<PAGE>
As filed with the Securities and Exchange Commission on November 29, 1999
Registration No. 333-90935
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NetIQ Corporation
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7372 77-0405505
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
---------------
NetIQ Corporation
5410 Betsy Ross Drive
Santa Clara, California 95054
(408) 330-7000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Ching-Fa Hwang
President and Chief Executive Officer
NetIQ Corporation
5410 Betsy Ross Drive
Santa Clara, California 95054
(408) 330-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Thomas C. DeFilipps, Esq. William D. Sherman, Esq.
Wilson Sonsini Goodrich & Rosati Morrison & Foerster LLP
Professional Corporation 755 Page Mill Road
650 Page Mill Road Palo Alto, California 94304
Palo Alto, California 94304 (650) 813-5600
(650) 493-9300
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
NetIQ Corporation hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until NetIQ Corporation
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 29, 1999
3,500,000 Shares
[LOGO OF NET IQ APPEARS HERE]
Common Stock
--------
This is a public offering of 3,500,000 shares of common stock of NetIQ
Corporation. Of the shares being sold, NetIQ is selling 1,500,000 shares and
the selling stockholders identified in this prospectus are selling 2,000,000
shares. NetIQ will not receive any of the proceeds from the sale of the shares
by the selling stockholders.
Our common stock is quoted on the Nasdaq National Market under the symbol
NTIQ. On November 11, 1999, the last reported sale price of our common stock
was $52.125 per share.
The underwriters have an option to purchase a maximum of 525,000 additional
shares from NetIQ to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 5.
<TABLE>
<CAPTION>
Underwriting
Discounts Proceeds to
Price to and Proceeds the Selling
Public Commissions to NetIQ Stockholders
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Per Share.................................. $ $ $ $
Total...................................... $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Hambrecht & Quist
Robertson Stephens
SoundView Technology Group
C.E. Unterberg, Towbin
This prospectus is dated , 1999.
<PAGE>
------------
TABLE OF CONTENTS
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Page
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<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 15
Use of Proceeds.......................................................... 16
Price Range of Common Stock.............................................. 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 31
Management............................................................... 45
</TABLE>
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<CAPTION>
Page
----
<S> <C>
Certain Transactions....................................................... 55
Principal and Selling Stockholders......................................... 57
Description of Capital Stock............................................... 60
Shares Eligible for Future Sale............................................ 63
Underwriting............................................................... 64
Notice to Canadian Residents............................................... 66
Legal Matters.............................................................. 67
Experts.................................................................... 67
Where To Find Other NetIQ Documents........................................ 67
Index to Consolidated Financial Statements................................. F-1
</TABLE>
----------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is
legal to sell these securities. The information in this prospectus is accurate
only as of the date of this document.
<PAGE>
[Inside gatefold: Descriptive text accompanying graphic depiction of computer
console screen, computers and servers.
Applications Management Optimizing Performance and Availability for Highly
Complex Windows NT Environments
. Centrally manages the performance of distributed Windows NT-based systems
and applications
. Helps ensure the availability of systems and applications through automated
problem detection and correction
. Designed specifically for the Windows NT environment
. Integrates with leading systems management frameworks
NetIQ's Comprehensive Approach
NetIQ believes that the combination of AppManager's comprehensive functionality
together with its use of familiar and native Microsoft technology and standards
provides a superior solution for managing systems and applications in
distributed Windows NT environments.
Comprehensive and Easy to Use
The NetIQ AppManager Suite provides a consolidated view of a business' entire
Windows NT environment from a central, easy-to-use console.
Scalable and Reliable
The NetIQ AppManager Suite is highly reliable and scales easily to accommodate a
business' rapid growth in the number of windows NT-based servers and
applications.
Extensible and Interoperable
The NetIQ AppManager Suite can be easily extended to monitor a business'
custom applications without having to learn proprietary languages. And IT
personnel can easily integrate the NetIQ AppManager Suite with network and
systems management frameworks right "out-of-the-box."]
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully.
NetIQ Corporation
We provide eBusiness infrastructure management software that enables
businesses to optimize the performance and availability of their Windows NT-
based systems and applications. In addition, we have released software products
that support existing preliminary versions of Windows 2000-based systems and
applications and plan to release software products to support the commercially
released version of Windows 2000 when it becomes available.
As businesses increasingly use the Internet for eBusiness, or the electronic
conduct of business with partners as well as with customers, many of these
businesses are relying upon Windows NT-based systems and applications for
critical business functions. Electronic messaging, or e-mail, which provides an
increasingly important means of communication between businesses and their
partners, customers and employees, is an example of a critical business
application that many companies are deploying on the Windows NT operating
system. According to International Data Corporation, a leading information
technology research firm, in 1998 43% of all e-mail server software was
deployed on the Windows NT operating system, and this percentage is expected to
reach 65% by 2001. In addition to e-mail, businesses are increasingly using
Windows NT servers to run their Internet sites and to support electronic
commerce initiatives. Forrester Research, another leading technology research
firm, estimates that by the year 2000 60% of large businesses will run their
web servers on Windows NT.
Because of the critical importance of e-mail and web servers in an eBusiness
infrastructure--for example, the Gartner Group, another leading information
technology research firm, estimates that by 2001 businesses will receive 25% of
all inquiries via e-mail and the Internet--these systems require high
performance and availability standards, including around-the-clock uptime. Our
eBusiness infrastructure management software, which is called the NetIQ
AppManager Suite, enables businesses to centrally manage the performance and
helps ensure the availability of their Windows NT-based e-mail and web servers.
In addition to managing e-mail and web servers, AppManager also manages
database applications such as Oracle and SAP R/3, hardware management tools and
the underlying Windows NT and, with its anticipated commercial release, Windows
2000 operating systems. By helping ensure the availability of a wide range of
Windows NT-based systems and applications through automated monitoring,
correction and reporting features, AppManager helps lower the total cost of
ownership of businesses' Windows NT-based eBusiness infrastructure.
Our products are used by businesses in a wide variety of industries and
computing environments. As of the date of this prospectus, we license our
AppManager products to more than 550 customers, including ALCOA, Arthur
Andersen & Co., AT&T, Boeing Shared Services Group, Charles Schwab & Co.,
Countrywide Home Loans, Dell Computer, General Electric, Georgia-Pacific, Glaxo
Wellcome, Merck & Co., Microsoft, Nabisco, NationsBank, Nordstrom Information
Systems, Pfizer, Shell Services International, Southern Company Services, the
Department of Veterans Affairs and Wells Fargo Bank N.A. We have established
development and/or marketing relationships with Citrix, Compaq, Computer
Associates, Dell Computer, Hewlett-Packard, IBM, including both its Lotus and
Tivoli subsidiaries, Microsoft and Oracle.
We were incorporated in California in June 1995 and reincorporated in
Delaware in July 1999. Our revenue has increased from $0.4 million in fiscal
1997 to $7.1 million in fiscal 1998 and to $21.6 million in fiscal 1999 and
from $4.1 million in the three months ended September 30, 1998 to $7.6 million
in the three months ended September 30, 1999. We incurred net losses of $3.1
million in fiscal 1998 and $1.6 million in fiscal 1999, and while we reported
net income of $472,000 for the three months ended September 30, 1999, at
September 30, 1999 we had an accumulated deficit of $7.5 million.
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. Information contained on our Web site does not
constitute part of this prospectus.
-----------
NetIQ, AppManager, Knowledge Scripts and Work Smarter are registered United
States trademarks of NetIQ. NetIQ Partner Network and the NetIQ logo are also
trademarks of NetIQ. This prospectus also contains trademarks and tradenames of
other companies.
3
<PAGE>
The Offering
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<C> <S>
Common stock offered by NetIQ..................... 1,500,000 shares
Common stock offered by the selling stockholders.. 2,000,000
Common stock to be outstanding after this
offering......................................... 16,886,238 shares
Use of proceeds to NetIQ.......................... For general corporate
purposes
Nasdaq National Market symbol..................... NTIQ
</TABLE>
Except as otherwise indicated, all references to the number of outstanding
shares of common stock are based on shares outstanding as of September 30, 1999
and assume no exercise of the underwriters' over-allotment option.
Please see "Capitalization" on page 17 of this prospectus for a more complete
discussion regarding the outstanding shares of common stock, securities to
purchase common stock and other related matters.
Summary Consolidated Financial Information
The as adjusted consolidated balance sheet data summarized below reflects the
application of the net proceeds from the sale of the 1,500,000 shares of common
stock offered by NetIQ at an assumed public offering price of $52.125 and after
deducting the underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended June 30, September 30,
---------------------------------- --------------
1996 1997 1998 1999 1998 1999
------- ------- ------- ------- ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue.................... $ -- $ 388 $ 7,070 $21,569 $4,090 $7,586
Gross profit............... -- 333 6,428 19,554 3,827 7,011
Income (loss) from
operations................ (1,006) (2,397) (3,373) (1,750) (69) 246
Net income (loss).......... (909) (2,281) (3,111) (1,642) (50) 472
Basic net income (loss) per
share..................... $ (1.55) $ (1.62) $ (1.34) $ (0.47) $(0.02) $ 0.04
Shares used to compute
basic net income (loss)
per share................. 587 1,411 2,325 3,476 3,070 11,696
Diluted net income (loss)
per share................. $ (1.55) $ (1.62) $ (1.34) $ (0.47) $(0.02) $ 0.03
Shares used to compute
diluted net income (loss)
per share................. 587 1,411 2,325 3,476 3,070 15,785
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
-------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................................. $52,281 $125,914
Working capital............................................ 48,784 122,417
Total assets............................................... 59,408 133,041
Total stockholders' equity................................. 50,578 124,211
</TABLE>
4
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially adversely affect our business, operating
results and financial condition and could result in a complete loss of your
investment.
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 quarters, 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 and from
$4.1 million in the three months ended September 30, 1998 to $7.6 million in
the three months ended September 30, 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.
We have a history of losses, we expect to incur losses in the future and we may
not become profitable.
We were founded in June 1995, and our limited operating history makes it
difficult to forecast our future operating results. Except for the quarter
ended September 30, 1999, we have not been profitable in any quarter 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 for the fiscal 1999. As of September 30, 1999, we
had an accumulated deficit of $7.5 million. We expect to achieve limited
profitability and may 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 could incur losses.
We cannot be certain that we will sustain or increase our 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 18 of this prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 19
of this prospectus.
Unanticipated fluctuations in our quarterly operating results due to such
factors as change in the demand for AppManager and changes in the market for
Windows NT, Windows 2000 and related products could affect our stock price.
We believe that quarter-to-quarter 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
quarterly operating results fail to meet the expectations of analysts, the
trading price of our common stock could be negatively affected. Our quarterly
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 "Risk Factors" section of the prospectus, including many
that are beyond our control. These factors include:
. Changes in demand for AppManager or for applications management software
solutions generally, including any changes in customer purchasing
patterns relating to year 2000 concerns
. Changes in demand for Windows NT and Windows 2000-based systems and
applications
. Increased competition in general and any changes in our pricing policies
that may result from increased competitive pressures
5
<PAGE>
. Varying budgeting cycles of our customers and potential customers
. Varying size, timing and contractual terms of enterprise-wide orders for
our products
. Our ability to develop and introduce on a timely basis new or enhanced
versions of our products
. Potential downturns in our customers' businesses, in the domestic or
international economies
. Changes in the mix of revenue attributable to domestic and international
sales
. Software defects and other product quality problems
. Changes in the mix of revenue attributable to higher-margin software
license revenue as opposed to substantially lower-margin service revenue
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. The market for Windows 2000-based systems and application is just
emerging and is rapidly evolving and highly competitive, and we will face many
of the same risks described above with respect to the Windows NT-based market
in the Windows 2000-based market.
For a further description of the competitive pressures we face, see
"Business--Competition" on page 43 of this prospectus.
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 and Windows 2000-
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 and Windows 2000-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 and Windows 2000 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.
6
<PAGE>
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 and Windows 2000-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. Please see "Business--Competition" on page 43
of this prospectus for a further discussion on the possible competitive
pressures we may face in the future.
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 $1,163,000,
or 6%, of software license revenue for fiscal 1999 and $820,000, or 13%, of
software license revenue for the three months ended September 30, 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
7
<PAGE>
our third party channel partners, sell our AppManager products through
telephone sales efforts to customers typically having fewer than 100 Windows
servers and that are not served through our field sales efforts or third party
channels.
If the markets for Windows NT and Windows 2000 and applications management
software for these 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 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.
Windows 2000. We have adapted our AppManager product to support existing
preliminary versions of Windows 2000 and are continuing to adapt it to support
the commercially released version of Windows 2000 when it becomes available. As
a result, we expect our products will become more dependent on the Windows
2000 market. If the market for Windows 2000 does not develop or develops more
slowly than we currently
anticipate, this would materially adversely affect our ability to grow our
business, sell our products, and maintain profitability. Windows 2000 may not
gain market acceptance if its launch is delayed beyond its expected release
date. In addition, users of previous versions of Windows NT may decide to
migrate to another operating system due to the delays or to improved
functionality of some other vendor's operating system. Windows 2000 may address
more of the needs of our customers for systems administration and operations
management, in which case our customers would not need to purchase our products
to perform those functions.
If there is a broader acceptance of other existing or new operating systems
that provide enhanced capabilities, or offer similar functionality to Windows
NT, or Windows 2000, at a lower cost, our business would likely suffer. In
addition, federal and state regulatory authorities are currently engaged in
broad antitrust-related actions against Microsoft. Recently, a federal judge
released his findings of fact that many commentators believe contained a number
of findings unfavorable to Microsoft's position, including a finding that
Microsoft has monopoly power. We cannot predict the course of these antitrust
actions and to what extent they may affect the market for Microsoft's Windows
NT and Windows 2000 products, and our relationship with Microsoft. It is
possible, however, that these actions may limit the market penetration of
Microsoft's Windows NT and Windows 2000 products.
Applications Management Software for Windows NT and Windows 2000. The market
for applications management software for optimizing the performance and
availability of Windows NT and Windows 2000-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 and Windows 2000 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 and Windows 2000-
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.
8
<PAGE>
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 significant portion 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 have minimal backlog of orders for the
subsequent quarter. If a large number of orders or any large individual orders
are not placed or are deferred, our net income and revenue in that quarter
could be substantially reduced.
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:
. customers' budgetary constraints and internal acceptance procedures
. concerns about the introduction or announcement of our or our
competitors' new products, including product announcements by Microsoft
relating to Windows NT or Windows 2000
. customer requests for product enhancements
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.
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. We believe
that some customers have delayed deployment of new software, including new
versions and product updates, and may continue to do so, to avoid the
possibility of introducing or encountering any new year 2000 problems. We
believe that some customers have chosen to defer new software product purchases
to avoid year 2000 problems and there is a risk that additional 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 additional 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.
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 maintain profitability.
Our ability to 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 accomodate 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
150 employees at September 30, 1999. We have also opened 11 field sales offices
and have significantly expanded our operations. We are currently implementing
new financial and accounting systems
9
<PAGE>
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. Microsoft permits 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. However, Microsoft is not
obligated to continue to work with our engineers. Additionally, we participate
in joint marketing programs with Microsoft and count Microsoft as one of our
significant customers.
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, Singapore, 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, approximately 20% of total revenue in fiscal 1999 and
approximately 23% in the three months ended September 30, 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
10
<PAGE>
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:
. Longer payment cycles . Fluctuations in currency
. Seasonal reductions in business exchange rates
activity during the summer . Recessionary environments in
months in Europe and other parts foreign economies
of the world . Problems in collecting accounts
. Increases in tariffs, duties, receivable
price controls or other . Difficulties in staffing and
restrictions on foreign managing international
currencies or trade barriers operations
imposed by foreign countries . Limited or unfavorable
. Difficulties in localizing our intellectual property protection
products for foreign markets
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 and Windows 2000 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 currently dependent upon Windows NT, we
will need to continue to respond to technology advances in this operating
system, including major revisions and the migration to Windows 2000. We cannot
be sure that we will be able to completely adapt our products to work with the
commercially released version of Windows 2000 so as to provide the same levels
of functionality that our products provide with the current version of Windows
NT. If our introduction of new systems management software products for Windows
2000 is not successful, our revenues could decline. Our position in the
existing market for applications management software for optimizing performance
and availability of Windows NT and Windows 2000-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 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.
11
<PAGE>
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. 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
and Windows 2000-based systems and applications, any software errors or bugs in
the Windows NT or Windows 2000 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.
12
<PAGE>
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 current software
product releases 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 28 of this prospectus.
We may acquire technologies or companies in the future which could cause
disruption of our business or other risks.
We may acquire technologies or companies or make investments in complementary
companies, products or technologies. Such acquisitions entail many risks, any
of which could materially harm our business. These risks include:
.difficulty assimilating the acquired company's personnel and operations
.diversion of management's attention
.loss of our or the acquired businesses' key personnel
.dilution of our existing stockholders as a result of issuing equity
securities
.assumption of liabilities of the acquired company; and
.incurring substantial expenses as a result of the transaction.
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 patents have
been issued or approved for issuance but 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.
13
<PAGE>
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 19 of this prospectus 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.
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 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
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 2000, 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. For a further description of our license agreement
with Summit, see "Business--Intellectual Property" on page 44 of this
prospectus.
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.
14
<PAGE>
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, limit the ability of 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, our board of directors has 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. For a further discussion of these
charter provisions and Delaware law, see "Description of Capital Stock" on page
60 of this prospectus.
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.
For a further description of the eligibility of shares for sale into the
public market following the offering see "Shares Eligible for Future Sale" on
page 63 of this prospectus.
Our stock will likely be subject to substantial price and volume fluctuations
which may prevent stockholders from reselling their shares at or above the
price at which they purchased their shares.
Fluctuations in the price and trading volume of our common stock may prevent
stockholders from reselling their shares above the price at which they
purchased their shares. Stock prices and trading volumes for many software
companies fluctuate widely for a number of reasons, including some reasons
which may be unrelated to their businesses or results of operations. This
market volatility, as well as general domestic or international economic,
market and political conditions, could materially adversely affect the market
price of our common stock without regard to our operating performance. In
addition, our operating results may be below the expectations of public market
analysts and investors. If this were to occur, the market price of our common
stock would likely significantly decrease.
FORWARD-LOOKING STATEMENTS
Many statements under the captions "Prospectus Summary," "Risk Factors," "Use
of Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed
under "Risk Factors" beginning on page 5 of this prospectus.
15
<PAGE>
USE OF PROCEEDS
We will receive net proceeds of approximately $73.6 million (approximately
$99.6 million if the underwriter's over-allotment option is exercised in full)
from the sale of 1,500,000 shares of common stock at the assumed public
offering price of $52.125 per share after deducting underwriting commissions,
discounts and estimated expenses. We will not receive any proceeds from the
sale of shares by the selling stockholders.
