cash
investments in fiscal 1997, resulted in net cash
outflows, principally related to the acquisition of
capital assets, of $238,000, $529,000 and $1,353,000 in
the fiscal 1997, fiscal 1998, and fiscal 1999,
respectively.
Financing activities provided
cash of $7.9 million in fiscal 1997, principally related
to the proceeds from the issuance of preferred stock.
Financing activities provided cash of $13,000 in fiscal
1998 from the exercises of stock options. Financing
activities provided cash of $5.6 million in fiscal 1999,
principally from the proceeds of the $5.0 million loan
from Compuware, proceeds from our bank credit facility
and the exercises of stock options.
As of June 30, 1999, our
principal commitments consisted of the $5.0 million loan
from Compuware, $349,000 of advances under our bank
credit facility for equipment purchases, and $3.3 million
in accounts payable, accrued compensation and other
accrued liabilities. The Compuware loan and interest
thereon were repaid upon completion of our initial public
offering effective July 29, 1999, by a cash payment of
approximately $1.8 million and the forgiveness of
approximately $3.3 million in connection with the
exercise of the warrant issued to Compuware in connection
with the settlement of litigation. Advances under our
bank credit facility for equipment purchases were repaid
in August 1999.
Deferred revenue consists
principally of the unrecognized portion of revenue
received under maintenance service agreements. These
amounts are recognized ratably over the term of the
service agreement. Deferred revenue was $3.9 million at
June 30, 1999.
We believe that the net proceeds
from our initial public offering, together with our cash
balances and cash flow generated by operations will be
sufficient to satisfy our anticipated cash needs for
working capital and capital expenditures for the next 12
months. Thereafter, we may require additional funds to
support our working capital requirements, or for other
purposes, and may seek to raise such additional funds
through public or private equity financings or from other
sources. We may not be able to obtain adequate or
favorable financing at that time. A portion of our cash
may be used to acquire or invest in complementary
businesses or products or to obtain the right to use
complementary technologies. From time to time, in the
ordinary course of business, we may evaluate potential
acquisitions of businesses, products or technologies. We
have no current plans, agreements or commitments, and are
not currently engaged in any negotiations with respect to
any such transaction.
Year 2000 Compliance
Background of Year 2000 Issues
Many currently-installed computer
and communications systems and software products are
unable to distinguish between twentieth century dates and
twenty-first century dates. This situation could result
in system failures or miscalculations causing
disruptions, in the operations of any business,
including, among other things, a temporary inability to
process transactions, send invoices or engage in similar
normal business activities. As a result, many companies
’ software and computer and communications systems
may need to be upgraded or replaced to comply with such
“year 2000” requirements.
Our Products
In the ordinary course of our
business, we test and evaluate our software products. We
believe that our AppManager Suite is year 2000
compliant, meaning that the use or occurrence of dates on
or after January 1, 2000, will not materially affect the
performance of such software products or the ability of
such products to correctly create, store, process and
output information of data involving dates. However, we
may learn that some
modules do not contain all necessary software routines and
codes necessary for the accurate calculation, display,
storage and manipulation of data involving dates. In
addition, in the majority of our larger contracts with
customers, we have warranted that the use or occurrence
of dates on or after January 1, 2000, will not adversely
affect the performance of our products with respect to
four digit date dependent data or the ability to create,
store, process and output information related to such
data. If any of our licensees experience year 2000
problems as a result of their use of our software
products, those licensees could assert claims for
damages. Many of our licensing agreements provide that if
our products do not perform to their specifications, we
will correct such problems or issue replacement software.
If these corrective measures fail, we may refund the
license fee associated with the non-performing product.
To date we have not received any year 2000 related claims
on our software products.
Our State of Readiness
Our business depends on the
operation of numerous systems that could potentially be
impacted by year 2000 related problems. The systems
include:
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computer and
communications hardware and software systems used to
deliver our software enabling keys and allow our
customers and employees to download product,
documentation and Knowledge Scripts
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computer and
communications hardware and software systems used
internally in the management of our business
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communications networks
such as the Internet and private intranets
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the internal systems of
our customers and suppliers
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non-information
technology systems and services we use to manage our
business, such as telephone, security and building
management systems.
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Based on an analysis of all
systems potentially impacted by conducting business in
the year 2000 and beyond, we have pursued a phased
approach to making such systems and our operations ready
for the year 2000. Beyond awareness of the issues and
scope of systems involved, the phases of activities
included:
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an assessment of
specific underlying computer and communications
systems, programs and hardware
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remediation or
replacement of year 2000 non-compliant technology
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validation and testing
of technologically-compliant year 2000 solutions
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implementation of year
2000 compliant systems.
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As of the date of this report,
all of our systems have been upgraded or replaced, as
appropriate and validation and testing have been
completed.
We have obtained assurances from
a majority of the providers of our internal production
computer systems, including Compaq, Dell,
Hewlett-Packard, IBM and Micron, that our computer
systems are year 2000 compliant. These production
computers run on the Microsoft Windows NT Server 4.0
operating system, and in accordance with Microsoft’s
instructions a corrective release has been implemented to
ensure that this operating system is year 2000 compliant.
We have also obtained assurances from a majority of the
providers of our significant software applications such
as Microsoft Exchange Server 5.5 and Microsoft SQL Server
6.5, that these applications are year 2000 compliant. We
have also received assurances from the provider of our
new accounting system software, that this software is
year 2000 compliant.
Our network routers are
manufactured by Cisco Systems. We have replaced
non-compliant series routers with compliant series
routers. We have received assurances from our third party
vendors that our other networking equipment is year 2000
compliant and that our remote access equipment, such as
our Lucent InterNetworking Systems, is year 2000
compliant.
We have also received assurances
from our third party vendors that our telephone system,
voicemail system and Cardkey building security system are
year 2000 compliant.
Costs to Address Year 2000 Issues
To date, we have not incurred any
material costs directly associated with our year 2000
compliance efforts, except for compensation expense
associated with our salaried employees who have devoted
some of their time to our year 2000 assessment and
remediation efforts. We do not expect the total cost of
year 2000 problems to be material to our business,
financial condition and operating results. We would have
incurred the replacement cost of non-information
technology systems regardless of the year 2000 issue due
to technology obsolescence and our growth. We have and
will continue to expense all costs arising from year 2000
issues, funding them from working capital.
We do not believe that future
expenditures to upgrade internal systems and applications
will materially harm our business. In addition, although
we do not know the potential costs of redeployment of
personnel and any delays in implementing other projects,
we anticipate the costs to be immaterial and we expect
minimal adverse impact to the business.
Contingency Plans
We have not yet developed a
contingency plan for handling year 2000 problems that are
not detected and corrected prior to their occurrence.
Upon completion of testing and implementation activities,
we will be able to assess areas requiring contingency
planning, and we expect to institute appropriate
contingency planning at that time. Any failure to address
any unforeseen year 2000 issue could harm our business.
Customers’ Purchasing Patterns
Prior to the end of 1999 and
continuing into 2000, there is likely to be an increased
customer focus on addressing year 2000 compliance issues.
Some customers have indicated to us that they will delay
deployment of new software, including new versions and
product updates, at various times over the next six to
nine months to avoid the possibility of introducing or
encountering any new year 2000 problems. There is a risk
that existing or potential customers may also choose to
defer new software product purchases as a result of year
2000 concerns. Moreover, customers may reallocate capital
expenditures or personnel in order to fix year 2000
problems of existing systems instead of purchasing new
software. If customers defer purchases or reallocate
capital expenditures and personnel, it could materially
adversely affect our business, future quarterly and
annual operating results and financial condition. In
addition, year 2000 compliance issues also could cause a
significant number of companies, including our current
customers, to reevaluate their current system needs and,
as a result, consider switching to other systems and
suppliers.
Factors That May
Affect Future Results
The statements contained in this
Report on Form 10-K that are not purely historical are
forward-looking statements within the meaning of the
Securities Act of 1933 and Section 21E of the Securities
Act of 1934, including statements about our plans,
objectives, expectations and intentions. Forward-looking
statements include: statements regarding future products
or product development; statements regarding future
research and development spending and our product
development strategy; statements regarding the levels of
international sales; statements regarding future
expenditures; statements regarding Year 2000 compliance
costs; and statements regarding current or future
acquisitions. All forward-looking statements included in
this document are based on information available to us on
the date hereof, and we assume no obligation to update
any such forward-looking statements. It is important to
note that the Company’s actual results could differ
materially from those in such forward-looking statements.
Some of the factors that could cause actual results to
differ materially are set forth in “Factors That May
Affect Operating Results” under “Management
’s Discussion and Analysis of Financial Condition
and Results of Operations” and elsewhere in, or
incorporated by reference into, this report.
We have a history of losses,
we expect to incur losses in the future and we may not
ever become profitable.
We were founded in June 1995, and
our limited operating history makes it difficult to
forecast our future operating results. We have not been
profitable in any year since inception, and we incurred
net losses of $0.9 million for the period from inception
through June 30, 1996, $2.3 million for fiscal 1997, $3.1
million for fiscal 1998 and $1.6 million in fiscal 1999.
As of June 30, 1999, we had an accumulated deficit of
$7.9 million. We expect to continue to incur net losses
in the near future and possibly longer. We anticipate
that our expenses will increase substantially in the
foreseeable future as we continue to develop our
technology, expand our distribution channels and increase
our sales and marketing activities. These efforts may
prove more expensive than we currently anticipate and we
may not succeed in increasing our revenue sufficiently to
offset these higher expenses. If we fail to increase our
revenues to keep pace with our expenses, we will continue
to incur losses. If we do achieve profitability in any
period, we cannot be certain that we will sustain or
increase such profitability on a quarterly or annual
basis. For more detailed information regarding our
operating results and financial condition, please see
“Selected Consolidated Financial Data” on page
12 of this report.
Our revenue may not continue
to grow at the same rate in the future as it has in the
past.
Although our revenue has grown
substantially in recent years, we do not expect our
revenue to grow at such a rapid rate in the future, and
our revenue could in fact decline. Our total revenue has
grown from $0.4 million in fiscal 1997 to $7.1 million in
fiscal 1998 to $21.6 million in fiscal 1999. This growth
rate reflects the relatively recent introduction of our
AppManager product suite in the U.S. and abroad.
As our business matures, it is unlikely that our revenue
will continue to grow at the same rapid pace as it has
since we introduced AppManager in 1997. If our
revenue does not increase at or above the rate analysts
expect, the trading price for our common stock may
decline. We believe that our future growth rates will
depend on our ability to expand our penetration of our
existing markets, which will require significant expenses
that we may not have sufficient resources to undertake.
Unanticipated fluctuations in
our annual operating results due to such factors as
change in the demand for AppManager and changes in
the market for Windows NT and related products could
affect our stock price.
We believe that year-to-year
comparisons of our financial results are not necessarily
meaningful indicators of our future operating results,
and you should not rely on them as an indication of our
future performance. If our annual operating results fail
to meet the expectations of analysts, the trading price
of our common stock could be negatively affected. Our
annual operating results have varied substantially in the
past and may vary substantially in the future depending
upon a number of factors described below and elsewhere in
this report, including many that are beyond our control.
These factors include:
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Changes in demand for
AppManager or for applications management
software solutions generally, including any changes in
customer purchasing patterns relating to year 2000
concerns
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Changes in demand for
Windows NT-based systems and applications
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Increased competition
in general and any changes in our pricing policies that
may result from increased competitive pressures
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Varying budgeting
cycles of our customers and potential customers
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Varying size, timing
and contractual terms of enterprise-wide orders for our
products
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Our ability to develop
and introduce on a timely basis new or enhanced
versions of our products
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Potential downturns in
our customers’ businesses, in the domestic or
international economies
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Changes in the mix of
revenue attributable to domestic and international sales
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Software defects and
other product quality problems
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Changes in the mix of
revenue attributable to higher-margin software license
revenue as opposed to substantially lower-margin
service revenue
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If a large number of the
orders that are typically booked at the end of a quarter
are not booked, our net income and revenue for that
quarter could be substantially reduced.
A majority of our software
license revenue in any quarter depends on orders booked
and shipped in the last month, weeks or days of that
quarter. At the end of each quarter, we typically have
either minimal or no backlog of orders for the subsequent
quarter. If a large number of orders or any large,
enterprise-wide orders are not placed or are deferred,
our net income and revenue in that quarter could be
substantially reduced.
If customers that are delaying
introducing new software products to their computing
environments to avoid potential year 2000 problems also
delay purchases of our software, our revenue will be
lower.
Prior to the end of 1999 and
continuing into 2000, there is likely to be an increased
customer focus on addressing year 2000 compliance issues.