The principal purpose of this offering is to obtain additional working
capital and register the shares being offered by selling stockholders. We have
no specific plans regarding the use the net proceeds of this offering and
expect to use them for general corporate purposes, including working capital,
capital expenditures and research and development. Pending such uses, we intend
to invest the net proceeds of the offering in investment grade, interest-
bearing securities. We may use the proceeds of the offering for potential
strategic investments or acquisitions that complement our products, services,
technologies or distribution channels. However, we do not currently have any
plans to make any such strategic investments or acquisitions.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "NTIQ"since July 29, 1999, the date of our initial public offering. The
following table shows the high and low sales prices for our common stock as
reported on the Nasdaq National Market for the period indicated:
Fiscal year ending June 30, 2000
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
First quarter (beginning July 29, 1999)...................... $39.875 $14.750
Second quarter (through November 11, 1999)................... $54.750 $23.500
</TABLE>
On November 11, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $52.125 per share. As of September 30, 1999, there
were approximately 160 holders of record of our common stock and 15,386,238
shares of our common stock outstanding.
DIVIDEND POLICY
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.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at September 30, 1999:
. on an actual basis; and
. on an adjusted basis to show the effect of our receipt of the estimated
net proceeds from the sale of 1,500,000 shares of common stock offered at
the assumed public offering price of $52.125 per share and the
application of the net proceeds therefrom.
The outstanding share information excludes 5,333,332 shares of common stock
that are reserved for issuance upon exercise of stock options under our stock
option plan as of September 30, 1999, of which options to purchase 2,483,961
shares were outstanding at such date at a per share weighted average exercise
price of $3.77. The outstanding share figure also excludes 31,332 shares of
common stock issued after September 30, 1999 pursuant to our employee stock
purchase plan and approximately 128,870 shares of common stock to be issued
upon exercises of options by selling stockholders who have indicated their
intention to sell such option shares in this offering.
The capitalization information set forth in the table below is qualified by,
and should be read in conjunction with, the more detailed Consolidated
Financial Statements, Condensed Consolidated Financial Statements and Notes
thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
------------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C> <C>
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000,000 shares
authorized, no shares outstanding,................. $ -- $ --
Common Stock, $0.001 par value, actual 100,000,000
shares authorized; 15,386,238 shares outstanding,
actual; 16,886,238 shares outstanding, as
adjusted........................................... 59,940 133,573
Deferred stock-based compensation................... (1,864) (1,864)
Accumulated deficit................................. (7,471) (7,471)
Accumulated other comprehensive loss................ (27) (27)
------- --------
Total stockholders' equity........................ $50,578 $124,211
======= ========
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements, Condensed Consolidated
Financial Statements and Notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which are included
elsewhere in this prospectus. The consolidated statements of operations data
for the years ended June 30, 1997, 1998 and 1999, and the consolidated balance
sheet data at June 30, 1998 and 1999, are derived from the audited consolidated
financial statements included elsewhere in this prospectus. The consolidated
balance sheet data as of June 30, 1996 and 1997 and the consolidated statement
of operations data for the year ended June 30, 1996, are derived from audited
financial statements not included in this prospectus. The consolidated
statements of operations data for the three months ended September 30, 1998 and
1999 and the consolidated balance sheet data as of September 30, 1999, are
derived from unaudited consolidated financial statements included elsewhere in
this prospectus. In our opinion, these unaudited statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the information when read in conjunction with the consolidated
financial statements and notes thereto. Results for the three months ended
September 30, 1999, are not necessarily indicative of the expected results for
the full year.
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended June 30, September 30,
---------------------------------- ----------------
1996 1997 1998 1999 1998 1999
------- ------- ------- ------- ------ --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Software license
revenue................. $ -- $ 369 $ 6,603 $18,433 $3,640 $ 6,221
Service revenue.......... -- 19 467 3,136 450 1,365
------- ------- ------- ------- ------ -------
Total revenue......... -- 388 7,070 21,569 4,090 7,586
------- ------- ------- ------- ------ -------
Cost of software license
revenue................. -- 9 235 755 87 156
Cost of service revenue.. -- 46 407 1,260 176 419
------- ------- ------- ------- ------ -------
Total cost of
revenue.............. -- 55 642 2,015 263 575
------- ------- ------- ------- ------ -------
Gross profit............. -- 333 6,428 19,554 3,827 7,011
Operating expenses:
Sales and marketing..... 77 1,238 5,748 11,685 2,125 4,124
Research and
development............ 665 1,003 2,192 4,344 884 1,709
General and
administrative......... 264 479 1,611 2,983 523 754
Stock-based
compensation........... -- 10 250 1,928 364 178
Settlement of
litigation............. -- -- -- 364 -- --
------- ------- ------- ------- ------ -------
Total operating
expenses............. 1,006 2,730 9,801 21,304 3,896 6,765
------- ------- ------- ------- ------ -------
Income (loss) from
operations.............. (1,006) (2,397) (3,373) (1,750) (69) 246
Interest income, net..... 97 116 262 108 19 348
Income taxes............. -- -- -- -- -- (122)
------- ------- ------- ------- ------ -------
Net income (loss)........ $ (909) $(2,281) $(3,111) $(1,642) $ (50) $ 472
======= ======= ======= ======= ====== =======
Basic net income (loss)
per share(1)............ $ (1.55) $ (1.62) $ (1.34) $ (0.47) $(0.02) $ 0.04
======= ======= ======= ======= ====== =======
Shares used to compute
basic net income (loss)
per share(1)............ 587 1,411 2,325 3,476 3,070 11,696
======= ======= ======= ======= ====== =======
Diluted net income (loss)
per share(1)............ $ (1.55) $ (1.62) $ (1.34) $ (0.47) $(0.02) $ 0.03
======= ======= ======= ======= ====== =======
Shares used to compute
diluted net income
(loss) per share(1)..... 587 1,411 2,325 3,476 3,070 15,785
======= ======= ======= ======= ====== =======
<CAPTION>
June 30, Sep. 30,
---------------------------------- --------
1996 1997 1998 1999 1999
------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............. $ 32 $ 7,748 $ 3,358 9,634 $52,281
Working capital.......... 1,755 7,493 4,314 4,443 48,784
Total assets............. 2,255 8,202 8,205 18,354 59,408
Long-term obligations,
net of current portion.. -- -- -- 205 --
Total stockholders'
equity.................. 1,880 7,787 4,939 5,799 50,578
</TABLE>
- --------
(1) See Note 6 to audited Consolidated Financial Statements and Note 4 to
unaudited Condensed Consolidated Financial Statements for the determination
of shares used in computing basic and diluted net income (loss) per share
on pages F-14 and F-21 of this prospectus.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our Consolidated
Financial Statements, Condensed Consolidated Financial Statements and the Notes
thereto. This discussion contains forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Our actual results and the timing of
events could differ materially from those anticipated in these forward-looking
statements as a result of several factors, including those set forth in the
following discussion and under "Risk Factors," "Business" and elsewhere in this
prospectus.
Overview
We provide eBusiness infrastructure management software that allows
businesses to optimize the performance and availability of their Windows NT-
based systems and applications. In addition, we have released software products
that support existing preliminary versions of Windows 2000-based systems and
applications and plan to release software products to support the commercially
released version of Windows 2000 when it becomes available.
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 $0.4
million in fiscal 1997, to $7.1 million in fiscal 1998 and to $21.6 million in
fiscal 1999, and from $4.1 million in the three months ended September 30, 1998
to $7.6 million in the three months ended September 30, 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 fiscal 1997 to $9.8 million in
fiscal 1998 and to $21.3 million in fiscal 1999, and from $3.9 million in the
three months ended September 30, 1998 to $6.8 million in the three months ended
September 30, 1999. Our operating expenses increased as we expanded our
operations, including growing our employee base from 14 at June 30, 1996 to 150
at September 30, 1999. Our operating expenses, which include charges for stock-
based compensation and a charge for settlement of litigation in fiscal 1999,
together with cost of revenue have exceeded revenue in every quarter since
inception except the most recent quarter ended September 30, 1999. 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 $7.5 million at September 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 each quarter 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 fiscal 1997 to 87% in fiscal 1998 and 40% in fiscal 1999 and from
39% in the three months ended September 30, 1998 to 31% in the three months
ended September 30, 1999. Cost of software license revenue, as a percentage of
software license revenue, has increased from 2% in fiscal 1997 to 4% in fiscal
1998 and fiscal 1999 and from 2% in the
19
<PAGE>
three months ended September 30, 1998 to 3% in the three months ended September
30, 1999. Although service revenue has increased as a percentage of total
revenue from 5% in fiscal 1997 to 7% in fiscal 1998 to 15% in fiscal 1999 and
from 11% in the three months ended September 30, 1998 to 18% in the three
months ended September 30, 1999, the declining cost of service revenue has
resulted in an increase in overall gross margin from 86% in fiscal 1997 to 91%
in fiscal 1998 and fiscal 1999 and from 94% in the three months ended
September 30, 1998 to 92% in the three months ended September 30, 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 fiscal 1998 and 30%
of total revenue in fiscal 1999 and 33% of total revenue in the three months
ended September 30, 1999, and our strategy is to increase sales through third-
party channel partners. Two customers accounted for 45% and 12% of total
revenue in fiscal 1997. During both fiscal 1998 and fiscal 1999 and the three
months ended September 30, 1999, no single customer accounted for more than 10%
of our total revenue. 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 and 13% of total revenue in the three
months ended September 30, 1998 and 23% of total revenue in the three months
ended September 30, 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:
. 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 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, paying $11.70 per share.
Pursuant to the completion of our initial public offering we paid approximately
$1.8 million to satisfy our note and interest obligation to Compuware, and the
remaining $3.3 million was cancelled in connection with Compuware's
20
<PAGE>
exercise of the warrant. Additionally, as part of our settlement agreement, we
agreed not to hire 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, 1998 and 1999 and for the
three month periods ended September 30, 1998 and 1999.
<TABLE>
<CAPTION>
Percentage of Total Three-Months
Revenue Year Ended June 30, Ended Sept. 30,
--------------------------------- ---------------
1997 1998 1999 1998 1999
--------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
89
Software license revenue.. 95 % 93 % 85 % % 82%
Service revenue........... 5 7 15 11 18
--------- -------- -------- ------- -------
Total revenue....... 100 100 100 100 100
--------- -------- -------- ------- -------
Cost of software license
revenue.................. 2 3 3 2 2
Cost of service revenue... 12 6 6 4 6
--------- -------- -------- ------- -------
Total cost of
revenue............ 14 9 9 6 8
--------- -------- -------- ------- -------
Gross margin:............. 86 91 91 94 92
Operating expenses:
Sales and marketing... 319 81 54 52 54
Research and
development.......... 259 31 20 22 23
General and
administrative....... 123 23 14 13 10
Stock-based
compensation......... 3 4 9 9 2
Settlement of
litigation........... -- -- 2 -- --
--------- -------- -------- ------- -------
Total operating
expenses........... 704 139 99 96 89
--------- -------- -------- ------- -------
Income (loss) from
operations............... (618) (48) (8) (2) 3
Interest income, net...... 30 4 -- 1 5
Income taxes.............. -- -- -- -- (2)
--------- -------- -------- ------- -------
Net income (loss)......... (588)% (44)% (8)% (1)% 6%
========= ======== ======== ======= =======
- --------
Cost of software license
revenue, as a percentage
of software license
revenue.................. 2 % 4 % 4 % 2 % 3%
------- -------
Cost of service revenue,
as a percentage of
service revenue.......... 242 % 87 % 40 % 39 % 31%
------- -------
</TABLE>
Comparison of Three Months Ended September 30, 1998 and 1999
Revenue
Software License Revenue. Our software license revenue increased from $3.6
million for the three months ended September 30, 1998, to $6.2 million for the
three months ended September 30, 1999, representing growth of 71%. This
increase was 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. Service revenue increased from $450,000 for the three months
ended September 30, 1998, to $1.4 million for the three months ended September
30, 1999, representing growth of 203%. This increase was due primarily to
maintenance fees associated with new software licenses. Service revenue also
increased as a percentage of total revenue due to the compounding effect of our
base of installed licenses and
21
<PAGE>
due to a significant majority of our 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 $87,000, or
2% of software license revenue, for the three months ended September 30, 1998,
to $156,000, or 3% of software license revenue, for the three months ended
September 30, 1999. The increase in absolute dollar amount was due principally
to increases in software license revenue. The percentage increase is due to the
purchase of additional fulfillment services.
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 $176,000 and $419,000
for the three months ended September 30, 1998 and 1999, respectively,
representing 39% and 31% 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 $2.1 million for the three months ended September 30,
1998, to $4.1 million for the three months ended September 30, 1999. This
increase in dollar amount was due primarily to the hiring of additional field
sales, inside sales and marketing personnel, which increased from 52 people to
76 people during the period from September 30, 1998 to September 30, 1999, and
expanding our sales infrastructure and third-party channel partners. Sales and
marketing expenses represented 52% and 54% of total revenue for the three
months ended September 30, 1998 and 1999, respectively. The increase in sales
and marketing expenses as a percentage of total revenue was principally the
result of hiring additional personnel and expanded marketing efforts. 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
$884,000, or 22% of total revenue, for the three months ended September 30,
1998, to $1.7 million, or 23% of total revenue for the three months ended
September 30, 1999. This increase in dollar amount resulted principally from
increases in engineering and technical writing personnel, which increased from
28 people to 43 people at the end of each quarter, together with increases in
third party developmental effort. 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.
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 $523,000 for the three months ended
September 30, 1998, to $754,000 for the three
22
<PAGE>
months ended September 30, 1999, representing 13% and 10% 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 7 people at September 30, 1998, to 19 people at
September 30, 1999. Legal expenses were a significant cost for the three months
ended September 30, 1998, amounting to $214,000 principally 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.
The decrease in general and administrative expense as a percentage of total
revenue was due primarily to the growth in total revenue and the decline in
legal expense to $62,000 in the quarter ended September 30, 1999. 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 the three months ended September 30, 1998,
we recorded deferred stock-based compensation of $575,000 relating to stock
option grants to employees and non-employees. No deferred stock-based
compensation was recorded in the three months ended September 30, 1999;
however, due to attrition approximately $80,000 of the deferred stock-based
compensation was reversed. These amounts are being amortized over the vesting
periods of the granted options, which is generally four years for employees.
During the three months ended September 30, 1998 and 1999, we recognized stock-
based compensation expense of $364,000 and $178,000, respectively. At September
30, 1999, total deferred stock-based compensation was $1.9 million. We expect
to amortize up to approximately $180,000 of deferred stock-based compensation
each quarter through March 31, 2003.
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 the three months
ended September 30, 1998 and 1999, interest income, net, was $19,000 and
$348,000, respectively. The increase in interest income, net is the result
primarily of increased cash and cash equivalent balances due to proceeds from
our initial public offering in July 1999.
Income taxes. We incurred net operating losses during the three months ended
September 30, 1998 and consequently paid no federal, state or foreign income
taxes. We recorded income tax expense of $122,000 for the three months ended
September 30, 1999, representing the expected effective tax rate for fiscal
year 2000.
Comparison of Fiscal Years Ended June 30, 1998 and 1999
The trends in the comparisons of operating results for fiscal 1998 and fiscal
1999, generally apply to the comparison of results of operations for the
quarters ended September 30, 1998 and 1999, except for differences described
below.
Revenue
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. Service revenue increased from $467,000
in fiscal 1998 to $3.1 million in fiscal 1999, representing growth of 572%.
This increase was due primarily to maintenance fees associated with new
software licenses.
Cost of Revenue
Cost of Software License Revenue. 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.
23
<PAGE>
Cost of Service Revenue. 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.
Operating Expenses
Sales and Marketing. 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 at the end of fiscal 1998
to 66 people at the end of fiscal 1999, and expenses associated with 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 larger revenue base.
Research and Development. Research and development 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 at the end of fiscal 1998 to 43 people at the
end of fiscal 1999, 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.
General and Administrative. 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 the end of
fiscal 1998, to 14 people at the end of fiscal 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.
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
and during fiscal 1998 and fiscal 1999, we recognized stock-based compensation
expense of $250,000 and $1.9 million, respectively.
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. 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 insignificant amounts for federal, state or foreign
income taxes.
24
<PAGE>
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 operations 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 from $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
fiscal 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 insignificant amounts for federal, state or foreign
income taxes.
25
<PAGE>
Quarterly Results of Operations
The following table sets forth our unaudited quarterly results of operations
data for the nine most recent quarters ended September 30, 1999, as well as
such data expressed as a percentage of our total revenue for the periods
presented. The information in the table below should be read in conjunction
with our Consolidated Financial Statements and the Notes thereto included
elsewhere in this prospectus. We have prepared this information on the same
basis as the Consolidated Financial Statements and the information includes all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results for the quarters presented. Our quarterly operating results have varied
substantially in the past and may vary substantially in the future. You should
not draw any conclusions about our future results from the results of
operations for any particular quarter.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------------
Sept 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30,
1997 1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
(in thousands, except as a percentage of total revenue)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Software license
revenue............... $ 526 $1,479 $ 1,181 $3,417 $3,640 $4,519 $4,978 $ 5,296 $6,221
Service revenue........ 23 75 136 233 450 628 894 1,164 1,365
------ ------ ------- ------ ------ ------ ------ ------- ------
Total revenue......... 549 1,554 1,317 3,650 4,090 5,147 5,872 6,460 7,586
Cost of software
license revenue....... 18 68 73 76 87 158 287 223 156
Cost of service
revenue............... 20 65 118 204 176 384 334 366 419
------ ------ ------- ------ ------ ------ ------ ------- ------
Total cost of
revenue.............. 38 133 191 280 263 542 621 589 575
------ ------ ------- ------ ------ ------ ------ ------- ------
Gross profit........... 511 1,421 1,126 3,370 3,827 4,605 5,251 5,871 7,011
Operating expenses:
Sales and marketing.... 895 1,209 1,496 2,148 2,125 2,864 3,038 3,658 4,124
Research and
development........... 416 493 553 730 884 806 962 1,692 1,709
General and
administrative........ 261 332 401 617 523 742 974 744 754
Stock-based
compensation.......... -- -- 83 167 364 661 330 573 178
Settlement of
litigation............ -- -- -- -- -- -- -- 364 --
------ ------ ------- ------ ------ ------ ------ ------- ------
Total operating
expenses............. 1,572 2,034 2,533 3,662 3,896 5,073 5,304 7,031 6,765
------ ------ ------- ------ ------ ------ ------ ------- ------
Income (loss) from
operations............ (1,061) (613) (1,407) (292) (69) (468) (53) (1,160) 246
Interest income, net... 90 71 54 47 19 38 32 19 348
Income taxes........... -- -- -- -- -- -- -- -- (122)
------ ------ ------- ------ ------ ------ ------ ------- ------
Net income (loss)...... $ (971) $ (542) $(1,353) $ (245) $ (50) $ (430) $ (21) $(1,141) $ 472
====== ====== ======= ====== ====== ====== ====== ======= ======
As a Percentage of Total
Revenue:
Software license
revenue............... 96 % 95 % 90 % 94 % 89 % 88 % 85 % 82 % 82 %
Service revenue........ 4 5 10 6 11 12 15 18 18
------ ------ ------- ------ ------ ------ ------ ------- ------
Total revenue......... 100 100 100 100 100 100 100 100 100
Cost of software
license............... 3 5 6 2 2 3 5 3 2
Cost of services....... 4 4 9 6 4 7 6 6 6
------ ------ ------- ------ ------ ------ ------ ------- ------
Total cost of
revenue.............. 7 9 15 8 6 10 11 9 8
------ ------ ------- ------ ------ ------ ------ ------- ------
Gross margin........... 93 91 85 92 94 90 89 91 92
Operating expenses:
Sales and marketing.... 163 78 114 59 52 56 52 57 54
Research and
development........... 76 32 42 20 22 16 16 26 23
General and
administrative........ 47 20 30 16 13 14 16 12 10
Stock-based
compensation.......... -- -- 6 5 9 13 6 9 2
Settlement of
litigation............ -- -- -- -- -- -- -- 5 --
------ ------ ------- ------ ------ ------ ------ ------- ------
Total operating
expenses............. 286 130 192 100 96 99 90 109 89
------ ------ ------- ------ ------ ------ ------ ------- ------
Income (loss) from
operations............ (193) (39) (107) (8) (2) (9) (1) (18) 3
Interest income, net... 16 4 4 1 1 1 1 1 5
Income taxes........... -- -- -- -- -- -- -- -- (2)
------ ------ ------- ------ ------ ------ ------ ------- ------
Net income (loss)...... (177)% (35)% (103)% (7)% (1)% (8)% (0)% (17)% 6%
====== ====== ======= ====== ====== ====== ====== ======= ======
Cost of software
license revenue, as a
percentage of software
license revenue....... 3 % 5 % 6 % 2 % 2 % 3 % 6 % 4% 3%
Cost of service
revenue, as a
percentage of service
revenue............... 87 % 87 % 87 % 88 % 39 % 61 % 37 % 31% 31%
</TABLE>
26
<PAGE>
The trends discussed in the comparisons of operating results for the three
months ended September 30, 1998 and 1999, and fiscal 1997, 1998 and 1999
generally apply to the comparison of results of operations for our nine most
recent quarters ended September 30, 1999, except for differences as discussed
below.
Our total revenue increased in every quarter, except the quarter ended March
31, 1998, which reflected a modest decline from the prior quarter due to the
timing of initial orders, which at our early stage of development represented
significant portions of revenue. Our service revenue has increased every
quarter and reflects an increasing percentage of total revenue due to the
compounding effect of maintenance service contracts on our base of installed
licenses.
Cost of software license revenue ranged from 2% to 6% of related software
license revenue during the nine quarters ended September 30, 1999, as a result
of the timing of the purchase of user manuals, packaging materials and CDs,
which are expensed when purchased in volume. Cost of service revenue was
approximately 87% of related service revenue in each of the four quarters ended
June 30, 1998, based on time spent on post-sale support activities by home
office and field-based technical personnel. Cost of service revenue declined in
fiscal 1999 as a percentage of total revenue due primarily to economies of
scale achieved as our revenue and installed base grew. During the quarter ended
December 31, 1998, we incurred a one-time charge of $132,000 relating to a
special consulting project for one customer. Excluding this one-time charge,
the cost of service revenue as a percentage of service revenue would have been
40% for that quarter.
Total operating expenses increased in absolute dollar terms in every quarter
during the eight quarters ended June 30, 1999 and decreased slightly in the
quarter ended September 30, 1999 due to higher stock-based compensation and the
settlement of the Compuware litigation which increased expenses in the quarter
ended June 30, 1999. Total operating expenses during the first three quarters
of fiscal 1998 ranged from 130% to 286% of total revenue, due principally to
the start-up nature of our various operating activities, and since that time
have ranged from 89% to 109% of total revenue as an explicit strategy of
investment to allow for rapid growth. In the near future, we expect to continue
to devote substantial resources to product development and expansion of our
sales and marketing efforts, and expect that total operating expenses to
increase in absolute dollars in future periods, although these expenses as a
percentage of revenue will vary depending on the level of revenue.
Effect of Recent Accounting Pronouncements
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. Adoption of this statement does not have a material
impact on our financial position, results of operations or cash flows.
Liquidity and Capital Resources
We have funded our operations through June 30, 1999 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. In July
1999, we sold 3,000,000 shares of common stock in an underwritten public
offering and in August 1999 sold an additional 450,000 shares through the
exercise of underwriters' over-allotment option for aggregate net proceeds of
approximately $40.4 million.
27
<PAGE>
Our operating activities resulted in net cash inflows of $236,000 and $4.6
million in the three months ended September 30, 1998 and 1999, respectively.
Sources of cash during the three months ended September 30, 1999 were
principally a decrease in accounts receivable and increases in accounts
payable, accrued compensation and deferred revenue. Uses of cash in the three
months ended September 30, 1998 were principally for net losses, an increase in
accounts receivable and a decrease in accrued compensation. Sources of cash in
the three months ended September 30, 1998 were principally from stock-based
compensation, a decline in prepaid expenses and increases in other liabilities
and deferred revenue.
Our investing activities resulted in net cash outflows, principally related
to the acquisition of capital assets, of $440,000 and $375,000 in the three
months ended September 30, 1998 and 1999, respectively.
Financing activities provided cash of $31,000 in the three months ended
September 30, 1998, related to the proceeds from the exercise of stock options.
Financing activities provided net cash of $38.4 million in the three months
ended September 30, 1999 principally from our initial public offering, net of
cash paid to retire short-term and long-term debt.
We believe that the net proceeds from our initial public offering and this
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 at least 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 current AppManager Suite release 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 or 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.
28
<PAGE>
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:
. 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
. computer and communications hardware and software systems used
internally in the management of our business
. communications networks such as the Internet and private intranets
. the internal systems of our customers and suppliers
. non-information technology systems and services we use to manage our
business, such as telephone, security and building management systems.
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:
. an assessment of specific underlying computer and communications
systems, programs and hardware
. remediation or replacement of year 2000 non-compliant technology
. validation and testing of technologically-compliant year 2000 solutions
. implementation of year 2000 compliant systems.
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.
However, due to the inherent complexities of the year 2000 issues, there can
be no assurances that material unforeseen problems will not materialize.
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.
29
<PAGE>
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 on our business.
Contingency Plans
We have not developed a formal contingency plan for handling year 2000
problems that are not detected and corrected prior to their occurrence.
Generally, we believe that non-product issues can be resolved with short-term
manual solutions, the use of redundant server-hosting services contracted for
by NetIQ, or other software or service solutions, We expect to deal with
product-related issues, if any, in an expeditious manner by applying NetIQ
engineering and other technical resources. Additional contingency planning
activities will continue and we expect to institute appropriate contingency
plans from time to time.
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. We believe
that some customers have delayed deployment of new software, including new
versions and product updates, and may continue to do so, to avoid the
possibility of introducing or encountering any new year 2000 problems. We
believe that some customers have chosen to defer new software product purchases
to avoid year 2000 problems and 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 additional 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.
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.
Our business is principally transacted in United States dollars. During the
three months ended September 30, 1999, 7% 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 revenue and operating expenses
in Australia, Germany, Japan, Singapore and the United Kingdom. We believe that
a natural hedge exists in local currencies, as local currency denominated
revenue will substantially offset the local currency denominated operating
expenses. We assess the need to utilize financial instruments to hedge currency
exposures on an ongoing basis. However, as of September 30, 1999, we had no
hedging contracts outstanding.
At September 30, 1999 we had $52.3 million in cash and cash equivalents. A
hypothetical 10% increase or decrease in interest rates would not have a
material impact on our earnings or loss, or the fair market value or cash flows
of these instruments.
30
<PAGE>
BUSINESS
The following Business section contains forward-looking statements relating
to future events or our future financial performance, which involves risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of several factors,
including those set forth in "Risk Factors" and elsewhere in this prospectus.
NetIQ Overview
We provide eBusiness infrastructure management software that enables
businesses to optimize the performance and availability of their Windows NT-
based systems and applications. In addition, we have released software products
that support existing preliminary versions of Windows 2000-based systems and
applications and plan to release software products to support the commercially
released version of Windows 2000 when it becomes available.
As businesses increasingly use the Internet for eBusiness, or the electronic
conduct of business with partners as well as with customers, many of these
businesses are relying upon Windows NT-based systems and applications for
critical business functions. Electronic messaging, or e-mail, which provides an
increasingly important means of communication between businesses and their
partners, customers and employees, is an example of a critical business
application that many companies are deploying on the Windows NT operating
system. In addition to e-mail, businesses are increasingly using Windows NT
servers to run their Internet site and to support electronic commerce
initiatives.
Because of the critical importance of e-mail and web servers in an eBusiness
infrastructure--for example, the Gartner Group estimates that by 2001
businesses will receive 25% of all inquiries via e-mail and the Internet--these
systems require high performance and availability standards, including around-
the-clock uptime. Our eBusiness infrastructure management software, which is
called the NetIQ AppManager Suite, enables businesses to centrally manage the
performance and helps ensure the availability of their Windows NT-based e-mail
and web servers. In addition to managing e-mail and web servers, AppManager
also manages database applications such as Oracle and SAP R/3, hardware
management tools and the underlying Windows NT and, with its anticipated
commercial release, Windows 2000 operating systems. By helping ensure the
availability of a wide range of Windows NT-based systems and applications
through automated monitoring, correction and reporting features, AppManager
helps lower the total cost of ownership of businesses' Windows NT-based
eBusiness infrastructure.
Industry Background
The use of the Internet to promote the electronic conduct of business with
partners as well as with customers, or eBusiness, is fundamentally changing
business-to-business, business-to-consumer and business-to-employee
interactions. To capitalize on the eBusiness opportunity, businesses require
complex systems comprised of sophisticated software applications and hardware
products that, among other things, facilitate the electronic communication
between businesses and their partners, customers and employees. We refer to
these applications and products, which include electronic messaging, or e-mail,
web servers, database servers and applications and the underlying hardware, as
eBusiness infrastructure, because they comprise the tools that businesses
require to compete in an eBusiness environment.
Businesses are increasingly turning to the Windows NT operating system as a
leading platform for deploying eBusiness infrastructure software applications.
According to International Data Corporation, a leading information technology
research firm, the market for Windows NT-based servers will grow from 1.3
million servers in 1998, or 32% of all server operating systems shipped in that
year, to an estimated 3.3 million servers by 2002, or 51% of all server
operating systems shipped in that year. The growth of Windows NT has been
driven by, among other things, businesses' increasing reliance on e-mail and
web servers and applications. For example, businesses are increasingly
deploying e-mail servers using Windows NT. According to International Data
Corporation, the percentage of all e-mail server software deployed on Windows
NT as opposed to other operating systems will grow from approximately 43% in
1998 to approximately 65% in 2001.
31
<PAGE>
Forrester Research estimated by the year 2000 large businesses will run 60% of
their web servers on Windows NT. Additionally, it is expected that over the
next few years businesses will start to gradually migrate to Windows 2000,
Microsoft's next generation operating system, which is currently scheduled for
first commercial release during the first quarter of 2000.
Because businesses rely on Windows NT-based systems and applications to help
them compete in an eBusiness environment, these systems and applications
require high performance and availability standards, including around-the-clock
uptime. However, the growth and deployment of Windows NT-based systems and
applications in highly complex computing environments have created a number of
unique performance and application management challenges. These complex,
distributed computing environments are characterized by multiple servers
running multiple enterprise-wide applications at remote locations. These
challenges range from basic tasks such as monitoring central processing unit
utilization and memory and disk-space availability to tasks as complex as
monitoring Internet traffic and e-mail response times or identifying specific
database commands that are creating bottlenecks for system performance.
According to the Gartner Group, an industry research firm, in a survey of more
than 100 companies, Windows NT-specific issues created an average of 224.5
hours of unscheduled downtime per machine per year, as compared to UNIX system-
specific issues which averaged 23.6 hours of downtime and AS/400 system-
specific issues which averaged 5.2 hours of downtime.
To address the performance and availability management challenges created by
the increasing deployment of eBusiness systems and applications on Windows NT,
businesses require infrastructure management software to ensure the
availability of eBusiness applications and optimize the performance of these
applications and their underlying systems through automated monitoring,
correction and reporting procedures.
We believe that traditional systems management solutions have not adequately
addressed the unique challenges of the complex deployment of eBusiness systems
and applications within the Windows NT environment. Among these traditional
systems management solutions are "framework" products that attempt to address
all aspects of system and application management problems across multiple
platforms, such as Windows NT, UNIX and AS/400, with a single product suite.
According to the Gartner Group, these framework products have generally
performed poorly, have been difficult to implement and Gartner Group estimates
that 36 months after purchase, 70% of enterprise management framework
implementations fail to be fully and successfully implemented and utilized.
UNIX-based systems management vendors have attempted to modify their UNIX-based
platforms to address specific systems and applications management needs for
Windows NT. In addition, because these framework and UNIX-based systems
management solutions have not been designed specifically for the Windows NT
platform, they often are more difficult to use because they do not incorporate
the "look and feel" of Windows NT, and generally use non-Windows oriented
language and commands to extend the functionality of basic systems.
Furthermore, many of these systems management solutions offer only limited
reporting functions and utilize an architecture that does not easily scale to
accommodate the growth in the number of Windows NT servers and applications
organizations are deploying across their computing enterprises. Because of
their limitations, framework and UNIX-based systems management solutions often
require extensive and costly customization, long deployment times and
significant ongoing support, thereby increasing an organizations' total cost of
ownership.
The unique challenges for managing Windows NT-based eBusiness systems and
applications have created the need for eBusiness infrastructure management
software that is designed specifically for the Windows NT and Windows 2000
environment. We believe a complete eBusiness infrastructure management software
solution for the distributed Windows NT and Windows 2000 environment must
incorporate the following characteristics:
. Comprehensive breadth and depth of performance and availability
management capabilities optimized for the Windows NT and Windows 2000
environment
. Familiar "look and feel" of Microsoft Windows NT and Windows 2000-based
products that information technology professionals can easily adopt and
use
. Advanced architecture that scales to support rapid growth in the number
of servers and applications deployed on the Windows NT and Windows 2000
platform yet retains centralized access and control
. Rapid deployment capabilities and low maintenance costs that result in
improved return on investment
. Close integration with other systems, network and hardware management
solutions
32
<PAGE>
The NetIQ Solution
Our AppManager products provide a comprehensive solution for centrally
managing the performance of businesses' Windows NT environments. Utilizing a
centralized console with automated monitoring, correction and reporting
capabilities, our products help optimize the performance and availability of
Windows NT systems and applications and reduce associated support costs. Key
features of our solution include:
Comprehensive Windows NT-Based Systems and Application Management
Functionality
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 approximately 500 pre-packaged
"Knowledge Scripts," or business rules and policies, that indicate 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.
Utilizes and Builds Upon Microsoft Technology and Standards
AppManager utilizes and builds upon leading Microsoft technologies and
standards, protocols and application programming interfaces. As a result,
AppManager looks, feels and operates in 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, products, including Windows 2000, and features develop, we will
incorporate these standards and features into AppManager.
Scalable Product; Centralized Control
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 roll-out 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.
Rapid Deployment; Reduced Total Cost of Ownership
Because AppManager provides comprehensive, "out-of-the-box" functionality and
has the "look and feel" of Microsoft Windows NT products, it is easier for
information technology professionals to deploy and maintain our products than
traditional system management solutions. AppManager requires minimal
customization, maintenance and ongoing customer support and is designed to
reduce the total cost of ownership and administration of distributed Windows NT
environments, relative to other system management solutions. Our Knowledge
Scripts enable information technology professionals to quickly implement
AppManager and our architecture enables organizations to efficiently roll-out
AppManager from limited departmental uses to managing multiple important
applications throughout an organization.
Open Architecture that Integrates with Existing System, Network and Hardware
Management Products
Since many of our customers have made significant investments in legacy
system and network management applications, we have designed our products to
integrate closely with these solutions. We have developed "connectors" that
integrate with leading enterprise management framework products by sharing
33
<PAGE>
performance and event information. In addition, because many organizations have
purchased Windows NT servers from multiple hardware vendors, AppManager
includes product modules that integrate with hardware management tools to
monitor the status and performance of the hardware underlying Windows NT
systems.
Optimized for Microsoft's Channel
Because we focus exclusively on the Windows NT market and the developing
Windows 2000 market, we understand and can address the needs of this
marketplace. We target our sales efforts on the Windows NT segments of our
customers' information technology departments where the need for products and
expertise similar to ours is particularly acute. Moreover, because our products
have the "look and feel" of Microsoft technology and are developed for
Microsoft users, Microsoft's third party resellers and channel partners
typically find our products easy to market, sell and support.
Strategy
Our objective is to be the leading provider of eBusiness infrastructure
management software that enables businesses to optimize the performance and
availability of their Windows NT-based systems and applications and developing
Windows 2000-based systems and applications. Key elements of our strategy
include:
Enhancing Position as a Leading Provider of Windows NT eBusiness
Infrastructure Management Solutions and Developing Similar Leadership
Position for Providing eBusiness Infrastructure Management Solutions for
Windows 2000
We intend to strengthen our technology leadership position in the Windows NT
eBusiness infrastructure management software market by continuing to focus on
managing applications that businesses are increasingly relying on to perform
critical business functions, including electronic messaging, Internet, group
collaboration and database applications. We intend to enhance our comprehensive
solutions by offering broader "out-of-the box" functionality and closer
integration with third party system, network and hardware management products.
We also intend to continue to introduce additional AppManager modules for
managing additional important applications such as Microsoft's Commerce Server.
In addition, we have released software products that support existing
preliminary versions of Windows 2000-based systems and applications and plan to
release software products to support the commercially released version of
Windows 2000 when it becomes available.
Target Enterprise-wide Deployment within Existing Customer Base
As of the date of this prospectus, we license our products to over 550
customers across a broad range of industries. A number of our customers
initially deploy AppManager on a departmental basis or for managing particular
Windows NT-based systems or applications. We have focused and will continue to
focus on expanding existing customers' use of AppManager to an enterprise-wide
deployment managing multiple applications.
Expand Distribution Channels
We have formed relationships with value added resellers, system integrators,
original equipment manufacturers and distributors. We intend to build upon
these relationships and to pursue new ones. In particular, we intend to
continue to focus on relationships with third party resellers of Microsoft
products that constitute the most significant distribution channel for Windows
NT and Windows 2000-based systems and applications.