Some customers have indicated to us that they will delay
deployment of new software, including new versions and
product updates, at various times over the next six to
nine months to avoid the possibility of introducing or
encountering any new year 2000 problems. There is a risk
that existing or potential customers may also choose to
defer new software product purchases as a result of year
2000 concerns. Moreover, customers may reallocate capital
expenditures or personnel in order to fix year 2000
problems of existing systems instead of purchasing new
software. If customers defer purchases or reallocate
capital expenditures and personnel, it could lower our
product sales and service revenue. In addition, year 2000
compliance issues also could cause a significant number
of companies, including our current customers, to
reevaluate their current system needs and, as a result,
consider switching to other systems and suppliers.
New product introductions and
pricing strategies by our competitors could adversely
affect our ability to sell our products or could result
in pressure to price our products in a manner that
reduces our margins.
We may not be able to compete
successfully against our competitors and this could
impair our ability to sell our products. The market for
applications management software to help optimize the
performance availability of Windows NT-based systems and
applications is new, rapidly evolving and highly
competitive, and we expect competition in this market to
persist and intensify. New products for this market are
frequently introduced and existing products are
continually enhanced. Competition may also result in
changes in pricing policies by us or our competitors
which could hurt our ability to sell our products and
could adversely affect our profits. Many of our current
competitors have greater financial, technical, marketing,
professional services and other resources than we do. For
example, the annual revenue of each of our major
competitors, including IBM, Computer Associates and BMC,
approximates or exceeds $1 billion. As a result, they may
be able to respond more quickly to new or emerging
technologies and changes in customer requirements. They
may also be able to devote greater resources to the
development, promotion and sale of their products than we
can. Many of these companies have an extensive customer
base and broad customer relationships, including
relationships with many of our current and potential
customers. If we are unable to respond as quickly or
effectively to changes in customer requirements as our
competition, our ability to grow our business and sell
our products will be negatively affected.
New competitors could
emerge and this could impair our ability to grow our
business and sell our products.
We may face competition in the
future from established companies who have not previously
entered the market for applications management software
for optimizing the performance and availability of
Windows NT-based systems and applications as well as from
emerging companies. Barriers to entry in the software
market are relatively low. Established companies may not
only develop their own Windows NT-based applications
management solutions, but they may also acquire or
establish cooperative relationships with our current
competitors. It is possible that new competitors or
alliances among competitors may emerge and rapidly
acquire significant market share. If those future
competitors are successful, we are likely to lose market
share and our revenue would likely decline.
We may face competition from
Microsoft in the future. Microsoft may enter the market
for managing the performance and availability of Windows
NT-based systems and applications in the future. This
could materially adversely affect our competitive
position and hurt our ability to sell our products. As
part of its competitive strategy, Microsoft could bundle
applications management software with its Windows NT
operating system software, which could discourage
potential customers from purchasing our products. Even if
the standard features of future Microsoft operating
system software were more limited than those of our
AppManager products, a significant number of
customers or potential customers might elect to accept
more limited functionality in lieu of purchasing
additional software. Moreover, competitive pressures
resulting from this type of bundling could lead to price
reductions for our products which would reduce our profit
margins.
Potential third party competition
may create bundling or compatibility issues and adversely
affect our ability to sell our products. In addition to
Microsoft, other potential competitors may bundle their
products or incorporate applications management software
for optimizing the performance availability of Windows
NT-based systems and applications into existing products,
including for promotional purposes. In addition, our
ability to sell our products will depend, in part, on the
compatibility of our products with other third party
products, such as messaging, Internet and database
applications. Some of these third party software
developers may change their products so that they will no
longer be compatible with our products. If our
competitors bundled their products in this manner or made
their products incompatible with ours, this could
materially adversely affect our ability to sell our
products and could lead to price reductions for our
products which could reduce our profit margins.
We will need to expand our
distribution channels in order to develop our business
and increase revenue.
Our ability to sell our products
in new markets and to increase our share of existing
markets will be impaired if we fail to significantly
expand our distribution channels. Our sales strategy
requires that we establish multiple indirect marketing
channels in the United States and internationally through
value added resellers, systems integrators and
distributors and original equipment manufacturers, and
that we increase the number of customers licensing our
products through these channels. Moreover, our channel
partners must market our products effectively and be
qualified to provide timely and cost-effective customer
support and service. If they are unable to do so, this
could harm our ability to increase revenue.
We will need to expand our
relationship with Tech Data and develop relationships
with other distributors to increase sales of our products.
Our domestic resellers order our
products through Tech Data Corporation, which is
currently our sole U.S. distributor. We intend to add
additional U.S. and international distributors, but may
not be able to do so and may not be able to maintain our
existing relationship with Tech Data. Sales of our
AppManager products through Tech Data accounted for
approximately $1,589,000, or 9%, of software license
revenue for fiscal 1999. Our agreement with Tech Data is
for successive one-year terms that expire each June, but
is subject to automatic one year renewals unless either
party provides a termination notice prior to the renewal
date. Either party to the distribution agreement may
terminate the contract upon 30 days written notice to the
other party. Our current agreement with Tech Data does
not prevent Tech Data from selling products of other
companies, including those of our competitors, and does
not require that Tech Data purchase minimum quantities of
our products. Tech Data and any of our future
distributors could give higher priority to the products
of other companies than they give to our products. As a
result, any significant reduction in sales volume through
any of our current or future distribution partners could
lower our revenue. In addition, sales through these
channels generally have lower costs than direct sales and
any significant decrease in sales through these channels
could also lower our gross margins. Furthermore, our
relationships with our distribution partners may not
generate enough revenue to offset the significant
resources used to develop these channels.
We will need to expand our
field sales and inside sales organizations to grow our
business and increase sales of our products.
Because we rely heavily on our
field sales and inside sales organizations, any failure
to expand those organizations could limit our ability to
sell our products and expand our market share. We are
planning to significantly expand our field sales efforts
in the U.S. and internationally and we are investing, and
plan to continue to invest, substantial resources in this
expansion. Despite these efforts, we may experience
difficulty in recruiting and retaining qualified field
sales personnel. Concurrent with expanding our field
sales efforts, we are also expanding our efforts to sell
our products through inside sales personnel who, in
addition to working with our third party channel
partners, sell our AppManager products through
telephone sales efforts to customers typically having
fewer than 100 Windows NT servers and that are not served
through our field sales efforts or third party channels.
If the markets for Windows NT
and applications management software for Windows NT-based
systems and applications do not continue to develop as we
anticipate, our ability to grow our business and sell our
products will be adversely affected.
Windows NT.
AppManager is designed to support Windows
NT-based systems and applications and we expect our
products to be dependent on the Windows NT market for the
foreseeable future. If the market for Windows NT systems
declines or develops more slowly than we currently
anticipate, this would materially adversely affect our
ability to grow our business, sell our products, and
achieve and maintain profitability. Although the market
for Windows NT has grown rapidly in recent periods, this
growth may not continue at the same rate, or at all.
Applications Management
Software for Windows NT. The
market for applications management software for
optimizing the performance and availability of Windows
NT-based systems and applications may not develop or may
grow more slowly than we anticipate and this could
materially adversely affect our ability to grow our
business, sell our products, and achieve and maintain
profitability. The rate of acceptance of our AppManager
products is dependent upon the increasing complexity
of businesses’ Windows NT environments as these
businesses deploy additional servers and applications
using this operating system. Many companies have been
addressing their applications management needs for
Windows NT-based systems and applications internally and
only recently have become aware of the benefits of
third-party solutions, such as our AppManager
products, as their needs have become more complex. Our
future financial performance will depend in large part on
the continued growth in the number of businesses adopting
third party applications management software products and
their deployment of these products on an enterprise-wide
basis.
The lengthy sales cycle for
our products makes our revenues susceptible to
fluctuations.
The delay or failure to complete
sales, especially large, enterprise-wide sales, in a
particular quarter or calendar year could reduce our
quarterly and annual revenue. We have traditionally
focused sales of our products to workgroups and divisions
of a customer, resulting in a sales cycle ranging between
90 and 180 days. The sales cycle associated with the
purchase of our products is subject to a number of
significant risks over which we have little or no
control, including:
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customers’
budgetary constraints and internal acceptance procedures
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concerns about the
introduction or announcement of our or our competitors
’ new products, including product announcements by
Microsoft relating to Windows NT
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customer requests for
product enhancements
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Increasingly, we are focusing
more of our selling effort on products for the customer
’s entire enterprise. However, the sales cycle for
these enterprise-wide sales typically can be
significantly longer than the sales cycle for
smaller-sized departmental sales. Enterprise-wide sales
of our AppManager products require an extensive
sales effort throughout a customer’s organization
because decisions to license and deploy this type of
software generally involve the evaluation of the software
by many people, in various functional and geographic
areas, each often having specific and conflicting
requirements. This evaluation process often requires
significant efforts to educate information technology
decision-makers about the benefits of our products for
the Windows NT environment.
We have experienced
significant growth in our business in recent periods and
our ability to manage this growth and any future growth
will affect our ability to achieve and maintain
profitability.
Our ability to achieve and
maintain profitability will depend in part on our ability
to implement and expand operational, customer support and
financial control systems and to train and manage our
employees. We may not be able to augment or improve
existing systems and controls or implement new systems
and controls in response to future growth, if any. In
addition, we will need to expand our facilities to
accommodate the growth in our personnel. Any failure to
manage growth could divert management attention from
executing our business plan and hurt our ability to
successfully expand our business. Our historical growth
has placed, and any further growth is likely to continue
to place, a significant strain on our resources. We have
grown from 14 employees at June 30, 1996 to 133 employees
at June 30, 1999. We have also opened 10 field sales
offices and have significantly expanded our operations.
We are currently implementing new financial and
accounting systems and to be successful, we will need to
expand our other infrastructure programs, including
implementing additional management information systems,
improving our operating and administrative systems and
controls, training new employees and maintaining close
coordination among our executive, engineering,
accounting, finance, marketing, sales, operations and
customer support organizations. In addition, our growth
has resulted, and any future growth will result, in
increased responsibilities for management personnel.
Managing this growth will require substantial resources
that we may not have.
We will need to recruit and
retain additional qualified personnel to successfully
grow our business.
Our future success will also
likely depend in large part on our ability to attract and
retain experienced sales, research and development,
marketing, technical assistance and management personnel.
If we do not attract and retain such personnel, this
could materially adversely affect our ability to grow our
business. Competition for qualified personnel in the
computer software industry is intense, particularly in
the Silicon Valley, and in the past we have experienced
difficulty in recruiting qualified personnel, especially
technical and sales personnel. Moreover, we intend to
expand the scope of our international operations and
these plans will require us to attract experienced
management, service, marketing, sales and customer
support personnel for our international offices. We
expect competition for qualified personnel to remain
intense, and we may not succeed in attracting or
retaining such personnel. In addition, new employees
generally require substantial training in the use of our
products, which in turn requires significant resources
and management attention. There is a risk that even if we
invest significant resources in attempting to attract,
train and retain qualified personnel, we will not be
successful in our efforts. Our costs of doing business
would increase without the expected increase in revenues.
Our relationships with
Microsoft are important to our product development,
marketing and sales efforts and any deterioration of
these relationships could adversely affect our ability to
develop, market and sell our products.
Any deterioration of our
relationships with Microsoft could materially adversely
affect our competitive position and our ability to
develop, market and sell our products. We do not have any
agreements to ensure that our existing relationships with
Microsoft will continue or expand. We rely on our
participation in Microsoft’s testing and feedback
programs to develop our technology and enhance the
features and functionality of our software.
Traditionally, Microsoft has not prohibited companies who
develop software that supports Microsoft operating
systems from participating in such programs. However,
Microsoft may prohibit us from participating in such
programs in the future for competitive or other reasons.
Recently, Microsoft has permitted one of our
engineers to work with
its Windows NT development group at its Redmond,
Washington headquarters. Microsoft also contracts for one
of our engineers to provide support for Microsoft’s
use of our products. Additionally, we participate in
joint marketing programs with Microsoft and count
Microsoft as one of our significant customers. Microsoft
is also currently distributing our AppManager WBEM
product with its Windows 2000 operating server test
version release. However, Microsoft is under no
obligation to continue to distribute this product in the
future, nor is Microsoft obligated to continue to work
with our engineers.
If we are unable to
successfully expand our international operations, this
could adversely affect our ability to grow our business.
We intend to expand the scope of
our international operations and currently have field
offices in London, Munich, Sydney and Tokyo. If we are
unable to expand our international operations
successfully and in a timely manner, this could
materially adversely affect our ability to increase
revenue. Our continued growth and profitability will
require continued expansion of our international
operations, particularly in Europe and the Asia-Pacific
region. We have only limited experience in developing,
marketing, selling and supporting our products
internationally and may not succeed in expanding our
international operations.
The success of our
international operations is dependent upon many factors
which could adversely affect our ability to sell our
products internationally and could affect our
profitability.
International sales represented
approximately 10% of our total revenue in fiscal 1998 and
approximately 20% of total revenue in fiscal 1999. Our
international revenue is attributable principally to our
European operations. Our international operations are,
and any expanded international operations will be,
subject to a variety of risks associated with conducting
business internationally, many of which are beyond our
control. The following factors may adversely affect our
ability to achieve and maintain profitability and our
ability to sell our products internationally:
| Ÿ
Longer payment cycles
Ÿ
Seasonal reductions in business activity during the
summer months in Europe and other parts of the world
Ÿ
Increases in tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers
imposed by foreign countries
Ÿ
Difficulties in localizing our products for foreign
markets
|
|
Ÿ
Fluctuations in currency exchange rates
Ÿ
Recessionary environments in foreign economies
Ÿ
Problems in collecting accounts receivable
Ÿ
Difficulties in staffing and managing international
operations
Ÿ
Limited or unfavorable intellectual property protection
|
|
If we do not respond
adequately to our industry ’s evolving technology
standards or do not continue to meet the sophisticated
needs of our customers, sales of our products may decline.
Our future success will depend on
our ability to address the increasingly sophisticated
needs of our customers by supporting existing and
emerging technologies, including technologies related to
the development of the Windows NT operating system
generally. If we do not enhance our products to meet
these evolving needs, this could materially adversely
affect our ability to remain competitive and sell our
products. We will have to develop and introduce new
products and enhancements to our existing AppManager
products on a timely basis to keep pace with
technological developments, evolving industry standards,
changing customer requirements and competitive products
that may render existing products and services obsolete.
In addition, because our AppManager products are
dependent upon Windows NT, we will need to continue to
respond to technology advances in this operating system,
including major revisions. Our position in the existing
market for applications management software for
optimizing performance and availability of Windows
NT-based systems and applications could be eroded rapidly
by product advances. Consequently, the life cycles of our
products are difficult to estimate. We expect that our
product development efforts will continue to require
substantial investments that we may not have the
resources to make.
We may experience delays in
developing our products that could adversely affect our
ability to introduce new products, maintain our
competitive position and grow our business.
If we are unable, for
technological or other reasons, to develop and introduce
new and improved products in a timely manner, this could
affect our ability to introduce new products, maintain
our competitive position and grow our business and
achieve and maintain profitability. We have experienced
product development delays in new versions and update
releases in the past and may experience similar or more
significant product delays in the future. To date, none
of these delays has materially affected our business.
However, future delays may have a material adverse effect
on our business. Difficulties in product development
could delay or prevent the successful introduction or
marketing of new or improved products or the delivery of
new versions of our products to our customers.
Our executive officers and
other key personnel are critical to our business and they
may not remain with NetIQ in the future which could hurt
our ability to grow our business.
Our success will depend to a
significant extent on the continued service of our
executive officers and other key employees, including key
sales, consulting, technical and marketing personnel. If
we lose the services of one or more of our executives or
key employees, including if one or more of our executives
or key employees decided to join a competitor or
otherwise compete directly or indirectly with us, this
could harm our business and could affect our ability to
successfully implement our business objectives.
Our future revenue is
partially dependent upon our current customers licensing
additional AppManager products.
If our current customers do not
purchase additional products, this would reduce our
revenue. In order to increase software license revenue,
our sales efforts target our existing customer base to
expand these customers’ use of our AppManager
products. Most of our current customers initially license
a small portion of our products for pilot programs. Our
customers may not license additional AppManager
products and may not expand their use of our products. In
addition, as we deploy new versions of our AppManager
products or introduce new products, our current
customers may not require the functionality of our new
products and may not license these products. We also
depend on our installed customer base for future revenue
from maintenance renewal fees. The terms of our standard
license arrangements provide for a one-time license fee
and a prepayment of one year of software maintenance and
support fees. Our maintenance agreements are renewable
annually at the option of our customers but there are no
minimum payment obligations or obligations to license
additional software.
Errors in our products could
result in significant costs to us and could impair our
ability to sell our products.
Because our software products are
complex, they may contain errors, or “bugs,”
that can be detected at any point in a product’s
life cycle. These errors could materially adversely
affect our reputation which could result in significant
costs to us and could impair our ability to sell our
products. The costs we may incur in correcting any
product errors may be substantial and could decrease our
profit margins. While we continually test our products
for errors and work with customers through our customer
support services to identify and correct bugs, errors in
our products may be found in the future. Testing for
errors is complicated in part because it is difficult to
simulate the highly complex computing environments in
which our customers use our products as well as because
of the increased functionality of our product offerings.
In the past, we have discovered errors in our products
and have experienced delays in the shipment of our
products during the period required to correct these
errors. These delays have principally related to new
versions and product update releases. To date, none of
these delays has materially affected our business.
However, product errors or delays in the future could be
material. Detection of any significant errors may result
in, among other things, loss of, or delay in, market
acceptance and sales of our products, diversion of
development resources, injury to our reputation, or
increased service and warranty costs. Moreover, because
our products support Windows NT-based systems and
applications, any software errors or bugs in the Windows
NT operating server software or the systems and
applications that our products manage may result in
errors in the performance of our software.
We may be subject to product
liability claims that could result in significant costs
to us.
We may be subject to claims for
damages related to product errors in the future. A
material product liability claim could materially
adversely affect our business because of the costs of
defending against these types of lawsuits, diversion of
key employees’ time and attention from the business
and potential damage to our reputation. Our license
agreements with our customers typically contain
provisions designed to limit exposure to potential
product liability claims. Some of our licensing
agreements state that if our products fail to perform, we
will correct or issue replacement software. Our standard
license also states that we will not be liable for
indirect or consequential damages caused by the failure
of our products. Limitation of liability provisions like
those in our license agreements, however, may not be
effective under the laws of some jurisdictions if local
laws treat those types of warranty exclusions as
unenforceable. Although we have not experienced any
product liability claims to date, the sale and support of
our products involves the risk of such claims. In
particular, issues relating to year 2000 compliance have
increased awareness of the potential adverse effects of
software defects and malfunctions.
We have warranted to a
majority of our major licensees that our products will be
year 2000 compliant and any problems our products
experience with year 2000 issues could result in third
party claims. Potential problems may occur in our third
party equipment or software, which could result in
significant costs.
If any of our licensees
experience year 2000 problems as a result of their use of
our AppManager products, they could assert claims
for damages which, if successful, could result in us
incurring significant costs to us that could lower our
profit margins. While we currently believe that our
software products are generally year 2000 compliant, we
may learn that our software products do not contain all
necessary software routines and codes necessary for the
accurate calculation, display, storage and manipulation
of data involving dates. In addition, in a majority of
our major software licenses, we have warranted that the
use or occurrence of dates on or after January 1, 2000,
will not adversely affect the performance of our products
with respect to four digit date dependent data or the
ability to create, store, process and output information
related to such data. In addition, we use third-party
equipment and software that may not be year 2000
compliant. If this third-party equipment or software does
not operate properly with regard to the year 2000, we may
incur unexpected expenses to remedy any problems.
Moreover, if our key systems, or a significant number of
our systems, were to fail as a result of year 2000
problems, we could incur substantial costs and disruption
of our business. For a more detailed description of our
year 2000 preparedness assessment, see “Management
’s Discussion and Analysis of Financial Condition
and Results of Operations—Year 2000 Compliance”
on page 17 of this report.
If we fail to protect
our intellectual property rights, competitors may be able
to use our technology or trademarks and this could weaken
our competitive position, reduce our revenue and increase
costs.
Our success is heavily dependent
upon proprietary technology. We rely primarily on a
combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual
provisions to protect our proprietary rights and prevent
competitors from using our technology in their products.
These laws and procedures provide only limited
protection. We have applied for three patents relating to
our engineering work. These three patents have been
issued or approved for issuance. These patents may not
provide sufficiently broad protection or they may not
prove to be enforceable in actions against alleged
infringers. Our ability to sell our products and prevent
competitors from misappropriating our proprietary
technology and trade names is dependent upon protecting
our intellectual property. Despite precautions that we
take, it may be possible for unauthorized third parties
to copy aspects of our current or future products or to
obtain and use information that we regard as proprietary.
In particular, we may provide our licensees with access
to our proprietary information underlying our licensed
applications. Additionally, our competitors may
independently develop similar or superior technology.
Policing unauthorized use of software is difficult and
some foreign laws do not protect our proprietary rights
to the same extent as United States laws. 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. Litigation could result in substantial
costs and diversion of resources and could materially
adversely affect our business, future operating results
and financial condition.
While we have settled
a claim that we infringed a third party’s
intellectual property rights, third parties in the future
for competitive or other reasons could assert that our
products infringe their intellectual property rights.
Such claims could injure our reputation and adversely
affect our ability to sell our products.
Third parties may claim that our
current or future products infringe their proprietary
rights and these claims, whether they have merit or not,
could harm our business including by increasing our
costs. We previously litigated a claim with Compuware
alleging that we had infringed a third party’s
intellectual property rights, and although this claim has
been settled and no other claims of this nature are
currently pending, any future claims could affect our
relationships with existing customers and may prevent
future customers from licensing our products. See “
Management’s Discussion and Analysis of Financial
Condition and Results of Operations” on page 13 of
this report for a further discussion of the Compuware
litigation and settlement agreement. The intensely
competitive nature of our industry and the important
nature of technology to our competitors’ businesses
may contribute to the likelihood of being subject to
third party claims of this nature. Any such claims, with
or without merit, could be time consuming, result in
potentially significant litigation costs, including costs
related to any damages we may owe resulting from such
litigation, cause product shipment delays or require us
to enter into royalty or licensing agreements. Royalty or
license agreements may not be available on acceptable
terms or at all. We expect that software product
developers will increasingly be subject to infringement
claims as the number of products and competitors in the
software industry grows and the functionality of products
in different industry segments overlaps.
Seasonal trends in
sales of our software products may affect our quarterly
operating results.
We expect to experience
seasonality in sales of our software products in the
future. These seasonal trends could materially affect our
quarter-to-quarter operating results. Revenue and
operating results in our quarter ending December 31 are
sometimes higher than in our other quarters, because many
customers make purchase decisions based on their calendar
year-end budgeting requirements.
As our expanding
international operations in Europe and the Asia-Pacific
region are increasingly conducted in currencies other
than the U.S. dollar, fluctuations in the value of
foreign currencies could result in currency exchange
losses.
Currently, a majority of our
international business is conducted in U.S. dollars.
However, as we expand our international operations, we
expect that our international business increasingly will
be conducted in foreign currencies. Fluctuations in the
value of foreign currencies relative to the U.S. dollar
have caused, and we expect such fluctuation to
increasingly cause, currency translation gains and
losses. We cannot predict the effect of exchange rate
fluctuations upon future quarterly and annual operating
results. We may experience currency losses in the future.
To date, we have not adopted a hedging program to protect
us from risks associated with foreign currency
fluctuations.
Because we license
technology from Summit Software that helps
AppManager run our applications management
modules, any failure to maintain satisfactory licensing
arrangements with this party could result in substantial
costs to us.
We license technology that helps
AppManager run our applications management modules
from Summit Software on a non-exclusive, worldwide basis.
Our AppManager product modules for Windows NT,
Windows NT Workstation and Super Console incorporate the
Summit Software technology. Although our agreement allows
us to continue to sell products using the Summit
technology for a period of 24 months after the license
terminates, our ability to sell our products could be
adversely affected if we are not able to replace this
technology on commercially reasonable terms. We license
this technology on a year-to-year basis which is
automatically renewed each August unless otherwise
terminated. Our license for this technology is terminable
by Summit upon 60 days notice in the event we breach our
agreement with Summit, including our failure to pay
royalty fees on a timely basis or any other material
breach by us of the license agreement.
Provisions in our
charter documents and in Delaware law may discourage
potential acquisition bids for NetIQ and prevent changes
in our management which our stockholders may favor.
Provisions in our charter
documents could discourage potential acquisition
proposals and could delay or prevent a change in control
transaction that our stockholders may favor. These
provisions could have the effect of discouraging others
from making tender offers for our shares, and as a
result, these provisions may prevent the market price of
our common stock from reflecting the effects of actual or
rumored takeover attempts and may prevent stockholders
from reselling their shares at or above the price at
which they purchased their shares. These provisions may
also prevent changes in our management that our
stockholders may favor. Our charter documents do not
permit stockholders to act by written consent, do not
permit stockholders to call a stockholders meeting and
provide for a classified board of directors, which means
stockholders can only elect, or remove, a limited number
of our directors in any given year. Furthermore, upon
completion of the offering, our board of directors will
have the authority to issue up to 5,000,000 shares of
preferred stock in one or more series. Our board of
directors can fix the price, rights, preferences,
privileges and restrictions of such preferred stock
without any further vote or action by our stockholders.