Increase International Presence
We believe that international markets present a substantial growth
opportunity for us as the worldwide market for Windows NT-based systems and
applications continues to expand, including the expected expansion of this
market with the anticipated introduction of Windows 2000, and as organizations
increasingly recognize
34
<PAGE>
the advantages of eBusiness infrastructure management software solutions. We
intend to expand our field and inside sales forces and establish additional
field offices in the United States and internationally. We plan to complement
our current international distribution channels by developing relationships
with additional international resellers, distributors and original equipment
manufacturers. Working with our Japanese original equipment manufacturers, we
have developed branded Japanese versions of our AppManager products for each of
these original equipment manufacturers to market, sell and support and we
intend to develop additional localized versions of our products in the future.
Expand Relationships with Microsoft
We intend to expand our relationships with Microsoft to further develop our
eBusiness infrastructure management solutions for Windows NT and Windows 2000-
based systems and applications and expand our penetration of the Windows NT
market. We participate in Microsoft's testing and feedback programs for new
systems and applications and intend to support all current and future Windows
NT and Windows 2000 technologies and standards. We plan to continue to
participate in joint marketing programs with Microsoft, expand Microsoft's use
of our products and continue to support new Microsoft Windows NT and Windows
2000-based applications.
Products and Technology
We develop, market and support the NetIQ AppManager Suite, a leading
eBusiness infrastructure management software solution for distributed Windows
NT environments. AppManager's automated monitoring, correction and reporting
features help information technology professionals optimize the performance and
increase the availability of their Windows NT-based systems and electronic
messaging, Internet and database applications, while reducing associated
support costs. Additionally, AppManager can monitor the status and performance
of the hardware underlying Windows NT systems. By using our AppManager
connector integration products, information technology professionals can use
AppManager with system and network management framework products to share
performance and event information. The following diagram illustrates how
AppManager enables information technology professionals to comprehensively
manage applications, underlying operating systems and hardware platforms that
businesses rely on to perform critical business functions in their Windows NT
environment from a central console.
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NetIQ's Comprehensive Approach to Managing
Windows NT Environments
[Graphic depiction of the interface between the company's product, the
applications, the Windows NT operating system and hardware platforms.]
36
<PAGE>
Our AppManager product suite is a set of fully integrated product modules
known as "AppManagers." The following table summarizes the functionality of our
Windows NT-based AppManager products by server or product category.
<TABLE>
<CAPTION>
Server or NetIQ Products
Product Category (Year Introduced) Representative Functionality
- --------------------------------------------------------------------------------------
<C> <C> <S>
Windows NT AppManager for . Identifies CPU bottlenecks
Operating and
Systems . Microsoft Windows NT (1996) terminates runaway
processes
. Microsoft Cluster Server (1997) . Checks if key services are
down and
. Windows NT Server, Terminal Server auto-starts
Edition
(1998) . Tracks disk space
utilization
. Citrix WinFrame (1998) . Determines if running low
on DHCP
. Microsoft Windows Load Balance leases
Service (1999)
. Active Directory (1999) . Resets terminal server
session
. Reboots downed Windows NT
server
- --------------------------------------------------------------------------------------
Messaging Servers AppManager for . Monitors e-mail
connectivity and
. Microsoft Exchange Server (1996) response time
. Lotus Domino/Notes (1997) . Reports on e-mail traffic
flow
. Microsoft Message Queue Server . Identifies top senders and
(1997) receivers of e-mail
. Monitors e-mail space
usage
- --------------------------------------------------------------------------------------
Internet/Web AppManager for . Monitors connection to
Servers URLs
. Microsoft Internet Information . Examines contents of URLs
Server (1996) and checks
. Microsoft Commercial Internet for changes
System News Server
(1997) . Monitors the availability
of a web server
. Microsoft Proxy Server (1998) . Displays HTTP connections
. Microsoft Site Server (1999) . Detects unauthorized login
attempts
. Detects if an Internet
port or IP address can be
accessed
- --------------------------------------------------------------------------------------
Database Servers AppManager for . Identifies SQL statements
utilizing
. Microsoft SQL Server (1996) most amount of system
resources
. Microsoft Transaction Server . Monitors database space
(1997) usage
. Oracle (1998) . Tracks locking conditions
. SAP R/3 (1999) . Truncates transaction log
if running out of space
- --------------------------------------------------------------------------------------
Hardware AppManager for . Monitors computer
Management temperature
Tools . Compaq Insight Manager (1997) . Detects if UPS battery is
running low
. HP TopTools for Servers (1998) . Reports error status of
network interface
. Dell OpenManage (1998) cards
. NEC ESMPro* (1998) . Monitors system voltage
.IBM NetFinity (1999) . Tracks asset information
.Siemens ServerView (1999) such as serial numbers
- --------------------------------------------------------------------------------------
Third-Party Tools AppManager for . Detects if software
distribution has
. Microsoft Systems Management failed
Server (1996)
. Microsoft SNA Server (1999) . Checks status of tool's
services and
. CA ARCServe (1999) auto-restart
. Veritas Backup Exec (1999) . Monitors SNA connections
. Legato NetWorker (1999) . Determines if backup job
has failed
- --------------------------------------------------------------------------------------
"Connector" to AppManager Connector for . Receives events from
Management AppManager
Frameworks . Tivoli Enterprise (1998) . Invokes AppManager console
from
. CA Unicenter TNG (1998) within framework
. HP OpenView Network Node Manager . Distributes AppManager
(1998) software
. Cabletron SPECTRUM (1999)
- --------------------------------------------------------------------------------------
Console Products AppManager for . Views and acknowledges
events
. Operator Console (1996) . Generates service level
agreement
. Developer Console (1996) reports
. Web Access Console (1997) . Edits pre-defined
Knowledge Scripts
. Displays performance
metrics
</TABLE>
- --------------------------------------------------------------------------------
* Available only with the Japanese edition of the NetIQ AppManager Suite.
37
<PAGE>
We also provide a localized version of our AppManager products for the
Japanese market.
Native Windows NT Implementation
AppManager uses standard Microsoft technology such as Visual Basic for
Applications scripting, the Microsoft COM object model and SQL Server. As a
result, AppManager looks, feels and operates the same as Microsoft products.
Our use of widely accepted Microsoft standards also makes our AppManager
products easy to customize and implement in a customer's existing IT
environment. We intend to continue to support new Microsoft technology,
including emerging Windows 2000-based technologies such as Active Directory and
Windows Management Instrumentation, a component of Microsoft's Web-based
Enterprise Management initiative, or WBEM.
Open Architecture that Easily Scales to Accommodate Growth
AppManager's advanced architecture easily scales to accommodate growth in the
number of Windows NT servers businesses deploy in their highly complex
computing environment and includes an exception-based communication mechanism
that reports only system events and exception data which minimizes network
traffic, and intelligent management agents that can continue to monitor systems
and applications regardless of the status of the network connection. AppManager
also offers information technology professionals the flexibility to work from a
robust Web-based interface to start and stop monitoring jobs and view
performance and event data.
AppManager's architecture is comprised of the following tiers:
. 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.
. Web Console. The Web console is an optional program that lets users
monitor their entire Windows NT environment from a Web browser.
. 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 200
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.
. Management Server. The management server is a program that manages event-
driven communication between the repository and the agent programs.
. 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.
38
<PAGE>
The following graphic illustrates the multiple tiers of the NetIQ AppManager
architecture:
[Graphic depiction of the relationship between AppManager consoles, management
server, repository server and agents.]
39
<PAGE>
Customers
As of the date of this prospectus, we license our AppManager products to more
than 550 customers. The following is a representative list of our customers
that have purchased at least $100,000 in software licenses and services since
the beginning of fiscal 1998:
Government Utilities/Energy
Defense Intelligence Agency Exxon Computing Services
Department of Veterans Affairs Fina Oil and Chemical Company
Ministere Emploi et Solidarite Koch Industries
US Postal Inspection Service Shell Services International
US Air Force Southern Company Services
Williams Information Services
Financial Services
Manufacturing/Distribution
Arthur Andersen & Co.
Charles Schwab & Co. ALCOA
Dresdner Bank AG Boeing Shared Services
Great West Life & Annuity Insurance Robert Bosch GmbH
JC Bradford & Co. General Electric
NationsBank/Bank of America Georgia-Pacific
Northern Trust
Safeco Insurance Companies Pharmaceuticals/Health Care
Standard & Poor's
Unum Corp. Baptist Memorial Hospital
Wells Fargo Bank N.A. Cerner Corporation
Glaxo Wellcome
High Technology Mayo Foundation for Medical
Education and Research
DataReturn Corporation Merck & Co.
Dell Computer Pfizer
Interliant
Microsoft Corporation Retail/Consumer Packaged Goods
Microstrategy
NCR Corporation London Drugs
Network Associates Nabisco Foods
PeopleSoft Nordstrom Information Systems
Siemens Business Services Office Depot
Unisys Corporation Pepsi-Cola
Philip Morris Europe
Telecommunications
American Telephone & Telegraph
Co.
BellSouth Cellular Corp.
Belgacom
40
<PAGE>
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 Atlanta, Bellevue, Dallas, Denver, Fairfax and New York City,
and our international field offices in London, Munich, Singapore, Sydney and
Tokyo. Each of our field sales offices includes 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 prospectus,
and, as of September 30, 1999, we had over 52 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 33 channel partners outside of North
America as of September 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 Cabletron, Citrix, Compaq, Computer Associates, Dell
Computer, Hewlett-Packard, IBM, including both its Lotus and Tivoli
subsidiaries, Legato, Microsoft, Oracle and Unisys. As part of these
relationships, we often develop joint marketing programs with these software
and hardware vendors. Our relationship with Microsoft is
41
<PAGE>
an example of this type of product-based relationship. Microsoft is one of our
larger customers, and sales of software licenses to Microsoft represented 2% of
our software license revenue in fiscal 1998 and 1% in each of fiscal 1999 and
the three months ended September 30, 1999. 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. 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, 20% of total revenue in
fiscal 1999 and 23% of total revenue in the three months ended September 30,
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.
Initial product license fees include one year of product software maintenance
and support. Thereafter, customers are entitled to receive software updates,
maintenance releases and technical support for an 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.
42
<PAGE>
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. Our research and
development expenses were $884,000 and $1.7 million, respectively, in the three
months ended September 30, 1998 and 1999. The dollar increase in fiscal 1997
and fiscal 1998 was due primarily to increased staffing and the purchasing of
additional hardware and software for development and testing purposes. For a
further discussion of our research and development programs, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 19 of this prospectus and "Risk Factors--If we do not respond
adequately to our industry's evolving technology standards . . ." on page 11 of
this prospectus.
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. See "Risk Factors--New
product introductions and pricing strategies by our existing competitors . . ."
beginning on page 6 of this prospectus, regarding risks associated with current
competitive pressures.
Existing Competition. We currently face competition from a number of sources,
including:
. Providers of network and systems management framework products such as
IBM, Computer Associates and Hewlett-Packard
. Providers of performance and availability management solutions such as
BMC Software
. Customers' internal information technology departments that develop or
integrate system and application monitoring tools for their particular
needs
Future Competition. We may face competition in the future from established
companies who have not previously entered the market for performance and
availability management software for Windows NT-based or Windows 2000-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 or Windows 2000-based system and application
management solutions, but they may also acquire or establish cooperative
relationships with our current competitors, including cooperative relationships
between large, established companies and smaller private companies. These
larger companies may be able to acquire the technology and expertise of smaller
companies to penetrate our market quickly. It is possible that new competitors
or alliances among competitors may emerge and rapidly acquire significant
market share.
To date, Microsoft has not competed against us in the market for applications
management software for optimizing the performance and availability of Windows
NT-based or Windows 2000-based systems and applications. However, Microsoft may
enter this market in the future, and this could materially adversely affect our
business, future annual and quarterly results of operations and financial
condition. As part of its competitive strategy, Microsoft could bundle
performance and availability management software with its Windows NT or Windows
2000-based operating system software and this could discourage potential
customers from purchasing our products. Even if the functionality provided as
standard features by future Microsoft operating system software were more
limited than that 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 margins and could materially adversely affect our
business, quarterly and annual operating results and financial condition.
43
<PAGE>
In addition to Microsoft, other potential competitors may bundle their
products or incorporate applications management software for optimizing the
performance and availability of Windows NT-based or Windows 2000-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. These third
party software developers may change their products so that they will no longer
be compatible with our products. If our competitors were to bundle their
products in this manner or make their products non-compatible 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.
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 three patents relating to our engineering work all of which
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 to 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 license 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 September 30, 1999, we had 150 employees, 43 of whom were engaged in
research and development, 76 in sales and marketing, 12 in customer support and
19 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. For a discussion of our
need to attract and retain additional qualified personnel, see "Risk Factors--
We will need to recruit and retain additional qualified personnel..." on page
10 of this prospectus.
Facilities
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. In addition we have leased approximately 8,000 square feet of
additional space in the same building through August 2000. Our current
facilities are expected to be adequate to meet our needs through July 2000 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 Atlanta, Bellevue,
Dallas, Denver, Fairfax and New York City, and have international field offices
in London, Munich, Singapore, Sydney and Tokyo.
44
<PAGE>
MANAGEMENT
The following table sets forth information with respect to our executive
officers and directors as of the date of this prospectus.
Executive Officers And Directors
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Ching-Fa Hwang................... 51 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
Glenn S. Winokur................. 41 Vice President, Worldwide Sales
Kuo-Wei ("Herbert") Chang(1)(2).. 37 Director
Louis C. Cole(2)................. 56 Director
Alan W. Kaufman(1)(2)............ 61 Director
Ying-Hon Wong.................... 42 Director
</TABLE>
- ---------------------
(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.
45
<PAGE>
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, Worldwide Sales since
October 1999. Prior to his promotion to Vice President, Worldwide Sales, Mr.
Winokur had served as our Vice President, Sales since May 1997 and 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.
Kuo-Wei ("Herbert") Chang has been a director since May 1997. Since April
1996, Mr. Chang has been the president of InveStar Burgeon Venture 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 directors 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 directors 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.
Classified Board
Our certificate of incorporation and bylaws provide for a board of directors
of six members consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors is elected
each year. Directors are elected for three-year terms. Alan Kaufman and Her-Daw
Che have been designated Class II directors whose terms expire at the 2000
annual meeting of stockholders. Louis Cole and Ching-Fa Hwang have been
designated Class III directors whose terms expire at the 2001 annual meeting of
stockholders. Herbert Chang and Ying-Hon Wong have been designated Class I
directors whose terms expire at the 2002 annual meeting of stockholders. See
"Description of Capital Stock--Antitakeover Effects of Some Provisions of Our
Certificate of Incorporation and Bylaws" beginning on page 61 of this
prospectus for a further description of the antitakeover provisions in our
charter documents.
46
<PAGE>
Executive officers are appointed by the board of directors on an annual basis
and serve until their successors have been duly elected and qualified. There
are no family relationship among any of our directors, officers or key
employees.
Audit Committee
We have established an audit committee, which consists of Messrs. Chang and
Kaufman. The audit committee reviews our internal accounting procedures and
consults with and reviews the services provided by our independent auditors.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Messrs. Chang, Cole and Kaufman. The
Compensation Committee is responsible for determining salaries, incentives and
other forms of compensation for our directors, officers and other employees and
administering various incentive compensation and benefit plans. Ching-Fa Hwang,
our President, Chief Executive Officer and a member of our board of directors,
participates in all discussions and decisions regarding salaries and incentive
compensation for all of our employees and consultants, except that he is
excluded from discussions regarding his own salary and incentive compensation.
No interlocking relationship exists between any member of our compensation
committee and any member of any other company's board of directors or
compensation committee.
Director Compensation
We reimburse each member of our board of directors for out-of-pocket expenses
incurred in connection with attending board meetings. No member of our board of
directors currently receives any additional cash compensation for serving as a
member of the Board.
In May 1997, we granted an option to Herbert Chang in his capacity as a
director to purchase up to 183,333 shares of common stock with an exercise
price of $0.30 per share which vests in annual installments over three years.
Because of Mr. Chang's contractual obligations with InveStar Burgeon Venture
Capital, the option was issued in the name of InveStar Burgeon Venture Capital
Inc. The vesting of this option terminates if Mr. Chang ceases to be a member
of the board of directors.
In August 1997, we granted an option to Alan Kaufman as a director to
purchase up to 66,666 shares of common stock at an exercise price of $0.30 per
share. 25% of the option shares vest on the first anniversary of the vesting
commencement date and the remaining shares vest ratably on a quarterly basis
over the next three years.
In November 1998, we granted an option to Louis Cole as a director to
purchase up to 50,000 shares of common stock at an exercise price of $1.50 per
share. 25% of the option shares vest on the first anniversary of the vesting
commencement date and the remaining shares vest ratably on a quarterly basis
over the next three years.
In November 1998, we granted non-statutory options to purchase up to 66,666
shares of common stock to Her-Daw Che and 80,000 shares of common stock to
Ching-Fa Hwang, each with an exercise
price of $1.50 per share. 37.5% of the shares subject to these options were
vested at the time of grant, and 6.25% of the remaining shares subject to these
options vest on a quarterly basis through April 2001.
In November 1998, we granted an option to Ying-Hon Wong in his capacity as a
director to purchase up to 53,333 shares of common stock with an exercise price
of $1.50 per share. Because of Mr. Wong's contractual obligations with
Wongfratris Investment Company, the option was issued in the name of
Wongfratris Investment Company. In January 1999 this option was exercised in
full subject to a right of repurchase in favor of NetIQ with respect to 63.5%
of the shares acquired if Mr. Wong ceases to be a member of the board of
directors. This repurchase right lapses as to 6.25% of the shares purchased
each quarter through April 2001.
See "Certain Transactions" on page 55 of this prospectus for additional
information about a consulting arrangement we have with one of our directors.
47
<PAGE>
Our stock option 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 hold 1% or more of our total voting power.
Our stock option 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 our initial public offering. Each non-
employee director who serves on the board for at least six months is granted an
option to purchase 8,333 shares of common stock on that date of the annual
meeting of our stockholders. However, since the first annual meeting following
our initial public offering fell within six months of the effective date of the
initial public offering no grants will be made until the 2000 annual
stockholders meeting. Each option granted to a non-employee director under this
program has a term of five years and the shares subject to these options shall
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. See "Incentive Stock Plans--1995 Stock Plan" on page 50 of this
prospectus for more detailed information regarding our stock option plan.
Executive Compensation
The following table sets forth in summary form information concerning the
compensation awarded to, earned by, or paid for services rendered to NetIQ in
all capacities during the fiscal years ended June 30, 1999, 1998, and 1997
respectively by NetIQ's President and Chief Executive Officer and NetIQ's other
executive officers or former executive officers whose salary and bonus for
fiscal 1999 exceeded $100,000. These individuals are referred to elsewhere in
this prospectus as named executive officers. Other than the salary, bonus and
commission described in the table below, we did not pay any named executive
officer any fringe benefits, perquisites or other compensation in excess of 10%
of such executive officer's salary and bonus during the fiscal years specified.