The issuance of shares of preferred stock may delay or
prevent a change in control transaction without further
action by our stockholders. In addition, Delaware law may
inhibit potential acquisition bids for NetIQ. We are
subject to the antitakeover provisions of Delaware law
which regulate corporate acquisitions. Delaware law
prevents certain Delaware corporations, including NetIQ,
from engaging, under certain circumstances, in a “
business combination” with any “interested
stockholder” for three years following the date that
such stockholder became an interested stockholder.
The substantial number
of shares that will be eligible for sale in the near
future may adversely affect the market price for our
common stock and may prevent stockholders from reselling
their shares at or above the price at which they
purchased their shares.
Sales of a substantial number of
shares of our common stock in the public market following
this offering could materially adversely affect the
market price for our common stock. As additional shares
of our common stock become available for resale in the
public markets, this could increase the supply for our
common stock which could adversely affect the price of
our common stock. This may prevent stockholders from
reselling their shares at or above the price at which
they purchased their shares. The number of shares of
common stock available for sale in the public market is
limited by restrictions under federal securities law and
under agreements that our stockholders have entered into
with the underwriters or with us.
Our investment of the
proceeds from this offering may not yield a significant
return.
We will have broad discretion as
to the use of the proceeds from this offering and we may
not invest these proceeds to yield a significant return.
Our primary purposes for this offering are to create a
public market for our common stock and to raise working
capital for general corporate purposes, and potential
strategic investments or acquisitions. Until the need
arises to use the proceeds, we plan to invest the net
proceeds in investment grade, interest-bearing securities.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We do not use derivative
financial instruments in our investment portfolio and
have no foreign exchange contracts. Our financial
instruments consist of cash and cash equivalents,
short-term investments, trade accounts and contracts
receivable, accounts payable, and long-term obligations.
We consider investments in highly liquid instruments
purchased with a remaining maturity of 90 days or less at
the date of purchase to be cash equivalents. Our exposure
to market risk for changes in interest rates relates
primarily to our short-term investments and short-term
obligations, thus, fluctuations in interest rates would
not have a material impact on the fair value of these
securities.
Principally our business is
transacted in United States dollars. In fiscal 1999, 3%
of our invoices were in currencies other than the United
States dollar. Accordingly, we are subject to exposure
from adverse movements
in foreign currency exchange rates. This exposure is
primarily related to local currency denominated revenues
and operating expenses in Australia, Germany, Japan,
Singapore and the United Kingdom. We believe that a
natural hedge exists, as local currency denominated
revenues will substantially offset the local currency
denominated operating expenses. The Company assesses the
need to utilize financial instruments to hedge currency
exposures on an ongoing basis. However, as of June 30,
1999, we had no hedging contracts outstanding.
At June 30, 1999 we had $9.6
million in cash and cash equivalents, $5.0 million of
short-term debt at a fixed interest rate of 6%, and
$144,000 of short-term debt and $205,000 of long-term
debt at variable interest rate. A hypothetical 10 percent
increase or decrease in interest rate would not have a
material impact on our earnings or loss, or the fair
market value or cash flows of these instruments. All
short-term and long-term debt was paid off in August 1999.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements are set
forth on pages 36 through 51 and the Schedule of
Valuation and Qualifying Accounts is set forth on page
54, which follow Item 14.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The following table sets forth
information with respect to our executive officers and
directors as of June 30, 1999.
| Name
|
|
Age
|
|
Position
|
|
Ching-Fa Hwang
|
|
50
|
|
President, Chief Executive Officer and Director
|
| James
A. Barth
|
|
56
|
|
Vice
President, Finance, Chief Financial Officer
and Secretary
|
| Her-Daw
Che
|
|
50
|
|
Vice
President, Engineering and Director
|
| Thomas
R. Kemp
|
|
33
|
|
Vice
President, Marketing
|
| Stephen
M. Kendall
|
|
43
|
|
Vice
President, Asia Pacific
|
| Glenn
S. Winokur
|
|
40
|
|
Vice
President, Sales
|
| Kuo-Wei
(“Herbert”) Chang(1)(2)
|
|
37
|
|
Director
|
| Louis
C. Cole(2)
|
|
55
|
|
Director
|
| Alan W.
Kaufman(1)(2)
|
|
61
|
|
Director
|
|
Ying-Hon Wong
|
|
41
|
|
Director
|
(1)
|
Member of Audit
Committee.
|
(2)
|
Member of
Compensation Committee.
|
Ching-Fa Hwang
co-founded NetIQ in June 1995 and has served as our
President and Chief Executive Officer and as a director
since our inception. From June 1995 to March 1999, Mr.
Hwang also served as our Chief Financial Officer. From
September 1994 to June 1995, Mr. Hwang served as the Vice
President of Research at Compuware, a developer of
information systems software. From August 1993 to
September 1994, Mr. Hwang served as the Vice President of
Technical Services and General Manager at the EcoSystems
Business Group of Compuware. In May 1991, Mr. Hwang
co-founded EcoSystems Software, a client/server
management software provider, and served as its Vice
President of Engineering from its inception until its
sale to Compuware in August 1993. Mr. Hwang holds a B.S.
in electrical engineering from National Taiwan University
and a M.S. in computer science from the University of
Utah.
James A. Barth has served
as our Vice President, Finance, Chief Financial Officer
and Secretary since March 1999. From November 1997 until
March 1999, Mr. Barth served as the Vice President, Chief
Financial Officer and Secretary of Interlink Computer
Sciences, a developer of enterprise networking software
designed for the IBM mainframe platform. From October
1994 to August 1997, Mr. Barth served as Executive Vice
President, Chief Financial Officer and Secretary at
MagiNet, a provider of interactive entertainment and
information systems for hotels. From March 1994 to
October 1994, he served as Vice President and Chief
Financial Officer at ACC Microelectronics, a
semiconductor company. From 1982 to March 1994, Mr. Barth
served as Vice President, Chief Financial Officer and
Secretary at Rational Software, a developer of
object-oriented software engineering tools. Mr. Barth
holds a B.S. in business administration from the
University of California at Los Angeles and is a
certified public accountant.
Her-Daw Che co-founded
NetIQ and has served as our Vice President, Engineering
and as a director since November 1995. From September
1993 to July 1995, Mr. Che served as the Director of
Engineering of the EcoSystems Business Group at
Compuware. Mr. Che co-founded EcoSystems and served as
its Director of Engineering from its inception until its
sale to Compuware. Mr. Che holds a B.S. in electrical
engineering from National Taiwan University and an M.S.
in computer science and a Ph.D. in computer science from
the University of Pennsylvania.
Thomas R. Kemp has served
as our Vice President, Marketing since May 1997. From
January 1996 to April 1997, Mr. Kemp served as our
Director of Products. From April 1995 to November 1995,
Mr. Kemp served as a Director of Product Management at
Compuware and from August 1993 to March 1995, he served
as a Manager
of Systems Engineers at Compuware. From July 1992 to July
1993, Mr. Kemp served as a Manager of System Engineers at
EcoSystems until its sale to Compuware. Prior to July
1992, Mr. Kemp held various consulting and marketing
positions at Oracle Corporation, a database management
company. Mr. Kemp holds a B.S. in computer science and
history from the University of Michigan.
Glenn S. Winokur has
served as our Vice President, Sales since May 1997. From
May 1996 to April 1997, Mr. Winokur served as our
Director of Sales. From March 1994 to May 1996, Mr.
Winokur served as a Regional Sales Manager at Compuware.
Mr. Winokur has a B.S. in business administration and
marketing from the University of Illinois.
Stephen M. Kendall has
served as our Vice President, Asia Pacific since
September 1997. From March 1997 to August 1997, Mr.
Kendall served as a Vice President at Commerce Direct
International. From December 1993 to January 1997, Mr.
Kendall served as the Vice President of Sales, Asia
Pacific at Cheyenne Software, a provider of storage
management, security and communications software
products. Mr. Kendall has a B.A. in Asian studies from
Cornell University and a M.B.A. from the Institût
Européen d’Administration des Affaires in
Fontainebleau, France.
Kuo-Wei (“Herbert”)
Chang has been a director since May 1997. Since April
1996, Mr. Chang has been the president of InveStar
Capital, Inc., a technology venture capital management
firm based in Taiwan. From July 1994 to March 1996, Mr.
Chang was a Senior Vice President at the WK Technology
Fund, a technology venture capital management firm based
in Taiwan. From July 1992 to June 1994, Mr. Chang served
as the Vice President of Sales and Marketing at DynaLab,
a developer of electronic document solutions. Mr. Chang
holds a B.S. in geology from National Taiwan University
and a M.B.A. from National Chiao-Tung University in
Taiwan.
Louis C. Cole has been a
director since September 1998. Since June 1989, Mr. Cole
has been President, Chief Executive Officer and a
director of Legato Systems, which develops, markets and
supports network storage management software products.
Since April 1995, Mr. Cole has also served as Chairman of
the Board of Legato. Mr. Cole also serves as a director
of Inference, a provider of enterprise customer
relationship management software, and Rogue Wave
Software, a provider of object-oriented software parts
and related tools software. Mr. Cole holds a B.S. in
mathematics and education from Pennsylvania State
University at Edinboro.
Alan W. Kaufman has been a
director since August 1997. Since August 1997, Mr.
Kaufman has served as a director of QueryObject Systems,
which develops and markets proprietary business
intelligence software, and he has served as Chairman of
the Board of QueryObject since March 1998. Mr. Kaufman
was President and Chief Executive Officer of QueryObject
from October 1997 to December 1998. From December 1996 to
October 1997, Mr. Kaufman was an independent consultant.
From April 1985 to December 1996, Mr. Kaufman held
various positions at Cheyenne Software, including most
recently as Executive Vice President of Worldwide Sales.
Mr. Kaufman is also a director of Global
Telecommunication Solutions, a provider of prepaid phone
cards. Mr. Kaufman holds a B.S. in electrical engineering
from Tufts University.
Ying-Hon Wong co-founded
NetIQ in June 1995 and has served as a director since our
inception. Since January 1991, Mr. Wong has been a
General Partner of Wongfratris Investment Company, a
venture investment firm. Mr. Wong holds a B.S. in
electrical engineering and industrial engineering from
Northwestern University and a M.B.A. from the Wharton
School of Business at the University of Pennsylvania.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this
item is included under the caption “Executive
Compensation” and “Stock Option Grants and
Exercises” in our Proxy Statement to be filed in
connection with our 1999 annual meeting of stockholders
and is incorporated by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by this
item is included under the caption “Security
Ownership of Certain Beneficial Owners and Management
” in our Proxy Statement to be filed in connection
with our 1999 annual meeting of stockholders and is
incorporated by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The information required by this
item is included under the caption “Certain
Relationships and Related Transactions” in our Proxy
Statement to be filed in connection with our 1999 annual
meeting of stockholders and is incorporated by reference.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following
documents are filed as part of this Report:
1.
Financial Statements. The
following financial statements of the Company and the
Report of Deloitte & Touche LLP, Independent
Auditors, are included in this Report on the pages
indicated:
|
|
|
Page
|
|
Independent Auditors’ Report
|
|
36
|
|
Consolidated Balance Sheets as of June 30, 1998 and 1999
|
|
37
|
|
Consolidated Statements of Operations for the Years
ended June 30, 1997, 1998 and 1999
|
|
38
|
|
Consolidated Statements of Stockholders’ Equity
|
|
39
|
|
Consolidated Statements of Cash Flows for the Years
ended June 30, 1997, 1998 and 1999
|
|
40
|
| Notes
to Consolidated Financial Statements
|
|
41
|
2.
Financial Statement Schedules.
The following financial statement schedule of the Company
for the years ended June 30, 1997, 1998 and 1999 is filed
as part of this report on Form 10-K and should be read in
conjunction with the financial statements.
Schedule
|
|
Title
|
|
Page
|
|
II
|
|
Valuation and Qualifying Accounts
|
|
54
|
Schedules not listed above have
been omitted because they are not applicable, not
required, or the information required to be set forth
therein is included in the Consolidated Financial
Statements or notes thereto.
3.
Exhibits.
Exhibit
Number
|
|
|
|
Description
|
|
3.1A
|
|
(b)
|
|
|
Restated Certificate of Incorporation of NetIQ
currently in effect
|
|
|
|
|
3.2B
|
|
(b)
|
|
|
Bylaws
of NetIQ currently in effect
|
|
|
|
|
4.1
|
|
(b)
|
|
|
Specimen Common Stock Certificate
|
|
|
|
|
4.2
|
|
(b)
|
|
|
Registration Rights Agreement, dated May 14, 1997, by
and among NetIQ and certain NetIQ
stockholders identified therein
|
|
|
|
| 10.1
|
|
(b)
|
|
|
Form of
Indemnification Agreement between NetIQ and each of its
directors and executive
officers
|
|
|
|
| 10.2
|
|
(b)
|
|
|
Form of
Change of Control Severance Agreements between NetIQ
and each of its executive
officers
|
|
|
|
| 10.3A
|
|
(b
|
)
|
|
Amended
and Restated 1995 Stock Plan
|
|
|
|
| 10.3B
|
|
(b)
|
|
|
Form of
Stock Option Agreement under the Amended and Restated
Stock Plan
|
|
|
|
| 10.3C
|
|
(b)
|
|
|
Form of
Director Option Agreement under the 1995 Amended and
Restated Stock Plan
|
|
|
|
| 10.4A
|
|
(b
|
)
|
|
1999
Employee Stock Purchase Plan
|
|
|
|
| 10.4B
|
|
(b)
|
|
|
Form of
Subscription Agreement under the 1999 Employee Stock
Purchase Plan
|
|
|
|
| 10.5A
|
|
(b)*
|
|
|
BasicScript License Agreement, dated August 27, 1996,
between NetIQ and Henneberry Hill
Technologies Corporation doing business as Summit
Software Company
|
|
|
|
| 10.5B
|
|
(b)
|
|
|
Amendment, dated May 21, 1999, to the BasicScript
License Agreement between NetIQ and
Henneberry Hill Technologies Corporation doing business
as Summit Software Company
|
|
|
|
| 10.6
|
|
(b)*
|
|
|
Software Distribution Agreement, dated June 23, 1998,
between NetIQ and Tech Data Product
Management, Inc.
|
|
|
Exhibit
Number
|
|
|
|
Description
|
| 10.7
|
|
(b)
|
|
|
Agreement of Sublease, dated July 31, 1998, between
NetIQ and AMP Incorporated
|
|
|
|
| 10.8
|
|
(b)
|
|
|
Confidential Settlement Agreement, dated March 10,
1999, by and between Compuware
Corporation, NetIQ Corporation, and the individuals named
therein
|
|
|
|
| 21
|
|
(b
|
)
|
|
List of
subsidiaries
|
|
|
|
| 24.1
|
|
(a
|
)
|
|
Power
of Attorney (see page 52)
|
|
|
|
| 27.1
|
|
(a
|
)
|
|
Financial Data Schedule
|
|
(b)
|
Incorporated by
reference to the exhibit bearing the same number filed
with the Company’s Registration Statement on Form
S-1 (Registration No. 333-79373), which the Securities
and Exchange Commission declared effective on July 29,
1999.
|
|
*
|
Subject to Confidential
Treatment
|
|
(b) Reports on Form 8-K:
Not applicable.
|
INDEPENDENT AUDITORS
’ REPORT
To the Board of Directors
and Stockholders of NetIQ Corporation:
We have audited the accompanying
consolidated balance sheets of NetIQ Corporation and
subsidiaries (the Company) as of June 30, 1998 and 1999,
and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the
three years in the period ended June 30, 1999. These
financial statements are the responsibility of the Company
’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in
accordance with generally accepted auditing standards.
Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the
accounting principles used and significant estimates made
by management, as well as evaluating the overall
financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated
financial statements present fairly, in all material
respects, the financial position of NetIQ Corporation and
subsidiaries as of June 30, 1998 and 1999, and the
results of their operations and their cash flows for each
of the three years in the period ended June 30, 1999 in
conformity with generally accepted accounting principles.
San Jose, California
July 9, 1999
(August 4, 1999 as to
Note 13)
NetIQ CORPORATION
CONSOLIDATED BALANCE
SHEETS
June 30, 1998 and 1999
(In thousands, except
share and per share amounts)
|
|
|
1998
|
|
1999
|
|
ASSETS
|
|
| Current
assets:
|
|
Cash and cash equivalents
|
|
$3,358
|
|
|
$9,634
|
|
Accounts receivable, net of allowance for uncollectible
accounts of $307 and $650 in
1998 and 1999
|
|
4,055
|
|
|
6,395
|
|
|
Prepaid expenses
|
|
167
|
|
|
764
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
7,580
|
|
|
16,793
|
|
|
Property and equipment, net
|
|
527
|
|
|
1,465
|
|
| Other
assets
|
|
98
|
|
|
96
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$8,205
|
|
|
$18,354
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
| Current
liabilities:
|
|
Short-term debt
|
|
$—
|
|
|
$5,144
|
|
|
Accounts payable
|
|
535
|
|
|
326
|
|
|
Accrued compensation and related benefits
|
|
809
|
|
|
1,100
|
|
|
Other liabilities
|
|
375
|
|
|
1,839
|
|
|
Deferred revenue
|
|
1,547
|
|
|
3,941
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
3,266
|
|
|
12,350
|
|
|
Long-term debt
|
|
—
|
|
|
205
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
3,266
|
|
|
12,555
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
Stockholders’ equity:
|
Convertible preferred stock-$0.001 (aggregate
liquidation preference of $11,000,000):
11,100,000 shares
authorized and 7,399,977 outstanding
|
|
10,955
|
|
|
10,955
|
|
Common stock-$0.001; 30,000,000 shares authorized;
shares outstanding: 1998,
3,217,833; 1999,
4,115,494
|
|
1,302
|
|
|
4,909
|
|
|
Note receivable from stockholder
|
|
(6
|
)
|
|
—
|
|
|
Deferred stock-based compensation
|
|
(1,011
|
)
|
|
(2,122
|
)
|
|
Accumulated deficit
|
|
(6,301
|
)
|
|
(7,943
|
)
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
4,939
|
|
|
5,799
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$8,205
|
|
|
$18,354
|
|
|
|
|
|
|
|
|
See notes to consolidated
financial statements.
NetIQ CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years Ended June 30,
1997 1998 and 1999
(In thousands, except
per share amounts)
|
|
|
1997
|
|
1998
|
|
1999
|
|
Software license revenue
|
|
$
369
|
|
|
$6,603
|
|
|
$18,433
|
|
| Service
revenue
|
|
19
|
|
|
467
|
|
|
3,136
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
388
|
|
|
7,070
|
|
|
21,569
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of
software license revenue
|
|
9
|
|
|
235
|
|
|
755
|
|
| Cost of
service revenue
|
|
46
|
|
|
407
|
|
|
1,260
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
55
|
|
|
642
|
|
|
2,015
|
|
|
|
|
|
|
|
|
|
|
|
| Gross
profit
|
|
333
|
|
|
6,428
|
|
|
19,554
|
|
|
Operating expenses:
|
|
|
|
|
Sales and marketing
|
|
1,238
|
|
|
5,748
|
|
|
11,685
|
|
|
Research and development
|
|
1,003
|
|
|
2,192
|
|
|
4,344
|
|
|
General and administrative
|
|
479
|
|
|
1,611
|
|
|
2,983
|
|
|
Stock-based compensation
|
|
10
|
|
|
250
|
|
|
1,928
|
|
|
Settlement of litigation
|
|
—
|
|
|
—
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
2,730
|
|
|
9,801
|
|
|
21,304
|
|
|
|
|
|
|
|
|
|
|
|
| Loss
from operations
|
|
(2,397
|
)
|
|
(3,373
|
)
|
|
(1,750
|
)
|
|
Interest income (expense):
|
|
|
|
|
Interest income
|
|
119
|
|
|
262
|
|
|
219
|
|
|
Interest expense
|
|
(3
|
)
|
|
—
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
116
|
|
|
262
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss
|
|
$(2,281
|
)
|
|
$(3,111
|
)
|
|
$(1,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic
and diluted net loss per share
|
|
$(1.62
|
)
|
|
$(1.34
|
)
|
|
$(0.47
|
)
|
| Shares
used to compute basic and diluted net loss per share
|
|
1,411
|
|
|
2,325
|
|
|
3,476
|
|
|
|
| Pro
forma basic and diluted net loss per share (See Note 1)
|
|
|
|
|
|
|
|
$(0.15
|
)
|
Shares
used to compute pro forma basic and diluted net loss
per share
(See Note 1)
|
|
|
|
|
|
|
|
10,876
|
|
See notes to consolidated
financial statements.
NetIQ CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended June 30,
1997, 1998 and 1999
(In thousands, except
share amounts)
|
|
|
Convertible Preferred Stock
|
|
Common Stock
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Balances, July 1, 1996
|
|
4,666,656
|
|
|
$2,786
|
|
|
2,882,665
|
|
|
$
9
|
|
Issuance of Series B preferred
stock, at $3.00 per share,
net of issuance costs of $31
|
|
2,733,321
|
|
|
8,169
|
|
|
—
|
|
|
—
|
|
|
Exercise of stock options
|
|
—
|
|
|
—
|
|
|
144,918
|
|
|
9
|
|
|
Deferred stock-based
compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
Amortization of deferred
stock-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 1997
|
|
7,399,977
|
|
|
10,955
|
|
|
3,027,583
|
|
|
48
|
|
|
Exercise of stock options
|
|
—
|
|
|
—
|
|
|
190,250
|
|
|
13
|
|
|
Deferred stock-based
compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,241
|
|
|
Amortization of deferred
stock-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 1998
|
|
7,399,977
|
|
|
10,955
|
|
|
3,217,833
|
|
|
1,302
|
|
|
Exercise of stock options
|
|
—
|
|
|
—
|
|
|
929,325
|
|
|
254
|
|
|
Repurchase of common stock
|
|
—
|
|
|
—
|
|
|
(58,331
|
)
|
|
(3
|
)
|
|
Issuance of stock
|
|
—
|
|
|
—
|
|
|
26,667
|
|
|
320
|
|
|
Deferred stock-based
compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,036
|
|
|
Amortization of deferred
stock-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 1999
|
|
7,399,977
|
|
|
$10,955
|
|
|
4,115,494
|
|
|
$4,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
Receivable
From
Stockholder
|
|
Deferred
Stock-based
Compensation
|
|
Accumulated
Deficit
|
|
Total
|
|
Balances, July 1, 1996
|
|
$
(6
|
)
|
|
$—
|
|
|
$
(909
|
)
|
|
$1,880
|
|
Issuance of Series B preferred
stock, at $3.00 per share,
net of issuance costs of $31
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,169
|
|
|
Exercise of stock options
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
Deferred stock-based
compensation
|
|
—
|
|
|
(30
|
)
|
|
—
|
|
|
—
|
|
|
Amortization of deferred
stock-based compensation
|
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
(2,281
|
)
|
|
(2,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 1997
|
|
(6
|
)
|
|
(20
|
)
|
|
(3,190
|
)
|
|
7,787
|
|
|
Exercise of stock options
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
Deferred stock-based
compensation
|
|
—
|
|
|
(1,241
|
)
|
|
—
|
|
|
—
|
|
|
Amortization of deferred
stock-based compensation
|
|
—
|
|
|
250
|
|
|
—
|
|
|
250
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
(3,111
|
)
|
|
(3,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 1998
|
|
(6
|
)
|
|
(1,011
|
)
|
|
(6,301
|
)
|
|
4,939
|
|
|
Exercise of stock options
|
|
—
|
|
|
—
|
|
|
—
|
|
|
254
|
|
|
Repurchase of common stock
|
|
6
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
Issuance of stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
320
|
|
|
Deferred stock-based
compensation
|
|
—
|
|
|
(3,036
|
)
|
|
—
|
|
|
—
|
|
|
Amortization of deferred
stock-based compensation
|
|
—
|
|
|
1,925
|
|
|
—
|
|
|
1,925
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
(1,642
|
)
|
|
(1,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 1999
|
|
$—
|
|
|
$(2,122
|
)
|
|
$(7,943
|
)
|
|
$5,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated
financial statements.