Bonus and commission figures for a fiscal year include bonuses and commissions
earned and paid in that fiscal year as well as bonuses and commissions earned
in that fiscal year but paid in subsequent fiscal years. Commissions are cash-
based incentive compensation for our sales executives that are earned as
licenses are sold. Unless otherwise specified, other annual compensation
figures represent commissions.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
-------------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Principal Salary Bonus Compensation Options/SARs Compensation
Position Year $ $ $ (#'s) $
------------------ ---- ------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current Executive
Officers
Ching-Fa Hwang.......... 1999 $93,749 $ -- $ -- 80,000 $2,069(3)
President and Chief 1998 90,000 -- -- - 1,739
Executive Officer 1997 90,000 -- 1,731(2) - 1,308
Thomas R. Kemp.......... 1999 113,699 -- -- 33,333 2,790(4)
Vice President,
Marketing 1998 101,674 320 -- 23,332 2,461
1997 77,508 -- -- 38,665 1,976
Glenn S. Winokur........ 1999 90,287 -- 133,450 33,333 2,918(5)
Vice President,
Worldwide Sales 1998 85,008 12,249 224,638 16,666 2,425
1997 80,004 25,000 -- 136,666 2,033
Former Executive
Officers
Stephen M. Kendall(1)... 1999 100,328 -- 19,437 20,000 7,131(6)
Vice President, Asia
Pacific 1998 81,545 -- 6,403 96,666 55,086
1997 -- -- -- -- --
</TABLE>
- --------
(1) Mr. Kendall resigned as Vice President, Asia Pacific in October 1999.
(2) Represents compensation of $1,731 paid by NetIQ in fiscal 1997 in lieu of
excess accrued vacation time.
48
<PAGE>
(3) Represents $278 and $216 in long-term disability insurance premiums paid by
NetIQ in fiscal 1999 and 1998, respectively; $108 and $81 in group life
insurance premiums paid by NetIQ in fiscal 1999 and 1998, respectively; and
$1,683, $1,442, and $1,308 in health insurance premiums paid by NetIQ in
fiscal 1999, 1998, and 1997, respectively.
(4) Represents $349 and $240 in long-term disability insurance premiums paid by
NetIQ in fiscal 1999 and 1998, respectively; $108 and $81 in group life
insurance premiums paid by NetIQ in fiscal 1999 and 1998, respectively; and
$2,333, $2,140, and $1,976 in health insurance premiums paid by NetIQ in
fiscal 1999, 1998, and 1997, respectively.
(5) Represents $274 and $204 in long-term disability insurance premiums paid by
NetIQ in fiscal 1999 and 1998, respectively; $108 and $81 in group life
insurance premiums paid by NetIQ in fiscal 1999 and 1998, respectively; and
$2,536, $2,140, and $2,033 in health insurance premiums paid by NetIQ in
fiscal 1999, 1998, and 1997, respectively.
(6) Represents $309 and $240 in long-term disability insurance premiums paid by
NetIQ in fiscal 1999 and 1998, respectively; $108 and $81 in group life
insurance premiums paid by NetIQ in fiscal 1999 and 1998, respectively;
$6,714 and $4,765 in health insurance premiums paid by NetIQ in fiscal 1999
and 1998, respectively; and $50,000 in moving expenses paid by NetIQ in
fiscal 1998.
Option Grants During Fiscal Year 1999
The following table sets forth information with respect to stock options
granted to each of the named executive officers during fiscal 1999, including
the potential realizable value giving effect to the July 29, 1999 initial
public offering price of $13.00 per share over the 10 year term of the options
based on assumed rates of stock appreciation of 5% and 10%, compounded annually
and subtracting from that result the total option exercise price. These assumed
rates of appreciation comply with the rules of the SEC and do not represent our
estimate of future stock price. Actual gains, if any, on stock option exercises
will be dependent on the future performance of our common stock. In fiscal
1999, we granted options to acquire up to an aggregate of 1,299,216 shares to
employees and directors, all under our stock option plan and all at an exercise
price equal to not less than the fair market value of our common stock on the
date of grant as determined in good faith by the board of directors. Optionees
may pay the exercise price by cash, check, promissory note, delivery of
already-owned shares of our common stock which have been owned by the optionee
for more than six months or the date of surrender or under a cashless exercise
procedure, to the extent authorized by the board. Options under the stock
option plan generally vest over four years with 25% of the shares subject to
option vesting on the first anniversary of the grant date, and the remaining
option shares vesting ratably quarterly thereafter.
<TABLE>
<CAPTION>
Individual Grants Potential
------------------------------------------- Realizable Value
Percent of at Assumed
Total Annual Rates of
Number of Options Stock Price
Securities Granted to Appreciations for
Underlying Employees Exercise Options Terms
Options in Price Expiration ---------------------
Name Granted Fiscal 1999 Per Share Date 5% 10%
- ---- ---------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Current Executive
Officers
Ching-Fa Hwang.......... 80,000 6.16% $1.50 05/18/02 $1,574,050 $2,577,492
Thomas R. Kemp.......... 33,333 2.57% 11.25 04/30/09 330,851 748,948
Glenn Winokur........... 33,333 2.57% 11.25 04/30/09 330,851 748,948
Former Executive
Officers
Stephen M. Kendall...... 20,000 1.54% 11.25 04/30/09 198,513 449,373
</TABLE>
49
<PAGE>
Aggregate Option Exercises During the Last Fiscal Year and Fiscal Year-End
Option Values
The following table sets forth the number of shares acquired and the value
realized upon exercise of stock options during fiscal 1999, and the number of
shares of common stock subject to exercisable stock options held as of June 30,
1999, by the named executive officers. The "Value Realized" and the "Value of
Unexercised In-the-Money Options at June 30, 1999" is based upon the July 29,
1999 initial public offering price of $13.00 per share, minus the per share
exercise price, multiplied by the number of shares underlying the option.
<TABLE>
<CAPTION>
Number Number of Securities Value of Unexercised
of Underlying Unexercised In-the-Money Options at
Shares Options at June 30, 1999 June 30, 1999
Acquired ------------------------- -------------------------
on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current Executive
Officers
Ching-Fa Hwang.......... -- -- 40,000 40,000 $460,000 $460,000
Thomas R. Kemp.......... 67,493 $ 872,360 1,670 94,168 21,210 841,338
Glenn Winokur........... 90,208 1,167,292 22,290 74,167 287,433 583,725
Former Executive
Officers
Stephen M. Kendall...... 39,790 505,333 -- 76,876 -- 757,325
</TABLE>
Incentive Stock Plans
1995 Stock Plan
The board of directors adopted our stock option plan in November 1995 and our
stockholders approved the stock option plan in April 1996. The board of
directors approved the amendment and restatement of stock option plan in May
1999 and our stockholders approved the amendment and restatement in July 1999.
The stock option plan provides for the grant to employees of incentive stock
options within the meaning of Section 422 of the United States tax code, and
for the grant to employees, directors and consultants of nonstatutory stock
options and stock purchase rights.
Number of Shares of Common Stock Available under the Stock Option Plan
As of September 30, 1999, a total of 5,333,332 shares of common stock were
authorized for issuance under the stock option plan, of which options to
acquire 2,483,961 shares were outstanding as of that date. The stock option
plan provides for annual increases in the number of shares available for
issuance thereunder, on the first day of each new fiscal year, effective
beginning with July 1, 2000, equal to the lesser of 4% of the outstanding
shares of common stock on the first day of the fiscal year, 1,333,333 shares or
an amount as the board may determine.
Administration of the Stock Option Plan
The stock plan administrator, which is the board of directors or a committee
of the board, administers the stock option plan. In the case of options
intended to qualify as "performance-based compensation" within the meaning of
the United States tax code, the committee will consist of two or more "outside
directors" within the meaning of the United States tax code. The administrator
has the power to determine the terms of the options or stock purchase rights
granted, including the exercise price, the number of shares subject to each
option or stock purchase rights, the exercisability of the options and the form
of consideration payable upon exercise.
Options
The administrator determines the exercise price of nonstatutory stock options
granted under the stock option plan, but with respect to nonstatutory stock
options intended to qualify as "performance-based compensation" within the
meaning of the United States tax code, the exercise price must at least be
equal to the fair market value of the common stock on the date of grant. The
exercise price of all incentive stock
50
<PAGE>
options granted under the stock option plan must be at least equal to the fair
market value of the common stock on the date of grant. For any participant who
owns stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the term of such incentive stock option must not exceed five years. The term of
all other options granted under the stock option plan may not exceed 10 years.
An optionee generally must exercise an option granted under the stock option
plan at the time set forth in the optionee's option agreement after the end of
optionee's status as an employee, director or consultant of NetIQ, or within 12
months after the optionee's termination by death or disability, but in no event
later than the expiration of the option's term.
Stock Purchase Rights
The administrator determines the exercise price of stock purchase rights
granted under the stock option plan. In the case of stock purchase rights,
unless the administrator determines otherwise, the restricted stock purchase
agreement entered into in connection with the exercise of the stock purchase
rights contains a repurchase option that we may exercise upon the voluntary or
involuntary termination of the purchaser's service with us for any reason,
including death or disability. The purchase price for shares we repurchase
under restricted stock purchase agreements will be the original price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to NetIQ. The repurchase option lapses at a rate that the
administrator determines.
Outside Director Options
The stock option plan also provides for an initial automatic grant of an
option to purchase 8,333 shares of common stock to a director who first becomes
a non-employee director after our initial public offering, and who does not
beneficially hold 1% or more of the total voting power of our voting securities
on the date of grant. After our initial public offering, each non-employee
director who has served on the board for at least the six previous months will
be granted an option to purchase 8,333 shares of common stock on the date of
the annual meeting of our stockholders. However, if the first annual meeting
following our 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 a non-employee director under this
program will have a term of five years and the shares purchasable under these
options are 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.
Transferability of Options and Stock Purchase Rights
An optionee generally may not transfer options and stock purchase rights
granted under the stock option plan and only an optionee may exercise an option
and stock purchase rights during his or her lifetime.
Adjustments upon Merger or Asset Sale
The stock option plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option or stock purchase rights. If
the outstanding options or stock purchase rights are not assumed or
substituted, the administrator will provide notice to the optionee that he or
she has the right to exercise the option or stock purchase rights as to all of
the shares subject to the option or stock purchase rights, including shares
which would not otherwise be exercisable, for a period of 15 days from the date
of the notice. The option or stock purchase rights will terminate upon the
expiration of the 15-day period. If an optionee's employment with the successor
corporation is terminated other than for cause or if a director's service with
the successor corporation is terminated other than for voluntary resignation,
which will not be considered voluntary if requested by the acquiring company,
within twelve months after a change of control, the optionee will fully vest in
the right to exercise all of the shares subject to the option or stock purchase
rights, including shares which would not otherwise be exercisable.
51
<PAGE>
Amendment and Termination of the Stock Option Plan
Unless terminated sooner, the stock option plan will terminate automatically
in 2005. In addition, the administrator has the authority to amend, suspend or
terminate the stock option plan, provided that no such action may affect any
share of common stock previously issued and sold or any option previously
granted under the stock option plan.
1999 Employee Stock Purchase Plan
The board of directors adopted our stock purchase plan in May 1999 and our
stockholders approved the stock purchase plan in July 1999.
Number of Shares of Common Stock Available under the Stock Purchase Plan
A total of 500,000 shares of common stock has been reserved for issuance
under the stock purchase plan of which 31,332 shares were issued in connection
with the purchase period ended October 29, 1999. In addition, the stock
purchase plan provides for annual increases in the number of shares available
for issuance under the stock purchase plan on the first day of each fiscal
year, beginning on July 1, 2000, equal to the lesser of 2% of the outstanding
shares of common stock on the first day of the fiscal year, 666,666 shares or
an amount as the board may determine.
Administration of the Stock Purchase Plan
The board of directors or a committee appointed by the board administers the
stock purchase plan,The board or its committee has full and exclusive authority
to interpret the terms of the stock purchase plan and determine eligibility.
Eligibility to Participate
Employees are eligible to participate if they are customarily employed by
NetIQ or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year. However, an employee may not be granted
an option to purchase stock under the stock purchase plan if such an employee:
. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
. whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate which exceeds $25,000 worth of stock for each
calendar year.
Offering Periods and Contributions
The stock purchase plan, which is intended to qualify under Section 423 of
the United States tax code, contains consecutive, overlapping 24 month offering
periods. Each offering period includes four six-month purchase periods. The
offering periods generally start on the first trading day on or after May 1 and
November 1 of each year, except for the first such offering period which
commenced on July 29, 1999 and will end on the last trading day on or before
October 30, 2001.
The stock purchase plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single purchase
period is 3,333 shares.
Purchase of Shares
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the stock purchase plan is 85% of the lower of
52
<PAGE>
the fair market value of the common stock at the beginning of the offering
period or end of the purchase period. In the event the fair market value at the
end of a purchase period is less than the fair market value at the beginning of
the offering period, participants will withdraw from the current offering
period following the exercise and will automatically re-enroll in a new
offering period. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with NetIQ.
Transferability of Rights
A participant may not transfer rights granted under the stock purchase plan
other than by will, the laws of descent and distribution or as otherwise
provided under the stock purchase plan.
Adjustments upon Merger or Asset Sale
The stock purchase plan provides that, in the event of our merger with or
into another corporation or a sale of substantially all of our assets, a
successor corporation may assume or substitute for each outstanding option an
option of its own. If the successor corporation refuses to assume or substitute
its own options for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.
Amendment and Termination of the Stock Purchase Plan
The stock purchase plan will terminate in 2009. However, the board of
directors has the authority to amend or terminate the stock purchase plan at
any time, except that, subject to exceptions described in the stock purchase
plan, no such action may adversely affect any outstanding rights to purchase
stock under the stock purchase plan.
401(k) Plan
We have adopted a tax-qualified employee savings and retirement plan, the
401(k) plan, for all eligible employees. Eligible employees may elect to defer
a percentage of their eligible compensation to the 401(k) plan, subject to the
statutorily prescribed annual limit. We may make matching contributions on
behalf of all participants in the 401(k) plan in an amount determined by our
board of directors. We may also make additional discretionary profit-sharing
contributions in such amounts as determined by the board of directors, subject
to statutory limitations. Matching and profit-sharing contributions, if any,
are subject to a vesting schedule; all other contributions are at all times
fully vested. The 401(k) plan, and the accompanying trust, is intended to
qualify under Sections 401(a) and 501(a) of the United States tax code so that
contributions by employees or by NetIQ to the 401(k) plan, and income earned
(if any) on plan contributions, are not taxable to employees until distributed
from the 401(k) plan, and so that contributions by NetIQ, if any, will be
deductible by NetIQ when made. The trustee under the 401(k) plan, at the
direction of each participant, invests the assets of the 401(k) plan in any of
a number of investment options.
Change in Control Agreements
We have entered into change of control severance agreements with each of our
executive officers. The Agreements provide that in the event of the executive's
involuntary termination without cause within 12 months after a change of
control, the executive is entitled to six months of severance pay, six months
of continued coverage under group health, life and other insurance
arrangements, and full acceleration of all outstanding options granted to the
executive. For purposes of these agreements, a "change of control" occurs if
. our stockholders approve a merger or consolidation of NetIQ with any
other corporation, other than a merger or consolidation which would
result in our voting securities outstanding immediately prior thereto
continuing to represent more than 50% of the total voting power of the
surviving entity in the merger;
53
<PAGE>
. our stockholders approve a plan of complete liquidation or an agreement
for the sale or disposition by us of all or substantially all of our
assets;
. any person becomes the "beneficial owner," directly or indirectly, of
our securities representing 50% or more of the total voting power
represented by our then outstanding voting securities; or
. a change in the composition of the board that results in fewer than a
majority of the directors being incumbent directors, meaning directors
who either are directors as of the date of the change of control
severance agreements, or are elected, or nominated for election, to the
board with the affirmative votes of at least a majority of those
directors whose election or nomination was not in connection with any
transaction described above or in connection with an actual or
threatened proxy contest relating to the election of directors.
See "Incentive Stock Plans--1995 Stock Plan" on page 50 of this prospectus
for a description of the change of control provisions of our stock option plan.
Limitations on Directors' Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following acts:
. any breach of their duty of loyalty to the corporation or its
stockholders
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
. unlawful payments of dividends or unlawful stock repurchases or
redemptions
. any transaction from which the director derived an improper personal
benefit
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and executive officers and other corporate agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. Our bylaws also permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions in this capacity, regardless of whether the bylaws would permit
indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our certificate of
incorporation and bylaws. These agreements, among other things, provide for
indemnification of our directors and executive officers for many expenses,
including attorneys' fees, judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of NetIQ, arising out of such person's services as a director or
executive officer of ours, any subsidiary of ours or any other company or
enterprise to which the person provided services at our request. We believe
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
54
<PAGE>
CERTAIN TRANSACTIONS
September 1995 Series A Preferred Stock Financing. In September 1995, we sold
4,666,656 shares of Series A Preferred Stock at a per share purchase price of
$0.60. Purchasers of the Series A Preferred Stock included Sen-Tien Lee, who
holds more than 5% of the outstanding common stock; Wongfratris Investment
Company, which holds more than 5% of the outstanding common stock and whose
representative, Ying-Hon Wong, is a member of the board of directors; Direct
International Limited, which holds more than 5% of the outstanding common
stock; Ching-Fa Hwang, who is our President and Chief Executive Officer and a
member of the board of directors; and Her-Daw Che, who is our Vice President,
Engineering and a member of the board of directors. The following table
summarizes purchases of Series A Preferred Stock by these individuals and
entities:
<TABLE>
<CAPTION>
Number of
Name of Stockholder Series A Shares
------------------- ---------------
<S> <C>
Sen-Tien Lee................................................. 833,333
Direct International Limited................................. 500,000
Wongfratris Investment Company............................... 500,000
Ching-Fa Hwang (1)........................................... 333,333
Her-Daw Che (2).............................................. 166,666
</TABLE>
- ---------------------
(1) Shares held by Mr. Hwang and his wife in joint tenancy.
(2) Represents shares purchased by the Che Family Trust.
May 1997 Series B Preferred Stock Financing. In May 1997, we sold 2,733,321
shares of Series B Preferred Stock at a per share purchase price of $3.00.
Purchasers of the Series B Preferred Stock include InveStar Burgeon Venture
Capital Inc., which holds more than 5% of the outstanding common stock and
whose representative, Herbert Chang, is a member of the board of directors;
Sen-Tien Lee; Direct International Limited; Ching-Fa Hwang; Wongfratris
Investment Company; Her-Daw Che; and Thomas R. Kemp, who is our Vice President,
Marketing. The following table summarizes purchases of Series B Preferred Stock
by these individuals and entities:
<TABLE>
<CAPTION>
Number of
Name of Stockholder Series B Shares
------------------- ---------------
<S> <C>
InveStar Burgeon Venture Capital............................ 666,666
Sen-Tien Lee................................................ 166,666
Direct International Limited................................ 100,000
Ching-Fa Hwang (1).......................................... 99,998
Wongfratris Investment Company.............................. 96,666
Her-Daw Che (2)............................................. 66,666
Thomas R. Kemp.............................................. 26,666
</TABLE>
- ---------------------
(1) Includes shares purchased by Jerry Hwang and Andrew Hwang, Mr. Hwang's
children and by Mr. Hwang and his wife in joint tenancy.