NetIQ CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years Ended June 30,
1997, 1998 and 1999
(In thousands)
|
|
|
1997
|
|
1998
|
|
1999
|
| Cash
flows from operating activities:
|
|
Net loss
|
|
$(2,281
|
)
|
|
$(3,111
|
)
|
|
$(1,642
|
)
|
Adjustments to reconcile net loss to net cash provided
by (used in)
operating
activities:
|
|
Depreciation
|
|
70
|
|
|
198
|
|
|
406
|
|
|
Stock-based compensation
|
|
10
|
|
|
250
|
|
|
1,928
|
|
|
Stock issued in lieu of compensation
|
|
—
|
|
|
—
|
|
|
320
|
|
|
Gain on sale of property and equipment
|
|
—
|
|
|
—
|
|
|
11
|
|
|
Changes in:
|
|
Accounts receivable
|
|
(159
|
)
|
|
(3,896
|
)
|
|
(2,340
|
)
|
|
Prepaid expenses
|
|
10
|
|
|
(166
|
)
|
|
(597
|
)
|
|
Accounts payable
|
|
199
|
|
|
308
|
|
|
(209
|
)
|
|
Accrued compensation and related benefits
|
|
46
|
|
|
731
|
|
|
291
|
|
|
Other liabilities
|
|
38
|
|
|
337
|
|
|
1,464
|
|
|
Deferred revenue
|
|
72
|
|
|
1,475
|
|
|
2,394
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities
|
|
(1,995
|
)
|
|
(3,874
|
)
|
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
| Cash
flows from investing activities:
|
|
Purchases of property and equipment
|
|
(220
|
)
|
|
(453
|
)
|
|
(1,366
|
)
|
|
Proceeds from sales of property and equipment
|
|
—
|
|
|
—
|
|
|
11
|
|
|
Purchases/maturities of short-term investments
|
|
2,085
|
|
|
—
|
|
|
—
|
|
|
Other
|
|
(18
|
)
|
|
(76
|
)
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities
|
|
1,847
|
|
|
(529
|
)
|
|
(1,353
|
)
|
|
|
|
|
|
|
|
|
|
|
| Cash
flows from financing activities:
|
|
Proceeds from borrowings
|
|
—
|
|
|
—
|
|
|
5,433
|
|
|
Payments on borrowings
|
|
—
|
|
|
—
|
|
|
(84
|
)
|
|
Net repayments on line of credit facility
|
|
(314
|
)
|
|
—
|
|
|
—
|
|
|
Proceeds from sale of common stock
|
|
9
|
|
|
13
|
|
|
254
|
|
|
Proceeds from issuance of preferred stock
|
|
8,169
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
7,864
|
|
|
13
|
|
|
5,603
|
|
|
|
|
|
|
|
|
|
|
|
| Net
increase (decrease) in cash and cash equivalents
|
|
7,716
|
|
|
(4,390
|
)
|
|
6,276
|
|
| Cash
and cash equivalents, beginning of year
|
|
32
|
|
|
7,748
|
|
|
3,358
|
|
|
|
|
|
|
|
|
|
|
|
| Cash
and cash equivalents, end of year
|
|
$7,748
|
|
|
$3,358
|
|
|
$9,634
|
|
|
|
|
|
|
|
|
|
|
|
| Noncash
investing and financing activities:
|
|
Receipt of common stock for stockholder’s note
receivable
|
|
$
—
|
|
|
$
—
|
|
|
$
(6
|
)
|
|
Supplemental disclosure of cashflow information—
cash paid for:
|
|
Interest
|
|
$
3
|
|
|
$
—
|
|
|
$
20
|
|
|
Income taxes
|
|
$
1
|
|
|
$
3
|
|
|
$
37
|
|
See notes to consolidated
financial statements.
NETIQ CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Years Ended June 30,
1997, 1998 and 1999
1.
Organization and Summary of Significant Accounting
Policies
Organization —
NetIQ Corporation (the Company) was incorporated in
California in June 1995 to develop, market and support
performance and availability management software for the
Microsoft Windows NT environment. In July 1999 the
Company was reincorporated in the state of Delaware (See
Note 13). The Company markets its products through its
field and inside sales organization and reseller channel
partners, which are focused on customers primarily
located in the United States, Europe and Asia.
Basis of Presentation
— The consolidated financial statements
include the accounts of the Company and its subsidiaries,
all of which are wholly-owned. All significant
intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates —
The preparation of the financial statements in
conformity with generally accepted accounting principals
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
reported period. Actual results could differ from those
estimates.
Cash Equivalents —
The Company considers all highly liquid debt
instruments purchased with a remaining maturity of three
months or less to be cash equivalents.
Property and Equipment
— Property and equipment are stated at
cost. Depreciation is computed using the straight-line
method over the estimated useful lives, generally three
to five years.
Software Development Costs
— Costs for the development of new
software products and substantial enhancements to
existing software products are expensed as incurred until
technological feasibility has been established, at which
time any additional costs would be capitalized in
accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, Computer Software To Be Sold,
Leased or Otherwise Marketed. The costs to develop
such software have not been capitalized as the Company
believes its current software development process is
essentially completed concurrent with the establishment
of technological feasibility.
Revenue Recognition —
Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2), was issued in October 1997 by the
American Institute of Certified Public Accountants
(AICPA) and was amended by Statement of Position 98-4
(SOP 98-4). The Company adopted SOP 97-2 effective July
1, 1997 and SOP 98-4 effective March 31, 1998. The
Company believes its current revenue recognition policies
and practices are consistent with SOP 97-2 and SOP 98-4.
Additionally, the AICPA issued SOP 98-9 in December 1998,
which provides certain amendments to SOP 97-2, and is
effective for transactions entered into by the Company
beginning July 1, 1999. The Company does not believe that
adoption of this amendment will have a material impact on
its financial position, results of operations or cash
flows.
Software license revenue is
recognized upon meeting all of the following criteria:
execution of a written purchase order, license agreement
or contract; delivery of software and authorization keys;
the license fee is fixed and determinable; collectibility
of the proceeds within six months is assessed as being
probable; and vendor-specific objective evidence exists
to allocate the total fee to elements of the arrangement.
Vendor-specific objective evidence is based on the price
generally charged when an element is sold separately, or
if not yet sold separately, is established by authorized
management. All elements of each order are valued at the
time of revenue recognition. For sales made through
distributors, resellers and original equipment
manufacturers the Company recognizes revenue at the time
these partners report to the Company that they have sold
the software to the end user and all revenue recognition
criteria have been met. Service revenue includes
maintenance revenue, which is
deferred and recognized ratably over the maintenance
period, and revenue from consulting and training
services, which is recognized as services are performed.
Income Taxes —
Deferred tax assets and liabilities are recorded
for the expected future tax consequences of temporary
differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. A
valuation allowance is recorded to reduce net deferred
tax assets to amounts that are more likely than not to be
recognized.
Stock-based Compensation
— The Company accounts for its employees
stock option plan in accordance with provisions of
Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees.
Net Loss Per Share —
Basic loss per share excludes dilution and is
computed by dividing net loss by the weighted average
number of common shares outstanding, less shares subject
to repurchase by the Company. Diluted net loss per share
reflects the potential dilution that could occur if
securities or other contracts to issue common stock
(convertible preferred stock, warrants and common stock
options) were exercised or converted into common stock.
Common share equivalents are excluded from the
computation in loss periods, as their effect would be
antidilutive.
Pro forma Net Loss Per Share
— Pro forma basic and diluted net
loss per share is computed by dividing net loss
attributable to common stockholders by the weighted
average number of common shares outstanding for the
period, less shares subject to repurchase by the Company,
and the weighted average number of common shares
resulting from the automatic conversion of all
outstanding shares of convertible preferred stock upon
the closing of the initial public offering (See Note 13).
Foreign Currency Transactions
— The functional currency of the
Company’s foreign subsidiaries is the U.S. dollar.
For those foreign subsidiaries whose books and records
are not maintained in the functional currency, all
monetary assets and liabilities are remeasured at the
current exchange rate at the end of each period reported,
nonmonetary assets are remeasured at historical rates and
revenues and expenses are remeasured at average exchange
rates in effect during the period, except for those
expenses related to balance sheet amounts that are
remeasured at historical exchange rates. Transaction
gains and losses, which are included in other income
(expense) in the accompanying consolidated statements of
operations, have not been significant.
Concentration of Credit Risk
— Financial instruments, which
potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. The
Company sells its products to companies in diverse
industries and generally does not require its customers
to provide collateral to support accounts receivable. To
reduce credit risk, management performs ongoing credit
evaluations of its customers’ financial condition.
The Company maintains allowances for potential credit
losses.
Certain Significant Risks and
Uncertainties — The Company operates
in the software industry, and accordingly, can be
affected by a variety of factors. For example, management
of the Company believes that changes in any of the
following areas could have significant negative effect on
the Company’s future financial position, results of
operations and cash flows; demand for performance and
availability management software solutions, including any
adverse purchasing patterns caused by Year 2000 related
concerns; new product introductions by competitors;
development of distribution channels; demand for Windows
NT-based systems and applications; ability to implement
and expand operational customer support and financial
control systems to manage rapid growth, both domestically
and internationally; the hiring, training and retention
of key employees; the Company’s relationship with
Microsoft; fundamental changes in technology underlying
software products; litigation or other claims against the
Company.
NETIQ CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS—(Continued)
Years Ended June 30,
1997, 1998 and 1999
Recently Issued Accounting
Standards — In June 1997, the
Financial Accounting Standards Board (FASB) issued SFAS
No.130, Reporting Comprehensive Income, which
requires an enterprise to report, by major components and
as a single total, the changes in its net assets during
the period from nonowner sources; and SFAS No. 131,
Disclosures About Segments of an Enterprise and Related
Information, which establishes annual and interim
reporting standards for an enterprise’s business
segments and related disclosures about its products,
services, geographic areas and major customers. The
Company’s comprehensive loss was equal to its net
loss for all periods presented. The Company currently
operates in one reportable segment under SFAS No. 131.
In June 1998, the FASB issued
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, which defines derivatives,
requires that all derivatives be carried at fair value,
and provides for hedge accounting when certain conditions
are met. SFAS No. 133 is effective for the Company in
fiscal 2001. Although the Company has not fully assessed
the implications of SFAS No. 133, the Company does not
believe that adoption of this statement will have a
material impact on the Company’s financial position
or results of operations.
2.
Property and Equipment
Property and equipment at June 30
consist of (in thousands):
|
|
|
1998
|
|
1999
|
|
Computer equipment and software
|
|
$760
|
|
|
$1,587
|
|
|
Furniture and fixtures
|
|
55
|
|
|
448
|
|
|
Construction in progress
|
|
6
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
821
|
|
|
2,148
|
|
| Less
accumulated depreciation
|
|
(294
|
)
|
|
(683
|
)
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
527
|
|
|
$1,465
|
|
|
|
|
|
|
|
|
3.
Settlement of Litigation
In September 1996, Compuware
Corporation filed a complaint against the Company
alleging misappropriation of certain trade secrets,
copyright infringement, unfair competition and other
claims. A settlement of these claims was reached in
January 1999 and final documentation (the Settlement
Agreement) was entered into and the charges dismissed in
March 1999.
In March 1999, as a part of the
Settlement Agreement, the Company received a loan of
$5,000,000 under a subordinated secured promissory note.
The loan bears interest at 6% per year and principal and
accrued interest are payable on the earliest of (i) an
initial public offering of the Company’s securities
raising in excess of $10,000,000, (ii) a change in
control meeting certain criteria, (iii) in the event of
the Company filing for bankruptcy or insolvency or other
specified events of default or (iv) January 1, 2002. The
note is secured by security agreements covering all of
the Company’s assets and is subordinated to any bank
credit facility.
Also in March 1999, as a part of
the Settlement Agreement, the Company issued a warrant to
purchase up to 2% of the total outstanding common stock
and common stock equivalents of the Company, calculated
immediately prior to the events described in (i) or (ii)
as follows, (i) the filing of a registration statement
relating to the public offering of the Company’s
common stock or (ii) the signing of a definitive
agreement regarding a change in control occurring prior
to the initial public offering of the Company’s
common stock. The warrant is exercisable either upon (i)
the effectiveness of a registration statement or (ii) the
closing of a change in control transaction. The exercise
price, in the case of (i), is 90% of the price to the
public or, in the case of (ii), is 80%
of the cash value of a share of common stock if the event
takes place before December 31, 1999 or 90% of the cash
value of a share of common stock if the event takes place
on or after January 1, 2000. On June 16, 1999 Compuware
executed an agreement to exercise its warrant to purchase
280,025 shares of common stock upon the effectiveness of
the registration statement relating to the initial public
offering. The value of such warrant, approximately
$364,000 based on the initial public offering price of
$13.00 per share, was charged to operating results in
June 1999. The fair value of the warrant approximates the
intrinsic value due to the diminimus life of the warrant.
4.
Debt
The Company had a Loan and
Security Agreement (the Agreement) with a financial
institution, which provided for a maximum credit facility
of $2,000,000. This facility expired in May 1999.
The Agreement also provided for
equipment advances of $500,000 and during the year ended
June 30, 1999, the Company obtained advances of $433,000
for capital acquisitions. Advances bear interest at the
bank’s prime rate (7.75% at June 30, 1999) plus
0.75%, which is payable monthly. Commencing December
1998, payments of principal and interest are due in equal
monthly installments over a 36-month period. At June 30,
1999, the outstanding obligation was $349,000. Borrowings
on the facility are due as follows: 2000, $144,000; 2001,
$144,000; and 2002, $61,000. Borrowings under the
Agreement are collateralized by a lien on all of the
Company’s assets.
5.
Stockholders’ Equity
At June 30, 1999, convertible
preferred stock consists of:
| |
|
Shares
Designated
|
|
Shares
Outstanding
|
|
Price Per
Share
|
|
Amount (Net
of Issuance
Costs)
|
|
Aggregate
Liquidation
Preference
|
| Series A
|
|
4,666,656
|
|
4,666,656
|
|
$0.60
|
|
$ 2,786,304
|
|
$2,800,000
|
| Series B
|
|
2,733,321
|
|
2,733,321
|
|
$3.00
|
|
8,169,049
|
|
8,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,399,977
|
|
7,399,977
|
|
|
|
$10,955,353
|
|
$11,000,000
|
|
|
|
|
|
|
|
|
|
|
|
Significant terms of the
convertible preferred stock are as follows:
|
Ÿ
|
Each share is
convertible, at the option of the holder, into one
share of common stock (subject to adjustments for
events of dilution). Shares of Series A and B will be
automatically converted into common stock upon the
closing of a public offering yielding proceeds in
excess of $7,500,000 and at a price of not less than
$2.40 and $6.00 per share, respectively, or upon
approval (by vote or written consent) of at least 66
2
/
3
% of the then outstanding shares of series A or
at least a majority of the then outstanding shares of
Series B.
|
|
Ÿ
|
Each share has the same
voting rights as the number of shares of common stock
into which it is convertible.
|
|
Ÿ
|
In the event of
liquidation, dissolution or winding up of the Company,
the preferred shareholders of Series A and Series B
shall receive an amount equal to $0.60 and $3.00 per
share, respectively, plus an amount equal to all
declared but unpaid dividends on each share. Any
remaining assets will be distributed among the holders
of Series A and Series B preferred stock and common
stock, pro rata, based on the number of shares of
common stock held by each shareholder on an
as-converted basis. In total, the holders of Series A
and Series B preferred stock shall not be entitled to
receive more than $1.50 and $7.50 per share,
respectively.
|
NETIQ CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS—(Continued)
Years Ended June 30,
1997, 1998 and 1999
|
Ÿ
|
Holders of preferred
stock are entitled to annual noncumulative dividends of
$0.06 and $0.24 per share for Series A and Series B,
respectively, when and if declared by the Board of
Directors, prior to any dividends declared on common
stock. No such dividends have been declared.
|
|
See Note 13 concerning
the subsequent conversion of preferred stock into
common stock.
|
Restricted Stock
— During fiscal year 1996 and 1999, the Company
issued 2,882,667 and 53,333 shares of common stock at a
total price of $9,035 and $80,000, respectively, to
officers and employees of the Company. The shares are
subject to repurchase by the Company at the original
purchase price per share upon termination of employment
prior to vesting of such shares. The restricted shares
vest over periods ranging from one to four years in
accordance with the terms of the original stock purchase
agreement. At June 30, 1999, approximately 26,667
outstanding shares of such stock were subject to
repurchase.
The exercise price of $1.50 was
less than the deemed fair value of the 53,333 shares
issued during fiscal year 1999. Accordingly, the Company
recorded $138,000 as deferred compensation and amortized
$74,000 to expense during fiscal year 1999.
Stock-Based Compensation
— In connection with options granted to
purchase common stock, the Company recorded deferred
stock compensation of $30,000, $1,241,000 and $3,036,000
in fiscal years 1997, 1998 and 1999, respectively. Such
amounts represent, for employee stock options, the
difference between the exercise price and the fair value
of the Company’s common stock at the date of grant,
and, for non-employee options, the deemed fair value of
the option at the date of vesting. The deferred charges
for employee options are being amortized to expense
through fiscal year 2003 and the deferred charges for
non-employee options were being amortized to expense
through the end of the fiscal year 1999. Stock-based
compensation expense of $10,000, $250,000 and $1,928,000
was recognized during fiscal years 1997, 1998 and 1999,
respectively.
Options granted to
non-employees — The Company has
granted options to non-employees for consulting and legal
services performed. The initial vesting period for these
options ranged from immediate vesting to vesting over 4
years and the option exercise period ranges from 6 months
to 10 years. Stock options issued to non-employees are
accounted for in accordance with provisions of SFAS No.
123, Accounting for Stock-Based Compensation and
Emerging Issues Task Force Issue No. 96-18, Accounting
for Equity Instruments That Are Issued To Other Than
Employees for Acquiring, or in Conjunction With Selling,
Goods or Services. The fair value of stock options
issued to non-employees was calculated using a risk free
interest rate of 6%, expected volatility of 50% and
actual length of the option.
During fiscal year 1996, options
for 150,667 shares were granted at an exercise price of
$0.03 and no compensation related to these options was
recorded in fiscal 1996. At June 30, 1996, unvested
options totaled 104,167 shares.
During fiscal year 1997, options
for 142,833 shares were granted at an exercise price of
$0.03. In connection with these options, the Company
recorded deferred stock compensation of $30,000 and
amortized $10,000 as an expense during fiscal year 1997.
At June 30, 1997, unvested options totaled 142,306 shares
and unamortized deferred stock-based compensation related
to unvested options totaled $20,000.
During fiscal year 1998, options
for 133,333 shares were granted at an exercise price of
$0.13. In connection with these options, the Company
recorded deferred stock compensation of $285,000 and
amortized $152,000 as an expense during fiscal year 1998.
At June 30, 1998, unvested options totaled 142,306 shares
and unamortized deferred stock-based compensation related
to unvested options totaled $153,000.
NETIQ CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS—(Continued)
Years Ended June 30,
1997, 1998 and 1999
During fiscal year 1999, options
for 20,333 shares were granted at an exercise price of
$0.13, options for 108,333 shares were granted at an
exercise price of $0.67 and 58,333 shares were granted at
an exercise price of $9.00. In connection with these
options, the Company recorded deferred stock compensation
of $1,041,000 and amortized $1,194,000 as an expense
during fiscal year 1999. At June 30, 1999, all
non-employee options were fully vested and deferred
stock-based compensation was fully amortized.
Common Shares Reserved for
Issuance — At June 30, 1999, the
Company had reserved shares of common stock for issuance
as follows.
|
Conversions of convertible preferred stock
|
|
7,399,977
|
|
Issuance under stock option plan
|
|
2,719,521
|
|
Issuance under Employee Stock Purchase Plan
|
|
500,000
|
|
Exercise of common stock warrants
|
|
280,025
|
|
|
|
|
Total
|
|
10,899,523
|
|
|
|
Stock Option Plan
— Under the Company’s 1995 Stock Option
Plan (the Plan) 5,333,332 shares are reserved for
issuance to employees, consultants and directors.
Incentive stock options are granted at fair market value
(as determined by the Board of Directors) at the date of
grant; nonstatutory options and stock sales may be
offered at not less than 85% of fair market value.
Generally, options become exercisable over four years and
expire ten years after the date of grant.
A summary of stock option
activity under the Plan is as follows:
|
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
Outstanding, July 1, 1996 (53,333 shares exercisable at
$0.06)
|
|
767,329
|
|
|
$0.06
|
|
Granted (weighted-average fair value of $0.03)
|
|
951,156
|
|
|
0.11
|
|
Exercised
|
|
(144,918
|
)
|
|
0.06
|
|
Canceled
|
|
(149,992
|
)
|
|
0.06
|
|
|
|
|
|
|
|
Outstanding, June 30, 1997 (249,705 shares exercisable
at $0.06)
|
|
1,423,575
|
|
|
0.09
|
|
Granted (weighted-average fair value of $1.26)
|
|
1,005,627
|
|
|
0.30
|
|
Exercised
|
|
(190,250
|
)
|
|
0.08
|
|
Canceled
|
|
(2,657
|
)
|
|
0.30
|
|
|
|
|
|
|
|
Outstanding, June 30, 1998 (631,723 shares exercisable
at $0.13)
|
|
2,236,295
|
|
|
0.20
|
|
Granted (weighted-average fair value of $3.15)
|
|
1,299,216
|
|
|
6.03
|
|
Exercised
|
|
(929,325
|
)
|
|
0.27
|
|
Canceled
|
|
(57,165
|
)
|
|
0.30
|
|
|
|
|
|
|
|
Outstanding, June 30, 1999
|
|
2,549,021
|
|
|
$3.13
|
|
|
|
|
|
|
At June 30, 1999, 153,169 shares
were available under the Plan for future grant.
NETIQ CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS—(Continued)
Years Ended June 30,
1997, 1998 and 1999
The following table summarizes
information concerning options outstanding as of June 30,
1999:
Range of
Exercise Prices
|
|
Options Outstanding
|
|
Options Vested
|
|
Number of
Options
Outstanding
|
|
Weighted-Average
Remaining
Contractual Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
Vested at
June 30,
1999
|
|
Weighted
Average
Exercise
Price
|
| $0.06 -
$0.30
|
|
1,441,174
|
|
8.04
|
|
$0.22
|
|
522,252
|
|
$0.20
|
| $1.50 -
$3.00
|
|
449,683
|
|
9.43
|
|
1.78
|
|
145,375
|
|
1.50
|
| $9.00 -
$12.00
|
|
658,164
|
|
9.81
|
|
10.43
|
|
64,744
|
|
9.12
|
|
|
|
|
|
|
|
|
|
|
|
| $0.06 -
$12.00
|
|
2,549,021
|
|
8.74
|
|
$3.13
|
|
732,371
|
|
$1.25
|
|
|
|
|
|
|
|
|
|
|
|
SFAS 123, Accounting for
Stock-Based Compensation, requires the disclosure of
pro forma net income or loss had the Company adopted the
fair value method since the Company’s inception.
Under SFAS 123, the fair value of stock-based awards to
employees is calculated through the use of the
Black-Scholes options pricing model, even though such
model was developed to estimate the fair value of freely
tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company
’s stock option awards. The Black-Scholes model also
requires subjective assumptions, including future stock
price volatility and expected time to exercise, which
greatly affect the calculated values.
The weighted-average fair value
of the Company’s stock-based awards to employees was
estimated using the minimum value method and assuming no
dividends will be declared and the following additional
assumptions:
|
|
|
Year Ended June 30,
|
|
|
|
1997
|
|
1998
|
|
1999
|
|
Estimated life (in years)
|
|
3.67
|
|
|
4.00
|
|
|
4.00
|
|
|
Risk-free interest rate
|
|
6.0
|
%
|
|
5.6
|
%
|
|
6.0
|
%
|
|
|
For pro forma
purposes, the estimated fair value of the Company’
s stock-based awards to employees is amortized, using
the straight-line method over the options’ vesting
period. The Company’s pro forma results are as
follows:
|
|
|
|
|
Year Ended June 30,
|
|
|
|
1997
|
|
1998
|
|
1999
|
| Net
loss:
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$(2,281
|
)
|
|
$(3,111
|
)
|
|
$(1,642
|
)
|
|
Pro forma
|
|
(2,281
|
)
|
|
(3,395
|
)
|
|
(2,936
|
)
|
| Basic
and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$(1.62
|
)
|
|
$(1.34
|
)
|
|
$(0.47
|
)
|
|
Pro forma
|
|
(1.62
|
)
|
|
(1.46
|
)
|
|
(0.84
|
)
|
NETIQ CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS—(Continued)
Years Ended June 30,
1997, 1998 and 1999
6.
Net Loss Per Share
The following is a
reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in
thousands, except per share amounts).
|
|
|
Year Ended June 30,
|
|
|
|
1997
|
|
1998
|
|
1999
|
| Net
loss (numerator), basic and diluted
|
|
$(2,281
|
)
|
|
$(3,111
|
)
|
|
$(1,642
|
)
|
|
|
|
|
|
|
|
|
|
|
| Shares
(denominator):
|
|
|
|
|
|
|
|
|
|
|
Weighed average common shares outstanding
|
|
2,944
|
|
|
3,095
|
|
|
3,654
|
|
Weighed average common shares outstanding subject to
repurchase
|
|
(1,533
|
)
|
|
(770
|
)
|
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
| Shares
used in computation, basic and diluted
|
|
1,411
|
|
|
2,325
|
|
|
3,476
|
|
|
|
|
|
|
|
|
|
|
|
| Net
loss per share, basic and diluted
|
|
$(1.62
|
)
|
|
$(1.34
|
)
|
|
$(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
For the above mentioned periods,
the Company had securities outstanding which could
potentially dilute basic earnings per share in the
future, but were excluded in the computation of diluted
net loss per share in the periods presented, as their
effect would have been antidilutive. Such outstanding
securities consist of the following (in thousands):
|
|
|
Year Ended June 30,
|
|
|
|
1997
|
|
1998
|
|
1999
|
|
Convertible preferred stock
|
|
7,400
|
|
7,400
|
|
7,400
|
| Shares
of common stock subject to repurchase
|
|
1,048
|
|
293
|
|
27
|
|
Outstanding options
|
|
1,424
|
|
2,236
|
|
2,549
|
|
Warrants
|
|
—
|
|
—
|
|
280
|
|
|
|
|
|
|
|
|
Total
|
|
9,872
|
|
9,929
|
|
10,256
|
|
|
|
|
|
|
|
7.