(2) Represents shares purchased by the Che Family Trust, Austin Che and Joyce
Che, Mr. Che's children.
Consulting Arrangement. Ying-Hon Wong, one of our directors and a general
partner of Wongfratris Investment Company, earned $60,000 in consulting fees in
each of fiscal 1997, 1998 and 1999, under a consulting arrangement under which
Mr. Wong is paid $5,000 per month that is terminable at any time. Since co-
founding NetIQ, Mr. Wong has provided general business consulting services to
us on a variety of issues including financial management, marketing and sales
strategies, recruiting and employee development, fund raising, investor
relationship management and consultation regarding the defense of legal claims.
55
<PAGE>
Change of Control Severance Agreement. We have entered into change of control
severance agreements with each of our executive officers. For a more detailed
description of the change of control severance agreements, see "Management--
Change in Control Agreements" on page 53 of this prospectus.
Option Grants to Directors and Significant Stockholders. In November 1995, in
connection with his assistance in helping us obtain the Series A Preferred
Stock financing, we granted an option exercisable for 133,333 shares of common
stock to C. S. Ho, the director of Direct International Limited, with an
exercise price of $0.06 per share which vests in annual installments over four
years. In May 1999, after determining that we probably would not need
additional private financing, we accelerated the vesting on this option so that
Mr. Ho could purchase all of the shares subject to this option to minimize
accounting charges associated with future vesting of this option.
We also have issued options to purchase common stock to Messrs. Chang,
Kaufman, Cole, Che, Hwang and Wong under our stock option plan. Because of
contractual obligations involving Messrs. Chang and Wong and their affiliated
investment entities, the option grant to Mr. Chang was issued in the name of
InveStar Burgeon Venture Capital Inc. and the option grant to Mr. Wong was
issued in the name of Wongfratris Investment Company. For a more detailed
description of the options granted Messrs. Chang and Wong, see "Director
Compensation" on page 47 of this prospectus.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership
of our common stock as of September 30, 1999 by the following individuals or
groups:
. each person or entity who . each of our directors
beneficially owns more
than 5% of our outstanding
common stock
. all directors and executive
officers as a group
. each of the named . each selling stockholder
executive officers
Except as otherwise noted the address for each holder of more than 5% of our
common stock is c/o NetIQ Corporation, 5410 Betsy Ross Drive, Santa Clara,
California 95054. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock held by them.
Percentage ownership is based on 15,386,238 shares of common stock outstanding
as of September 30, 1999 , and 16,886,238 shares immediately following the
completion of this offering. Shares of common stock subject to options that are
currently exercisable or exercisable within 60 days of September 30, 1999 are
treated as outstanding and to be beneficially owned by the person holding the
options for the purpose of computing the percentage ownership of the person and
are listed below under the "Number of Shares Underlying Options" column below,
but these options are not treated as outstanding for the purpose of computing
the percentage ownership of any other person.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior to Owned After
Offering Shares being Offering
----------------- sold by -----------------
Name and Address of Number of Selling Number of
Beneficial Owner Shares Percent Stockholders Shares Percent
- ------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
5% Stockholders:
Wongfratris Investment 1,083,332
Company(1).................. 7.0% -- 1,083,332 6.4%
51 Jordan Place
Palo Alto, CA 94303
Sen-Tien Lee................. 999,999 6.5% 500,000 499,999 3.0%
29 Alley 18, Lane 325
Chien Kung Road
Taipei, Taiwan
R.O.C
InveStar Burgeon Venture 788,888
Capital(2).................. 5.1% 48,888 740,000% 4.4%
1737 North First Street
Suite 650
San Jose, CA 25112
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior to Owned After
Offering Shares Being Offering
----------------- Sold by -----------------
Name and Address of Number of Selling Number of
Beneficial Owner Shares Percent Stockholders Shares Percent
- ------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Current Named Executive
Officers and Directors:
Ching-Fa Hwang (3)........... 1,949,997 12.6% 193,000 1,756,997 10.4%
Thomas R. Kemp (4)........... 209,098 1.4% 15,000 194,098 1.1
Glenn S. Winokur (5)......... 120,623 * 13,100 107,523 *
Herbert Chang (6)............ 788,888 5.1% 48,888 740,000 4.4
Her-Daw Che (7).............. 1,108,330 7.2% 46,846 1,061,484 6.3
Louis C. Cole (8)............ 12,500 * -- 12,500 *
Alan W. Kaufman (9).......... 37,498 * 6,666 30,832 *
Ying-Hon Wong (10)........... 1,083,332 7.0% -- 1,083,332 6.4
All directors and executive
officers as a group
(9 persons)(11)............. 5,310,266 33.9% 323,500 4,986,766 29.0%
Former Named Executive
Officers
Stephen M. Kendall (12)...... 45,832 * -- 45,832 *%
Other Selling Stockholders
Direct International Ltd.
(13) ....................... 733,333 4.7% 146,666 586,667 3.4%
Golden Ventures Capital (14)
............................ 399,999 2.6% 40,000 359,999 2.1
Jack Russo (15).............. 370,977 2.4% 75,000 295,977 1.7
Compuware Corporation........ 280,025 1.8% 280,025 -- *
Ken Prayoon Cheng (16)....... 203,579 1.3% 18,000 185,579 1.1
Yi-Jang Yang & Ru-Wen Lin.... 200,000 1.3% 30,000 170,000 1.0
Chiuch Chin Chu Hsu.......... 199,999 1.3% 30,000 169,999 1.0
George & Teresa Kuo.......... 199,999 1.3% 30,000 169,999 1.0
Russo & Hale, LLP (17)....... 178,725 1.1% 80,983 97,742 *
Chen Family Trust dtd
1/15/93..................... 166,666 1.1% 100,000 66,666 *
Concord Venture Capital
Company, Ltd. (18).......... 166,666 1.1% 42,000 124,666 *
Ching-Chou Lin............... 166,666 1.1% 80,000 86,666 *
Chii-Jau Yeh................. 166,666 1.1% 40,666 126,000 *
Liang-Tsai Lee............... 116,666 * 16,666 100,000 *
Peter J.H. Chen.............. 106,666 * 25,000 81,666 *
Chen-Fu Hung................. 99,999 * 39,999 60,000 *
Linda Show Sun............... 83,333 * 10,000 73,333 *
Tsai Family Trust............ 83,333 * 25,000 58,333 *
Yu T. & Cindy Wang........... 83,333 * 20,000 63,333 *
Other selling stockholders(5
persons)(19)................ 132,539 * 46,495 86,044 *%
</TABLE>
- ---------------------
* less than 1%
(1) The general partners of Wongfratris Investment Company include Mr. Wong,
a member of our board of directors, Y. Wood Wong and Y. Kuen Wong.
(2) The general partners of InveStar Burgeon Capital include Mr. Chang, a
member of our board of directors, and Kenneth Tai. Share figure includes
122,222 shares of common stock issuable upon exercise of outstanding
options which are presently exercisable or will become exercisable within
60 days of September 30, 1999. See "Management--Director Compensation" on
page 47 of this prospectus for a more detailed description of the option
granted Mr. Chang.
(3) Includes 33,332 shares held by Mr. Hwang's children and 399,999 shares
held by Mr. Hwang and his wife in joint tenancy. Share figure includes
50,000 shares of common stock issuable upon exercise of outstanding
options which are presently exercisable or will become exercisable within
60 days of September 30, 1999. Selling share figure includes 3,000 shares
to be sold by one of Mr. Hwang's children.
(4) Includes 13,124 shares issuable upon exercise of stock options exercisable
within 60 days of September 30, 1999.
58
<PAGE>
(5) Includes 90,208 held by the Glenn S. Winokur Living Trust dated July 29,
1999, of which Mr. Winokur is the trustee. Share figure includes 8,124
shares of common stock issuable upon exercise of outstanding options which
are presently exercisable or will become exercisable within 60 days of
September 30, 1999.
(6) Includes shares and options held by InveStar Burgeon Venture Capital. Mr.
Chang is the president of InveStar Capital, Inc., the investment manager
of InveStar Burgeon Venture Capital, Inc. Share figure includes 122,222
shares of common stock issuable upon exercise of outstanding options which
are presently exercisable or will become exercisable within 60 days of
September 30, 1999. Mr. Chang disclaims beneficial ownership of the shares
held by InveStar Burgeon Venture Capital. Selling share figure includes
12,222 shares to be sold by Mr. Chang. See "Management--Director
Compensation" on page 47 of this prospectus for a more detailed
description of the option granted Mr. Chang.
(7) Includes 13,333 shares held by Austin Che, Mr. Che's son, 13,333 shares
held by Joyce Che, Mr. Che's daughter and 206,666 shares held by the Che
Family Trust. Share figure includes 41,665 shares of common stock issuable
upon exercise of outstanding options which are presently exercisable or
will become exercisable within 60 days of September 30, 1999.
(8) Share figure includes 12,500 shares of common stock issuable upon exercise
of outstanding options which are presently exercisable or will become
exercisable within 60 days of September 30, 1999.
(9) Share figure includes 37,498 shares of common stock issuable upon exercise
of outstanding options which are presently exercisable or will become
exercisable within 60 days of September 30, 1999.
(10) Includes shares held by Wongfratris Company of which Mr. Wong is a general
partner. Mr. Wong disclaims beneficial ownership of the shares held by
Wongfratris Company, except to the extent of his pecuniary interest as a
general partner. Certain of these shares are subject to a repurchase
option in favor of NetIQ should Mr. Wong's membership on the board of
directors terminate.
(11) Share figure includes 285,133 shares of common stock issuable upon
exercise of outstanding options which are presently exercisable or will
become exercisable within 60 days of September 30, 1999.
(12) Mr. Kendall resigned as Vice President, Asia Pacific in October 1999.
Share figure includes 6,042 shares of common stock issuable upon exercise
of outstanding options.
(13) Includes 133,333 shares issuable upon exercise of stock options
exercisable within 60 days of September 30, 1999 held by C.S. Ho, a
Director of Direct International Limited and one of our consultants.
Selling share figure includes 26,666 shares to be sold by Mr. Ho.
(14) Includes 133,333 shares hold by Cosmos Venture Capital Investments Corp.
and Legend Venture Capital Investment Company.
(15) Includes 37,083 shares held by Florence Ventures LLC and 178,725 shares
issuable upon exercise of stock options exercisable within 60 days of
September 30, 1999 held by Russo & Hale LLP.
(16) Includes 6,666 shares held by Mr. Cheng's children and 3,333 shares
issuable upon exercise of stock options exercisable within 60 days of
September 30, 1999.
(17) Includes 178,725 shares issuable upon exercise of stock options
exercisable within 60 days of September 30, 1999.
(18) Includes 58,333 shares held by Concord II Venture Capital Co., Ltd and
25,000 shares held by Concord III Venture Capital Co., Ltd.
(19) Includes 7,541 shares issuable upon exercise of stock options exercisable
within 60 days of September 30, 1999.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 100,000,000 shares of common stock, $0.001 par
value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value.
Immediately after this offering, based on shares and options outstanding as of
September 30, 1999, we estimate there will be approximately 16,886,238 shares
of common stock outstanding, 2,483,961 shares of common stock will be issuable
upon exercise of outstanding options and no shares of preferred stock will be
issued and outstanding.
Our certificate of incorporation and bylaws contain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of the board of directors and which may have the effect of
delaying, deferring, or preventing a future takeover or change in control of
NetIQ unless such takeover or change in control is approved by the board of
directors.
Common Stock
Holders of common stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Holders of common stock do not have
cumulative voting rights, and, therefore, holders of a majority of the shares
voting for the election of directors can elect all of the directors. If this
occurs, the holders of the remaining shares will not be able to elect any
directors.
Holders of the common stock are entitled to receive such dividends as may be
declared from time to time by the board of directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between NetIQ and our debtholders. We have never declared or paid cash
dividends on our capital stock, expect to retain future earnings, if any, for
use in the operation and expansion of its business, and do not anticipate
paying any cash dividends in the foreseeable future. In the event of
liquidation, dissolution or winding up of NetIQ, the holders of common stock
are entitled to share ratably in all assets legally available for distribution
after payment of all debts and other liabilities and subject to the prior
rights of any holders of preferred stock then outstanding. Holders of common
stock have no preemptive or other subscription or conversion rights. There are
no redemption or sinking fund provisions applicable to the common stock.
Preferred Stock
We are authorized to issue 5,000,000 shares of undesignated preferred stock.
The board of directors has the authority to issue the preferred stock in one or
more series and to fix the price, rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting a series or the designation
of such series, without any further vote or action by our stockholders. The
issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of delaying, deferring or preventing a change in control of NetIQ
without further action by the stockholders and may adversely affect the market
price of, and the voting and other rights of, the holders of common stock. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others. We have no current plans to issue any shares of
preferred stock.
Registration Rights
Following this offering the holders of approximately 6,091,484 shares of
common stock will be entitled to rights with respect to registration of such
shares under the Securities Act. These rights are provided under the terms of
an agreement between NetIQ and those stockholders. Beginning January 27, 2000,
six months following the completion of our initial public offering, holders of
then outstanding registrable securities may require on up to two occasions that
we register their shares for public resale. We are obligated to register these
shares only if the outstanding registrable securities have an anticipated
public offering price of at least
60
<PAGE>
$5,000,000. Also, holders of registrable securities who hold more than two
percent of our outstanding common stock on a fully diluted basis, may require
on two separate occasions in any 12 month period that shares for public resale
on Form S-3 or similar short-form registration if the value of the securities
to be registered is at least $1,000,000. Furthermore, in the event we determine
to register any of our securities under the Securities Act, either of our own
account or for the account of other security holders exercising their
registration rights, the holders of registrable securities are entitled to
include their shares of common stock in the registration. The registration
rights are subject to conditions and limitations, among them the right of the
underwriter to limit the number of shares included in the registration which
may reduce the number of shares proposed to be registered in view of market
conditions. All expenses in connection with any registration, other than
underwriting discounts and commissions, will be borne by us. All registration
rights will terminate in July 2004. The selling stockholders are exercising
their registration rights with respect to all of the shares being sold by them
in this offering.
Antitakeover Effects of Some Provisions of Certificate of Incorporation and
Bylaws
The provisions of our certificate of incorporation and bylaws could make the
following actions or transactions more difficult:
. acquisition of NetIQ by means of a tender offer;
. acquisition of NetIQ by means of a proxy contest or otherwise; or
. the removal of our incumbent officers and directors.
These provisions, summarized below, are generally expected to discourage
coercive takeover practices and inadequate takeover bids. These provisions are
also designed to encourage persons seeking to acquire control of NetIQ to first
negotiate with our board. We believe that the benefits of increased protection
resulting from our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure NetIQ outweigh the
disadvantages of discouraging these proposals because we believe that the
negotiation of these proposals could result in an improvement of their terms.
See "Risk Factors--Provisions in our charter documents... " on page 14 of this
prospectus for a further discussion of these charter provisions.
Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term,
one class being elected each year by our stockholders. See "Management--
Executive Officers and Directors--Classified Board" on page 46 of this
prospectus for a further discussion of the election and terms of the directors.
This system of electing and removing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
NetIQ because it generally makes it more difficult for stockholders to replace
a majority of the directors.
Stockholder Meetings. Under our bylaws, only the board of directors, the
chairman of the board, the president, the chief executive officer and the
holders of at least a majority of our common stock then outstanding may call
special meetings of stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation and bylaws eliminate the right of stockholders to act by written
consent without a meeting.
Elimination of Cumulative Voting. Our certificate of incorporation and bylaws
do not provide for cumulative voting in the election of directors.
61
<PAGE>
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to change control of NetIQ. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of NetIQ.
Amendment of Charter Provisions. The amendment of the above provisions
relating to the election and removal of directors, stockholder meetings and the
elimination of stockholder action by written consent requires approval by
holder of at least 66 2/3% of the outstanding common stock.
See "Risk Factors--Provisions in our charter documents and in Delaware
law..." on page 14 of this prospectus for a further discussion of the charter
documents.
Effect of Delaware Antitakeover Statute
We are subject to Section 203 of the Delaware General Corporation Law which
regulates corporate acquisitions. Section 203 generally prevents Delaware
corporations, including those whose securities are listed for trading on the
Nasdaq National Market, from engaging in a business combination with any
interested stockholder for three years following the date that such stockholder
became an interested stockholder. A business combination includes, among other
things, a merger or consolidation involving NetIQ and the interested
stockholder and the sale of more than 10% of our assets. Generally, an
interested stockholder is any entity or person beneficially owning 15% or more
of our outstanding voting stock and any entity or person affiliated with or
controlling or controlled by such entity or person. A Delaware corporation may
"opt out" of the Section with an express provision in its original certificate
of incorporation or an express provision in its certificate of incorporation or
bylaws resulting from amendments approved by the holders of at least a majority
of the corporation's outstanding voting shares. We have not "opted out" of the
Section. See "Risk Factors--Provisions in our charter documents and in Delaware
law..." on page 14 of this prospectus for a further discussion of antitakeover
provisions of Delaware law.
Nasdaq National Market Listing
Our shares are listed on the Nasdaq Stock Market's National Market under the
symbol "NTIQ."
Transfer Agent
The transfer agent and registrar for the common stock is BankBoston, N.A. The
transfer agent's address is 150 Rayall St. Canton, Massachusetts 02021 and
their telephone number is (781) 575-3120.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, based upon shares outstanding at September 30, 1999, we
will have outstanding 16,886,238 shares of common stock assuming no exercise of
the underwriters' over-allotment option. Excluding the 1,500,000 shares of
common stock offered by NetIQ in this offering and assuming no exercise of the
underwriters' over-allotment option, as of the effective date of the
registration statement, there will be 15,386,238 shares of common stock
outstanding, 10,065,108 of which are "restricted" shares under the Securities
Act and are not being sold in the offering.
All restricted shares are subject to lock-up agreements with the underwriters
entered into in connection with our initial public offering under which the
holders of the restricted shares have agreed not to sell, pledge or otherwise
dispose of their shares for a period of 180 days after the effective date of
the initial public offering, or January 25, 2000. In addition, in connection
with this offering all executive officers and directors as well as certain
significant stockholders, entered into lock-up agreements with the underwriters
under which such persons have agreed not to sell, pledge or otherwise dispose
of their shares for a period of 90 days after the date of this prospectus.
Credit Suisse First Boston Corporation may release the shares subject to any of
these lock-up agreements in whole or in part at any time with or without
notice. However, Credit Suisse First Boston Corporation has no current plans to
do so. The following table indicates approximately when the 10,065,108 shares
of our common stock that are restricted and are not being sold in the offering
but which will be outstanding at the time the offering is complete will be
eligible for sale into the public market:
<TABLE>
<CAPTION>
Eligibility of Shares for Sale in Public Market
-----------------------------------------------
----------------------------------------------------------------------------
<S> <C>
At effective date of this offering............................ 0
----------------------------------------------------------------------------
January 25, 2000 (180 days after initial public offering
effective date).............................................. 2,477,074
----------------------------------------------------------------------------
90 days after effective date of this offering................. 10,038,442
</TABLE>
Many of the restricted shares that will become available for sale in the
public market beginning 90 days after the effective date will be subject to
volume and other resale restrictions pursuant to Rule 144 because the holders
are affiliates of NetIQ. In general, under Rule 144, an affiliate of NetIQ, or
person who has beneficially owned restricted shares for at least one year, will
be entitled to sell in any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of the common stock,
approximately 168,862 shares immediately after this offering, or the average
weekly trading volume during the four calendar weeks preceding the date on
which notice of the sale is filed with the SEC. Sales under Rule 144 are
subject to requirements relating to manner of sale, notice and availability of
current public information about NetIQ. A person who is not deemed to have been
an affiliate of ours at any time during the 90 days immediately preceding the
sale and who has beneficially owned his or her shares for at least two years is
entitled to sell his or her shares under Rule 144(k) without regard to the
limitations described above.
As of September 30, 1999, 5,333,332 shares were reserved for issuance under
the stock plan, of which options to purchase 2,483,961 shares were then
outstanding. Based on options outstanding as of September 30, 1999, beginning
90 days after the effective date approximately 993,996 shares issuable upon the
exercise of vested options will become eligible for sale and 36,665 shares
issued under restricted stock agreements under the stock option plan will no
longer be subject to a repurchase option and will be eligible for resale.
63
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we and the selling stockholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Hambrecht & Quist LLC, BancBoston Robertson Stephens Inc.,
SoundView Technology Group, Inc. and C.E. Unterberg, Towbin are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation............................
Hambrecht & Quist LLC.............................................
BancBoston Robertson Stephens Inc.................................
SoundView Technology Group, Inc. .................................
C.E. Unterberg, Towbin............................................
---------
Total........................................................... 3,500,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of common stock offered in this offering, if any are
purchased, other than those shares covered by the over-allotment option
described below. The underwriting agreement also provides that if an
underwriter defaults the purchase commitments of non-defaulting underwriters
may be increased or the offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro rata
basis up to 525,000 additional shares of common stock at the offering price
less the underwriting discounts and commissions. This option may be exercised
only to cover over-allotments of common stock.
The underwriters propose to offer the common stock initially at the public
offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $ per share. The underwriters and
the selling group members may allow a discount of $ per share on sales to
other broker/dealers. After the offering, the public offering price and
concession and discount to broker/dealers may be changed by the
representatives.
The following table summarizes the discounts and commissions and estimated
expenses that we and the selling stockholders will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
over-allotment over-allotment over-allotment over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
Underwriting discounts
and commissions paid by
selling stockholders... $ $ $ $
</TABLE>
We, our executive officers, directors, the selling stockholders and certain
of our other existing stockholders have agreed that we and they will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the SEC a registration statement under the Securities Act relating
to, any additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing,
64
<PAGE>
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 90 days after the date of this prospectus, except in our case for
grants of employee stock options under the terms of a plan in effect on the
date hereof, issuances of securities upon the exercise of employee stock
options outstanding on the date hereof or the exercise of any other stock
options outstanding on the date hereof. In addition, in connection with our
initial public offering in July 1999, holders of "restricted securities"
entered into lock-up agreements with the underwriters pursuant to which they
have agreed not to offer, sell, contract, to sell, announce their intention to
sell, pledge or otherwise dispose of, directly or indirectly, any shares of our
common stock without the consent of Credit Suisse First Boston Corporation
until January 25, 2000.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or to contribute to payments
which the underwriters may be required to make in respect thereof.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Securities Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase shares of the common
stock so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
. ""Passive'' market making allows market makers in the securities who are
underwriters or prospective underwriters to, subject to certain
limitations, make bids for purchases of the securities until the time, if
any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
65
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or under a
discretionary exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice prior to any
resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase confirmation
will be deemed to represent to us and the dealer from whom the purchase
confirmation is received that (1) such purchaser is entitled under applicable
provincial securities laws to purchase such common stock without the benefit of
a prospectus qualified under the such securities laws, (2) where required by
law, that such purchaser is purchasing as principal and not as agent, and (3)
such purchaser has reviewed the text above the text under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein and the selling shareholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. Such report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in our
common stock in their particular circumstances and with respect to the
eligibility of our common stock for investment by the purchaser under relevant
Canadian legislation.
66
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for NetIQ
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the underwriters by
Morrison & Foerster LLP, Palo Alto, California. As of the date of this
prospectus, WS Investment Company 95B, an investment partnership composed of
current and former members of and persons associated with Wilson Sonsini
Goodrich & Rosati, Professional Corporation beneficially own a total of 41,666
shares of NetIQ's common stock.
EXPERTS
The consolidated financial statements as of June 30, 1998 and 1999, and for
each of the years in the three year period ended June 30, 1999, included in
this prospectus and the related financial statement schedule included elsewhere
in the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in auditing and
accounting.
WHERE TO FIND OTHER NETIQ DOCUMENTS
We have filed a registration statement on Form S-1 with the SEC with respect
to the common stock offered hereby. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are
part of the registration statement. For further information with respect to
NetIQ and the common stock, reference is made to the registration statement and
its exhibits and schedules. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from the SEC's Web site at http://www.sec.gov.
We are subject to the information and periodic reporting requirements of the
Securities Exchange Act and, in accordance with this law, file periodic
reports, proxy statements and other information with the SEC. These periodic
reports, proxy statements and other information are available for inspection
and copying at the SEC's public reference rooms, our Web site and the Web site
of the SEC referred to above.
67
<PAGE>
NetIQ CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements for Fiscal Years Ended June 30, 1997, 1998
and 1999
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Unaudited Financial Statements for Three Months Ended September 30, 1998,
and 1999
Condensed Consolidated Balance Sheets.................................... F-18
Condensed Consolidated Statements of Operations and Comprehensive
Income.................................................................. F-19
Condensed Consolidated Statements of Cash Flows.......................... F-20
Notes to Condensed Consolidated Financial Statements..................... F-21
</TABLE>
F-1
<PAGE>
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.
Deloitte & Touche LLP
San Jose, California
July 9, 1999
(August 4, 1999 as to Note 13)
F-2
<PAGE>
NetIQ CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1999
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1998 1999
------- -------
ASSETS
<S> <C> <C>
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
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
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
======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NetIQ CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1997 1998 and 1999
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
NetIQ CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1997, 1998 and 1999
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible Note
Preferred Stock Common Stock Receivable Deferred
----------------- ----------------- From Stock-based Accumulated
Shares Amount Shares Amount Stockholder Compensation Deficit Total
--------- ------- --------- ------ ----------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1996.. 4,666,656 $ 2,786 2,882,665 $ 9 $ (6) $ -- $ (909) $1,880
Issuance of Series B
preferred stock, at
$3.00 per share, net
of issuance costs of
$31................... 2,733,321 8,169 -- -- -- -- -- 8,169
Exercise of stock
options............... -- -- 144,918 9 -- -- -- 9
Deferred stock-based
compensation.......... -- -- -- 30 -- (30) -- --
Amortization of
deferred stock-based
compensation.......... -- -- -- -- -- 10 -- 10
Net loss............... -- -- -- -- -- -- (2,281) (2,281)
--------- ------- --------- ------ ---- ------- ------- ------
Balances, June 30,
1997................... 7,399,977 10,955 3,027,583 48 (6) (20) (3,190) 7,787
Exercise of stock
options............... -- -- 190,250 13 -- -- -- 13
Deferred stock-based
compensation.......... -- -- -- 1,241 -- (1,241) -- --
Amortization of
deferred stock-based
compensation.......... -- -- -- -- -- 250 -- 250
Net loss............... -- -- -- -- -- -- (3,111) (3,111)
--------- ------- --------- ------ ---- ------- ------- ------
Balances, June 30,
1998................... 7,399,977 10,955 3,217,833 1,302 (6) (1,011) (6,301) 4,939
Exercise of stock
options............... -- -- 929,325 254 -- -- -- 254
Repurchase of common
stock................. -- -- (58,331) (3) 6 -- -- 3
Issuance of stock...... -- -- 26,667 320 -- -- -- 320
Deferred stock-based
compensation.......... -- -- -- 3,036 -- (3,036) -- --
Amortization of
deferred stock-based
compensation.......... -- -- -- -- -- 1,925 -- 1,925
Net loss............... -- -- -- -- -- -- (1,642) (1,642)
--------- ------- --------- ------ ---- ------- ------- ------
Balances, June 30,
1999................... 7,399,977 $10,955 4,115,494 $4,909 $-- $(2,122) $(7,943) $5,799
========= ======= ========= ====== ==== ======= ======= ======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NetIQ CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
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
F-7
<PAGE>
NETIQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1997, 1998 and 1999
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.
F-8
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1999
----- ------
<S> <C> <C>
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
===== ======
</TABLE>
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
F-9
<PAGE>
NETIQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1997, 1998 and 1999
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:
<TABLE>
<CAPTION>
Amount (Net Aggregate
Shares Shares Price Per of Issuance Liquidation
Designated Outstanding Share Costs) Preference
---------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
========= ========= =========== ===========
</TABLE>
Significant terms of the convertible preferred stock are as follows:
. 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.
. Each share has the same voting rights as the number of shares of common
stock into which it is convertible.
. 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.
F-10
<PAGE>
NETIQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1997, 1998 and 1999
. 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.
F-11
<PAGE>
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.
<TABLE>
<S> <C>
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
==========
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted-
Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
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
========= =====
</TABLE>
At June 30, 1999, 153,169 shares were available under the Plan for future
grant.
F-12
<PAGE>
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:
<TABLE>
<CAPTION>
Options Outstanding Options Vested
------------------------------------- ------------------
Weighted-Average Weighted Weighted
Number of Remaining Average Vested at Average
Range of Options Contractual Life Exercise June 30, Exercise
Exercise Prices Outstanding (Years) Price 1999 Price
--------------- ----------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$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
========= ==== ===== ======= =====
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
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:
<CAPTION>
Year Ended June 30,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
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)
</TABLE>
F-13
<PAGE>
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).
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
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)
======= ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
Year Ended June
30,
------------------
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
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
===== ===== ======
</TABLE>
7. Income Taxes
The Company's deferred income tax assets at June 30 are comprised of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
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
Accruals deductible in different periods............... (373) 231
Other.................................................. (173) (91)
------- -------
2,491 3,142
Valuation allowance...................................... (2,491) (3,142)
------- -------
Total.................................................... $ -- $ --
======= =======
</TABLE>
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.
F-14
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended June 30
---------------------
1997 1998 1999
----- ------- -----
<S> <C> <C> <C>
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)
----- ------- -----
$ -- $ -- $ --
===== ======= =====
</TABLE>
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.
F-15
<PAGE>
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).
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1997 1998 1999
---- ------ -------
<S> <C> <C> <C>
Total revenue:
United States......................................... $388 $6,342 $17,250
Foreign............................................... -- 728 4,319
---- ------ -------
Total revenue*...................................... $388 $7,070 $21,569
==== ====== =======
Long-lived assets:
United States......................................... $294 $ 528 $ 1,390
Foreign............................................... -- 97 171
---- ------ -------
Total long-lived assets............................. $294 $ 625 $ 1,561
==== ====== =======
</TABLE>
- --------
* 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
F-16
<PAGE>
NETIQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1997, 1998 and 1999
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.
F-17
<PAGE>
NetIQ CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1999
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June
30, September 30,
1999(1) 1999
------- -------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents............................. $ 9,634 $ 52,281
Accounts receivable, net of allowance for
uncollectible accounts............................... 6,395 4,516
Prepaid expenses...................................... 764 817
------- -----------
Total current assets................................ 16,793 57,614
Property and equipment, net............................. 1,465 1,509
Other assets............................................ 96 285
------- -----------
Total assets........................................ $18,354 $ 59,408
======= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt....................................... $ 5,144 $ --
Accounts payable...................................... 326 1,470
Accrued compensation and related benefits............. 1,100 1,245
Other liabilities..................................... 1,839 1,510
Deferred revenue...................................... 3,941 4,605
------- -----------
Total current liabilities........................... 12,350 8,830
Long-term debt.......................................... 205 --
------- -----------
Total liabilities................................... 12,555 8,830
------- -----------
Stockholders' equity:
Convertible preferred stock--$0.001: 5,000,000 shares
authorized, zero outstanding at September 30, 1999;
11,100,000 shares authorized, 7,399,977 outstanding
at June 30, 1999 .................................... 10,955 --
Common stock--$0.001, 100,000,000 shares authorized,
15,386,238 shares outstanding at September 30, 1999;
30,000,000 shares authorized, 4,115,494 outstanding
at June 30, 1999..................................... 4,909 59,940
Deferred stock-based compensation..................... (2,122) (1,864)
Accumulated deficit................................... (7,943) (7,471)
Accumulated other comprehensive loss.................. -- (27)
------- -----------
Total stockholders' equity.......................... 5,799 50,578
------- -----------
Total liabilities and stockholders' equity.......... $18,354 $ 59,408
======= ===========
</TABLE>
- --------
(1) Derived from audited consolidated financial statements.
See notes to condensed consolidated financial statements.
F-18
<PAGE>
NetIQ CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
Three Months Ended September 30, 1998 and 1999
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------
1998 1999
--------- ---------
<S> <C> <C>
Software license revenue................................. $ 3,640 $ 6,221
Service revenue.......................................... 450 1,365
-------- ---------
Total revenue.......................................... 4,090 7,586
-------- ---------
Cost of software license revenue......................... 87 156
Cost of service revenue.................................. 176 419
-------- ---------
Total cost of revenue.................................. 263 575
-------- ---------
Gross profit............................................. 3,827 7,011
Operating expenses:
Sales and marketing.................................... 2,125 4,124
Research and development............................... 884 1,709
General and administrative............................. 523 754
Stock-based compensation............................... 364 178
-------- ---------
Total operating expenses............................... 3,896 6,765
-------- ---------
Income (loss) from operations............................ (69) 246
Interest income (expense):
Interest income........................................ 19 382
Interest expense....................................... -- (34)
-------- ---------
Interest income, net................................... 19 348
-------- ---------
Income (loss) before income taxes........................ (50) 594
Income taxes............................................. -- 122
-------- ---------
Net income (loss)........................................ (50) 472
-------- ---------
Other comprehensive income (loss):
Foreign currency translation adjustments............... -- (27)
-------- ---------
Comprehensive income (loss).............................. $ (50) $ 445
======== =========
Basic net income (loss) per share........................ $ (0.02) $ 0.04
Shares used to compute basic net income (loss) per
share................................................... 3,070 11,696
Diluted net income (loss) per share...................... $ (0.02) $ 0.03
Shares used to compute diluted net income (loss) per
share................................................... 3,070 15,785
</TABLE>
See notes to condensed consolidated financial statements.
F-19
<PAGE>
NetIQ CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1998 and 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ (50) $ 472
Adjustments to reconcile net income (loss) to net cash
provided
by operating activities:
Depreciation.......................................... 61 167
Stock-based compensation.............................. 364 178
Gain on sale of property and equipment................ 8 --
Changes in:
Accounts receivable................................. (411) 1,891
Prepaid expenses.................................... 101 (75)
Accounts payable.................................... 64 1,134
Accrued compensation and related benefits........... (322) 165
Other liabilities................................... 105 25
Deferred revenue.................................... 316 658
-------- ---------
Net cash provided by operating activities........... 236 4,615
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment..................... (430) (182)
Proceeds from sales of property and equipment........... 11 --
Other................................................... (21) (193)
-------- ---------
Net cash used in investing activities............... (440) (375)
-------- ---------
Cash flows from financing activities:
Repayments on short-term debt........................... -- (1,724)
Repayments on long-term debt............................ -- (349)
Proceeds from sale of common stock...................... 31 40,515
-------- ---------
Net cash provided by financing activities........... 31 38,442
-------- ---------
Effect of exchange rate changes........................... -- (35)
-------- ---------
Net increase (decrease) in cash and cash equivalents...... (173) 42,647
Cash and cash equivalents, beginning of period............ 3,358 9,634
-------- ---------
Cash and cash equivalents, end of period.................. $ 3,185 $52,281
======== =========
Noncash investing and financing activities:
Conversion of preferred stock to common stock........... $ -- $10,955
Supplemental disclosure of cash flow information-cash paid
for:
Interest................................................ $ -- $ 125
Income taxes............................................ $ -- $ 101
</TABLE>
See notes to condensed consolidated financial statements.
F-20
<PAGE>
NETIQ CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended September 30, 1999 and 1998
(Unaudited)
1. Basis of Presentation
Interim Financial Information--The accompanying unaudited condensed
consolidated financial statements of NetIQ Corporation (the Company) have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the rules and regulations of the Securities
and Exchange Commission for interim financial statements. In the opinion of
management, the condensed consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) that management
considers necessary for a fair presentation of its financial position,
operating results and cash flows for the interim periods presented. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Operating results and cash flows for interim periods are not
necessarily indicative of results for the entire year.
These interim financial statements and notes should be read in conjunction
with the audited consolidated financial statements and notes thereto included
elsewhere in this prospectus.
2. 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. The income tax provision for the period ended September
30, 1999 reflects the expected tax expense based on the projected effective tax
rate for fiscal year 2000.
3. Foreign Currency Translation
Prior to July 1, 1999, the functional currency of our foreign subsidiaries
was the U.S. dollar. For those subsidiaries whose books and records were not
maintained in the functional currency, all monetary assets and liabilities were
remeasured at the current exchange rate at the end of each period reported,
nonmonetary assets and liabilities were remeasured at historical exchange rates
and revenues and expenses were remeasured at average exchange rates in effect
during the period. Transaction gains and losses, which are included in general
and administrative expenses in the accompanying condensed consolidated
statements of operations, have not been significant.
Effective July 1, 1999 the Company determined that the functional currencies
of the foreign subsidiaries changed from the U.S. dollar to the local
currencies. Accordingly, starting July 1, 1999, assets and liabilities of the
foreign subsidiaries are translated to U.S. dollars at the exchange rates in
effect as of the balance sheet date and results of operations for each
subsidiary are translated using average rates in effect for the period
presented. Translation adjustments are included in stockholders' equity as
accumulated other comprehensive loss and as part of our comprehensive income or
loss. The effect of the change in functional currencies did not have a material
impact on our consolidated financial position, results of operations or cash
flows.
4. Net Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income by the
number of weighted average common shares outstanding. Diluted net income per
share reflects potential dilution from preferred shares and outstanding stock
options using the treasury stock method.