Income Taxes
The Company’s deferred
income tax assets at June 30 are comprised of the
following (in thousands):
|
|
|
1998
|
|
1999
|
| Net
deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$2,897
|
|
|
$1,833
|
|
|
Stock-based compensation
|
|
—
|
|
|
593
|
|
|
Research and development and alternative minimum tax
credit
|
|
140
|
|
|
576
|
|
|
Accurals deductible in different periods
|
|
(373
|
)
|
|
231
|
|
|
Other
|
|
(173
|
)
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
2,491
|
|
|
3,142
|
|
|
Valuation allowance
|
|
(2,491
|
)
|
|
(3,142
|
)
|
|
|
|
|
|
|
|
| Total
|
|
$
—
|
|
|
$
—
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect
the tax effects of temporary differences between the
carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax
purposes, as well as net operating loss and tax credit
carryforwards. Due to the uncertainty surrounding the
realization of the benefits of its favorable tax
attributes in future tax returns, the Company has fully
reserved its net deferred tax assets.
NETIQ CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS—(Continued)
Years Ended June 30,
1997, 1998 and 1999
The valuation allowance
increased by $869,000, $1,286,000 and $651,000, in
fiscal years 1997, 1998 and 1999, respectively.
The Company’s effective tax
rate differs from the expected benefit at the federal
statutory rate as follows:
|
|
|
Year Ended June 30
|
|
|
|
1997
|
|
1998
|
|
1999
|
|
Federal statutory tax benefit
|
|
$(776
|
)
|
|
$(1,057
|
)
|
|
$(565
|
)
|
| State
tax benefit
|
|
(139
|
)
|
|
(180
|
)
|
|
(73
|
)
|
|
Stock-based compensation expense
|
|
—
|
|
|
100
|
|
|
225
|
|
|
Valuation allowance
|
|
869
|
|
|
1,286
|
|
|
651
|
|
| Other
|
|
46
|
|
|
(149
|
)
|
|
(238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
—
|
|
|
$
—
|
|
|
$
—
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 1999, the Company
had net operating loss (NOL) carryforwards of
approximately $3,215,000 for federal and $886,000 for
state income tax purposes and $1,845,000 for foreign
income tax purposes. The federal NOL carryforwards
expire through 2018 and the state NOL carryforwards
expire through 2003. In addition, at June 30, 1999, the
Company had $278,000 of research and development tax
credit carryforwards for federal and $231,000 for state
income tax purposes and $67,000 of alternative minimum
tax carryforwards. The extent to which the loss
carryforwards can be used to offset future taxable
income may be limited, depending on the extent of
ownership changes within any three-year period as
provided in the Tax Reform Act of 1986 and the
California Conformity Act of 1987. Additionally, loss
carryforwards generated in fiscal 1997 are required to
be amortized over six years, as the Company elected to
change its tax fiscal year end to June 30.
8.
Commitments and Contingencies
Operating Leases
— The Company leases its principal facility
under a noncancelable operating lease which expires in
July 2003, and certain equipment under an operating
lease. Under the terms of the facility lease, the
Company is responsible for its proportionate share of
maintenance, property tax and insurance expenses. The
agreement provides an option to extend the lease for two
years and a second option to extend for an additional 28
months. Future minimum annual lease commitments are as
follows: 2000, $781,000; 2001, $707,000; 2002, $730,000;
2003, $759,000; 2004, $63,000.
Rent expense under operating
leases was approximately $79,000, $224,000 and $888,000,
for fiscal years 1997, 1998 and 1999, respectively.
Royalty Agreement
— In August 1996, the Company entered into a
Software License and Distribution Agreement which
provides the Company a non-exclusive worldwide license
to certain third-party technology. The Company is
required to pay specified royalties based on a
percentage of revenue from products incorporating the
technology. Total royalty expense under the Agreement
for fiscal year 1998 and 1999 was $103,000 and $262,000,
respectively. No royalties were payable in fiscal 1997.
9.
Employee Benefit Plan
The Company sponsors a 401(k)
Savings and Retirement Plan (the Plan) for all eligible
employees who meet certain eligibility requirements.
Participants may contribute, on a pre-tax basis, between
1% and 15% of their annual compensation, but not to
exceed a maximum contribution amount pursuant to Section
401(k) of the Internal Revenue Code. The Company is not
required to contribute, nor has it contributed, to the
Plan for any of the periods presented.
NETIQ CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS—(Continued)
Years Ended June 30,
1997, 1998 and 1999
10.
Major Customers
One customer accounted for 11%
of accounts receivable at June 30, 1998. Two other
customers accounted for 15% and 10% of accounts
receivable at June 30, 1999. Two customers accounted for
45% and 12% of total revenue in fiscal 1997. No single
customer accounted for greater than 10% of total revenue
in fiscal 1998 or 1999.
11.
Segment and Geographical Information
As discussed in Note 1, the
Company follows requirements of SFAS No. 131,
Disclosures About Segments of an Enterprise and
Related Information. As defined in SFAS No. 131, the
Company operates in one reportable segment: the design,
development, marketing, support and sales of performance
and availability management software for the Microsoft
Windows NT environment. No individual foreign country
accounted for greater than 10% of total revenue or
long-lived assets in any of the periods presented. The
following table summarizes total net revenue and
long-lived assets attributed to significant countries
(in thousands).
|
|
|
Year Ended June 30,
|
|
|
|
1997
|
|
1998
|
|
1999
|
| Total
revenue:
|
|
|
|
|
|
|
|
United States
|
|
$388
|
|
$6,342
|
|
$17,999
|
|
Foreign
|
|
—
|
|
728
|
|
3,570
|
|
|
|
|
|
|
|
|
Total revenue*
|
|
$388
|
|
$7,070
|
|
$21,569
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
United States
|
|
$294
|
|
$528
|
|
$1,445
|
|
Foreign
|
|
—
|
|
97
|
|
116
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$294
|
|
$625
|
|
$1,561
|
|
|
|
|
|
|
|
*
|
Revenue is attributed
to countries based on location of customer invoiced.
|
12.
Related Party Transaction
During each of the fiscal years
1997, 1998 and 1999, a member of the Company’s
board of directors earned $60,000 in consulting fees.
13.
Subsequent Events
On July 9, 1999 the board of
directors and stockholders approved an increase in the
number of shares of common stock of the Company
available for issuance under the 1995 Stock Option Plan
from 3,966,666 to 5,333,332 shares, plus annual
increases, effective on the first day of each fiscal
year, beginning July 1, 2000, equal to the lesser of (i)
4% of the shares of common stock outstanding on the last
day of the preceding fiscal year, (ii) 1,333,333 shares
or (iii) an amount determined by the Company’s
board of directors. Additionally, the stock plan
includes an automatic nondiscretionary grant mechanism
that provides that options will be granted to
non-employee directors who on the date of grant do not
beneficially own 1% or more of the total voting power of
the Company’s voting securities. The stock plan
specifically provides for an initial automatic grant of
an option to purchase 8,333 shares of common stock to a
non-employee director who first becomes a director after
the Company’s initial public offering. Each
non-employee director who has served on the board for at
least six months will subsequently be granted an option
to purchase 8,333 shares of common stock on the date of
the annual meeting of stockholders. However, if the
first annual meeting following the Company’s
initial public offering falls within six months of the
effective date of the initial public offering no grants
will be made until the
following annual meeting. Each option granted to an
outside director under this program will have a term of
five years and the shares subject to these options will
be fully vested on the date of grant. The exercise price
of these options will be 100% of the fair market value
per share of common stock on the date of grant.
On July 9, 1999, the board of
directors and stockholders approved the 1999 Employee
Stock Purchase Plan (the Purchase Plan). Under the
Purchase Plan, eligible employees are allowed to have
salary withholding of up to 15% of their base
compensation to purchase shares of common stock at a
price equal to 85% of the lower of the market value of
common stock at the beginning or end of defined purchase
periods. The initial purchase period commences upon the
effective date for the initial public offering of the
Company’s common stock. The Company has initially
reserved 500,000 shares of common stock under this plan,
plus an annual increase to be added on the first day of
the Company’s fiscal year beginning July 1, 2000
equal to the lesser of (i) 666,666 shares, (ii) 2% of
the shares of common stock outstanding on the last day
of the preceding fiscal year or (iii) an amount
determined by the Company’s board of directors.
Concurrent with the
reincorporation in the State of Delaware, the Company
authorized 5,000,000 shares of preferred stock, no par
value, of which none were issued or outstanding at June
30, 1999. The preferred stock may be issued from time to
time in one or more series. The board of directors is
authorized to determine or alter the rights,
preferences, privileges and restrictions of such
preferred stock.
Effective July 27, 1999, the
shareholders approved an increase in the number of
authorized shares to 100,000,000 and a two-for-three
reverse stock split of its common and preferred stock
outstanding as of July 27, 1999. All share and per share
information, in the accompanying financial statements,
have been adjusted to retroactively give effect to the
stock split for all periods presented.
In an initial public offering
closed on August 4, 1999, the Company issued 3,000,000
shares of common stock at $13.00 per share and raised
proceeds of $36,270,000, net of underwriting discounts
and commissions. In connection with the initial public
offering, all outstanding shares of convertible
preferred stock were converted into common stock on a
share-for-share basis.
Pursuant to the
requirements of the Securities Act, NetIQ Corporation
has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Clara, State of
California, on the 28th day of September, 1999.
|
Ching-Fa Hwang
President and Chief Executive Officer
|
KNOW ALL PERSONS BY THESE
PRESENTS, that each person whose signature appears below
constitutes and appoints James A. Barth his true and
lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, to sign any and all
amendments to this Annual Report on Form 10-K and to
file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities
and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite
and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could
do in person, and hereby ratifies and confirms all that
said attorney-in-fact and agent, or his substitute or
substitutes, or any of them, shall do or cause to be
done by virtue hereof.
Name
|
|
Title
|
|
Date
|
|
|
|
/s/
CHING
-FA
HWAN
*
(Ching-Fa Hwang)
|
|
President, Chief Executive Officer and
Director (Principal Executive Officer)
|
|
September 30, 1999
|
|
|
|
/
S
/ JAMES
A. BARTH
(James A. Barth)
|
|
Vice
President, Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)
|
|
September 30, 1999
|
|
|
|
/s/
KUO
-WEI
CHANG
*
(Kuo-Wei Herbert Chang)
|
|
Director
|
|
September 30, 1999
|
|
|
|
/s/
HER
-DAW
CHE
*
(Her-Daw Che)
|
|
Vice
President, Engineering and
Director
|
|
September 30, 1999
|
|
|
|
/s/
LOUIS
C. COLE
*
(Louis C. Cole)
|
|
Director
|
|
September 30, 1999
|
|
|
|
/s/
ALAN
W. KAUFMAN
*
(Alan W. Kaufman)
|
|
Director
|
|
September 30, 1999
|
|
|
|
/s/
YING
-HON
WONG
*
(Ying-Hon Wong)
|
|
Director
|
|
September 30, 1999
|
|
|
|
/
S
/ JAMES
A. BARTH
*
B
Y
:
(J
AMES
A. B
ARTH
)
A
TTORNEY
-
IN
-F
ACT
|
|
|
|
|
INDEPENDENT AUDITORS
’ REPORT ON SCHEDULE
To the Board of
Directors and Stockholders of NetIQ Corporation:
We have audited the consolidated
financial statements of NetIQ Corporation and
subsidiaries (the Company) as of June 30, 1998, and 1999
and for each of the three years in the period ended June
30, 1999, and have issued our report thereon dated July
9, 1999 (August 4, 1999 as to Note 13) (included
elsewhere in this Annual Report on Form 10-K). Our
audits also included the financial statement schedule of
the Company, listed in Item 14(a)(2). The financial
statement schedule is the responsibility of the Company
’s management. Our responsibility is to express an
opinion based on our audits. In our opinion, such
financial statement schedule, when considered in
relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material
respects the information set forth therein.
San Jose, California
July 9, 1999
SCHEDULE II
VALUATION AND
QUALIFYING ACCOUNTS
(in thousands)
|
|
|
Balance at
beginning
of period
|
|
Charged
to cost
and
expenses
|
|
Deductions
|
|
Balance at
end
of period
|
| Year
ended June 30, 1997
|
|
Allowance for doubtful accounts
|
|
$—
|
|
$—
|
|
$—
|
|
$—
|
|
Allowance for sales returns
|
|
$—
|
|
$—
|
|
$—
|
|
$—
|
|
|
| Year
ended June 30, 1998
|
|
Allowance for doubtful accounts
|
|
$—
|
|
$307
|
|
$—
|
|
$307
|
|
Allowance for sales returns
|
|
$—
|
|
$50
|
|
$—
|
|
$50
|
|
|
| Year
ended June 30, 1999
|
|
Allowance for doubtful accounts
|
|
$307
|
|
$343
|
|
$—
|
|
$650
|
|
Allowance for sales returns
|
|
$50
|
|
$200
|
|
$—
|
|
$250
|
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