F-21
<PAGE>
NETIQ CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended September 30, 1999 and 1998
(Unaudited)
The following is a reconciliation of weighted average shares used in
computing net income (loss) per share, for the three-months ended September 30,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------
1998 1999
--------- ---------
<S> <C> <C>
Weighted average common shares outstanding............ 3,363 11,721
Weighted average common shares outstanding subject to
repurchase........................................... (293) (25)
-------- ---------
Shares used in computing basic net income (loss) per
share................................................ 3,070 11,696
======== =========
Weighted average common shares outstanding............ 11,721
Weighted average preferred shares outstanding......... 2,333
Dilutive effect of options outstanding................ 1,722
Dilutive effect of warrants outstanding............... 9
---------
Shares used in computing diluted net income (loss) per
share................................................ 15,785
=========
</TABLE>
The Company had a net loss for the three months ended September 30, 1998,
therefore shares used in computing diluted net loss per share are equal to the
quantity used for computing basic net loss per share.
5. Initial Public Offering
In July 1999, the Company sold 3,000,000 shares of Common Stock in an
underwritten public offering and in August 1999 sold an additional 450,000
shares through the exercise of the underwriters' over-allotment option for net
proceeds of approximately $40.4 million. Simultaneously with the closing of the
public offering, all 7,399,977 shares of the Company's preferred stock were
converted to common stock on a share for share basis. Additionally, Compuware
Corporation exercised its warrant in full and purchased 280,025 shares of
Common Stock. Proceeds from the warrant and cash of $1.8 million were used to
pay off the $5.0 million note plus accrued interest due to Compuware and cash
of $349,000 was used to pay off the equipment note to a financial institution.
F-22
<PAGE>
[Descriptive text accompanying NetIQ logo]
NetIQ is a leading provider of applications management software that enables
businesses to optimize the performance and availability of their Windows NT-
based systems and critical business applications including Internet-based
applications. The NetIQ AppManager Suite enables organizations to centrally
manage the performance of their highly complex Windows NT environments, helps
ensure availability through automated monitoring, correction and reporting
features and helps lower the total cost of ownership.
<PAGE>
[NetIQ LOGO APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by NetIQ in connection with the
sale of Common Stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................... $ 50,773
NASD filing fee.................................................... 18,763
Nasdaq National Market listing fee................................. 17,500
Printing and engraving costs....................................... 150,000
Legal fees and expenses............................................ 100,000
Accounting fees and expenses....................................... 75,000
Blue Sky fees and expenses......................................... 10,000
Transfer Agent and Registrar fees.................................. 15,000
Miscellaneous expenses............................................. 12,964
--------
Total............................................................ $450,000
========
</TABLE>
ITEM 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article X of our Restated Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law.
Article VI of our Bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of NetIQ if such person acted in
good faith and in a manner reasonably believed to be in and not opposed to the
best interest of NetIQ, and, with respect to any criminal action or proceeding,
the indemnified party had no reason to believe his or her conduct was unlawful.
We have entered into indemnification agreements with our directors and
executive officers, in addition to indemnification provided for in our Bylaws,
and intends to enter into indemnification agreements with any new directors and
executive officers in the future.
ITEM 15. Recent Sales of Unregistered Securities
Since incorporation in June 1995, we have issued unregistered securities to a
limited number of persons, as described below. None of these transactions
involved any underwriters, underwriting discounts or commissions, or any public
offering, and we believe that each transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof,
Regulation D promulgated thereunder or Rule 701 pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such
Rule 701. The recipients of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments
issued in such transactions. All recipients had adequate access, through their
relationships with NetIQ, to information about NetIQ.
1. In July 1995, NetIQ issued and sold 2,766,665 shares of common stock to
founders and directors at a purchase price per share of $.00075. These
transactions were exempt from the registration requirements of the
Securities Act by virtue of Rule 701.
II-1
<PAGE>
2. In December 1995 and April 1996, NetIQ issued and sold a total of
116,000 shares of common stock to an employee and to a director at a
purchase price of $0.06. These transactions were exempt from the
registration requirements of the Securities Act by virtue of Section
4(2).
3. Pursuant to NetIQ's 1995 Stock Option Plan, from inception to March 31,
1999, we issued and sold an aggregate of 1,119,995 shares of common
stock to certain of its employees, officers, directors and consultants.
These transactions were exempt from the registration requirements of the
Securities Act by virtue of Rule 701.
4. On September 14, 1995, we issued and sold 4,666,656 shares of Series A
Preferred Stock to a total of 28 investors for an aggregate purchase
price of $2,800,000. These transactions were exempt from the
registration requirements of the Securities Act by virtue of Section
4(2) and Regulation D.
5. On May 14, 1997 we issued and sold 2,733,321 shares of Series B
Preferred Stock to a total of 32 investors for an aggregate purchase
price of $8,200,000. These transactions were exempt from the
registration requirements of the Securities Act by virtue of Section
4(2) and Regulation D.
6. On March 10, 1999, we issued to one party a warrant to purchase that
number of shares of Common Stock equal to 2% of the outstanding voting
stock of NetIQ on a fully diluted basis as of the date of exercise at an
exercise price of 90% of the price to public in an initial public
offering undertaken by us. This transaction was exempt from the
registration requirements of the Securities Act by virtue of Section
4(2).
7. On May 28, 1999, we issued and sold to one party 26,666 shares of common
stock in connection with a software development agreement. These
transactions were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2).
8. On August 4, 1999, the date our initial public offering closed, we sold
an aggregate of 280,025 shares of common stock upon the exercise of the
warrant described in paragraph 6 above for an aggregate purchase price
of $3,276,293. This transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2).
II-2
<PAGE>
ITEM 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <C> <S>
1.1 (a) Form of Underwriting Agreement
3.1A (b) Certificate of Incorporation of NetIQ
3.1B (b) Form of Restated Certificate of Incorporation of NetIQ to be in
effect after the closing of the offering made under this
Registration Statement
3.2 (b) Bylaws of NetIQ
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
5.1 (c) Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
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 1995
Stock Plan
10.3C (b) Form of Director Option Agreement under 1995 the 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.
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
21.1 (b) List of subsidiaries
23.1 (a) Independent Auditors' Consent
23.3 (c) Form of Consent of Counsel (included in Exhibit 5.1)
24.1 (c) Power of Attorney
</TABLE>
- ---------------------
+ Confidential treatment has been previously granted for portions of these
agreements.
(a) Filed herewith.
(b) Incorporated by reference to exhibits filed with the registrant's
Registration Statement on Form S-1 (No. 333-79373) which was declared
effective on July 29, 1999.
(c)Previously filed.
(b) Financial Statement Schedules
(1) Schedule II - Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-3
<PAGE>
ITEM 17. Undertakings
The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this registration statement or otherwise, we have been advised that in the
opinion of the SEC such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered hereunder, we will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, NetIQ Corporation has
duly caused this Amendment No. 1 to the Registration Statement on Form S-1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Santa Clara, State of California, on the 29th day of November, 1999.
NETIQ CORPORATION
/s/ Ching-Fa Hwang
By: _________________________________
Ching-Fa Hwang
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Ching-Fa Hwang President, Chief Executive November 29, 1999
______________________________________ Officer and Director
(Ching-Fa Hwang) (Principal Executive
Officer)
/s/ James A. Barth* Vice President, Finance November 29, 1999
______________________________________ and Chief Financial
(James A. Barth) Officer (Principal
Financial and Accounting
Officer)
/s/ Kuo-Wei Chang* Director November 29, 1999
______________________________________
(Kuo-Wei Chang)
/s/ Her-Daw Che* Vice President, November 29, 1999
______________________________________ Engineering and Director
(Her-Daw Che)
/s/ Louis Cole* Director November 29, 1999
______________________________________
(Louis Cole)
/s/ Alan W. Kaufman* Director November 29, 1999
______________________________________
(Alan W. Kaufman)
/s/ Ying-Hon Wong* Director November 29, 1999
______________________________________
(Ying-Hon Wong)
</TABLE>
/s/ Ching-Fa Hwang
*By________________________
Ching-Fa Hwang, Attorney-in-
Fact
II-5
<PAGE>
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 registration statement). Our audits also included the financial
statement schedule of the Company, listed in Item 16(b)(1). 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.
Deloitte & Touche LLP
San Jose, California
July 9, 1999
S-1
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance Charged Balance
at to cost at end
Beginning and Deductions/end of
of Period expenses of period period
--------- -------- -------------- -------
<S> <C> <C> <C> <C>
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
==== ===== === ====
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <C> <S>
1.1 (a) Form of Underwriting Agreement
3.1A (b) Certificate of Incorporation of NetIQ currently in effect
3.1B (b) Form of Restated Certificate of Incorporation of NetIQ to be in
effect after the closing of the offering made under this
Registration Statement
3.2 (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
5.1 (c) Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
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 1995
Stock Plan
10.3C (b) Form of Director Option Agreement under 1995 the 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.
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
21.1 (b) List of subsidiaries
23.1 (a) Independent Auditors' Consent
23.3 (c) Form of Consent of Counsel (included in Exhibit 5.1)
24.1 (c) Power of Attorney
</TABLE>
- ---------------------
+ Confidential treatment requested for portions of these agreements.
(a) Filed herewith.
(b) Incorporated by reference to exhibits filed with the registrant's
Registration Statement on Form S-1 (No. 333-79373) which was declared
effective on July 29, 1999.
(c) Previously filed.
<PAGE>
EXHIBIT 1.1
3,500,000 Shares
NetIQ Corporation
Common Stock, par value $0.001 per share
UNDERWRITING AGREEMENT
----------------------
December ___, 1999
Credit Suisse First Boston Corporation
Hambrecht & Quist LLC
BancBoston Robertson Stephens, Inc.
SoundView Technology Group, Inc.
C. E. Unterberg, Towbin
As Representatives of the Several Underwriters,
Eleven Madison Avenue
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. NetIQ Corporation, a Delaware corporation ("Company"),
proposes to issue and sell 1,500,000 shares of its Common Stock, $0.001 par
value, ("Securities") and the stockholders listed in Schedule A hereto ("Selling
Stockholders") propose severally to sell an aggregate of 2,000,000 outstanding
shares of the Securities (such 3,500,000 shares of Securities being hereinafter
referred to as the "Firm Securities"). The Company also proposes to issue and
sell to the Underwriters, at the option of the Underwriters, an aggregate of not
more than 525,000 additional shares ("Optional Securities") of its Securities as
set forth below. The Firm Securities and the Optional Securities are herein
collectively called the "Offered Securities". The Company and the Selling
Stockholders hereby agree with the several Underwriters named in Schedule B
hereto ("Underwriters") as follows:
2. Representations and Warranties of the Company and the Selling
Stockholders.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement (No. 333-90935) relating to the
Offered Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (A) has been
declared effective under the Securities Act of 1933 ("Act") and is not
proposed to be amended or (B) is proposed to be amended by amendment or
post-effective amendment. If such registration statement ("initial
registration statement") has been declared effective, either (A) an
additional registration statement ("additional registration statement")
relating to the Offered Securities may have been filed with the Commission
pursuant
1
<PAGE>
to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has become
effective upon filing pursuant to such Rule and the Offered Securities all
have been duly registered under the Act pursuant to the initial
registration statement and, if applicable, the additional registration
statement or (B) such an additional registration statement is proposed to
be filed with the Commission pursuant to Rule 462(b) and will become
effective upon filing pursuant to such Rule and upon such filing the
Offered Securities will all have been duly registered under the Act
pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration statement
has been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
or, in the case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery of
this Agreement, the additional registration statement means (A) if the
Company has advised the Representatives that it does not propose to amend
such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment thereto
(if any) filed prior to the execution and delivery of this Agreement, was
declared effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (B) if the Company has advised the
Representatives that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as of which
such registration statement, as amended by such amendment or post-effective
amendment, as the case may be, is declared effective by the Commission. If
an additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "Effective Time" with respect
to such additional registration statement means the date and time as of
which such registration statement is filed and becomes effective pursuant
to Rule 462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the date
of the Effective Time thereof. The initial registration statement, as
amended at its Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a part of the
initial registration statement as of the Effective Time of the additional
registration statement pursuant to the General Instructions of the Form on
which it is filed and including all information (if any) deemed to be a
part of the initial registration statement as of its Effective Time
pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter
referred to as the "Initial Registration Statement". The additional
registration statement, as amended at its Effective Time, including the
contents of the initial registration statement incorporated by reference
therein and including all information (if any) deemed to be a part of the
additional registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement". The Initial Registration Statement and the Additional
Registration Statement are herein referred to collectively as the
"Registration Statements" and individually as a "Registration Statement".
The form of prospectus relating to the Offered Securities, as first filed
with the Commission pursuant to and in accordance with Rule 424(b) ("Rule
424(b)") under the Act or (if no such filing is required) as included in a
Registration Statement, is hereinafter referred to as the "Prospectus". No
document has been or will be prepared or distributed in reliance on Rule
434 under the Act.
(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all material respects to the
requirements of the Act
2
<PAGE>
and the rules and regulations of the Commission ("Rules and Regulations")
and did not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading, (B) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all material respects to the requirements of
the Act and the Rules and Regulations and did not include, or will not
include, any untrue statement of a material fact and did not omit, or will
not omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and (C) on the date
of this Agreement, the Initial Registration Statement and, if the Effective
Time of the Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all material
respects to the requirements of the Act and the Rules and Regulations, and
neither of such documents includes, or will include, any untrue statement
of a material fact or omits, or will omit, to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading. If the Effective Time of the Initial Registration Statement
is subsequent to the execution and delivery of this Agreement: on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement and the Prospectus will conform in all material
respects to the requirements of the Act and the Rules and Regulations,
neither of such documents will include any untrue statement of a material
fact or will omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and no
Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only
such information is that described as such in Section 7(b) hereof.
(iii) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
condition (financial or other), business, properties or results of
operations of the Company and its subsidiaries taken as a whole ("Material
Adverse Effect").
(iv) The Company has no U.S. subsidiaries and no other subsidiaries
which are significant subsidiaries as defined in paragraph (w) of Rule 1-02
of Regulation S-X promulgated under the Securities Exchange Act of 1934, as
amended.
(v) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on each Closing Date (as defined below), such Offered Securities
will have been, validly issued, fully paid and nonassessable and will
conform to the description thereof contained in the Prospectus; and the
stockholders of the Company have no preemptive rights with respect to the
Securities.
3
<PAGE>
(vi) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with
this offering.
(vii) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the
Company to include in the securities registered pursuant to a Registration
Statement any securities of the Company owned or to be owned by such
person, which right has not expired or been waived, nor, except as filed as
an exhibit to a Registration Statement, to require the Company to include
any securities of the Company owned or to be owned by such person in any
securities being registered pursuant to any other registration statement
filed by the Company under the Act, or to file any other registration
statement under the Act with respect to any such securities.
(viii) The Offered Securities are listed on The Nasdaq Stock Market's
National Market and a notice of listing of additional shares has been filed
with the Nasdaq Stock Market, Inc. with respect to the Offered Securities.
(ix) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and such
as may be required under state securities laws.
(x) The execution, delivery and performance of this Agreement, and
the issuance and sale of the Offered Securities will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a material default under, any statute, any rule, regulation or
order of any governmental agency or body or any court, domestic or foreign,
having jurisdiction over the Company or any subsidiary of the Company or
any of their properties, or any agreement or instrument to which the
Company or any such subsidiary is a party or by which the Company or any
such subsidiary is bound or to which any of the properties of the Company
or any such subsidiary is subject, or the charter or by-laws of the Company
or any such subsidiary, and the Company has full power and authority to
authorize, issue and sell the Offered Securities as contemplated by this
Agreement.
(xi) This Agreement has been duly authorized, executed and delivered
by the Company.
(xii) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and
except as disclosed in the Prospectus, the Company and its subsidiaries
hold any leased real or personal property under valid and enforceable
leases with no exceptions that would materially interfere with the use made
or to be made thereof by them.
(xiii) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by them
and have not received any notice of proceedings relating to the revocation
or modification of any such certificate, authority or permit that, if
determined adversely to the
4
<PAGE>
Company or any of its subsidiaries, would individually or in the aggregate
have a Material Adverse Effect.
(xiv) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(xv) The Company and its subsidiaries own, possess or can acquire
on reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and
other intellectual property (collectively, "intellectual property rights")
necessary to conduct the business now operated by them, or presently
employed by them, and have not received any notice of infringement of or
conflict with asserted rights of others with respect to any intellectual
property rights that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material
Adverse Effect.
(xvi) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or restoration
of the environment or human exposure to hazardous or toxic substances
(collectively, "environmental laws"), owns or operates any real property
contaminated with any substance that is subject to any environmental laws,
is liable for any off-site disposal or contamination pursuant to any
environmental laws, or is subject to any claim relating to any
environmental laws, which violation, contamination, liability or claim
would individually or in the aggregate have a Material Adverse Effect; and
the Company is not aware of any pending investigation which might lead to
such a claim.
(xvii) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of its
subsidiaries or any of their respective properties that, if determined
adversely to the Company or any of its subsidiaries, would individually or
in the aggregate have a Material Adverse Effect, or would materially and
adversely affect the ability of the Company to perform its obligations
under this Agreement, or which are otherwise material in the context of the
sale of the Offered Securities; and to the Company's knowledge no such
actions, suits or proceedings are threatened or, to the Company's
knowledge, contemplated.
(xviii) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of the
Company and its consolidated subsidiaries as of the dates shown and their
results of operations and cash flows for the periods shown, and such
financial statements have been prepared in conformity with the generally
accepted accounting principles in the United States applied on a consistent
basis, and the schedules included in each Registration Statement present
fairly the information required to be stated therein.
(xix) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as a whole, and, except as disclosed in or contemplated
by the Prospectus, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
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(xx) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(xxi) All outstanding Securities held by officers and directors of the
Company, all Selling Stockholders and certain other significant
stockholders specified by Credit Suisse First Boston Corporation ("CSFBC"),
and all securities convertible into or exercisable or exchangeable for
Securities, are subject to valid and binding agreements (collectively,
"Lock-up Agreements") that restrict the holders thereof from selling,
making any short sale of, granting option for the purchase of, or otherwise
transferring or disposing of, any of such Securities, or any such
securities convertible into or exercisable or exchangeable for Securities,
for a period of 90 days after the date of the Prospectus without the prior
written consent of CSFBC.
(b) Each Selling Stockholder severally represents and warrants to,
and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has, and on each Closing Date
hereinafter mentioned will have, valid and unencumbered title to the
Offered Securities to be delivered by such Selling Stockholder on such
Closing Date and full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver the Offered
Securities to be delivered by such Selling Stockholder on such Closing
Date hereunder; and upon the delivery of and payment for the Offered
Securities on each Closing Date hereunder the several Underwriters will
acquire valid and unencumbered title to the Offered Securities to be
delivered by such Selling Stockholder on such Closing Date.
(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act and the Rules and Regulations and did not include any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, (B) on the Effective Date of the Additional Registration
Statement (if any), each Registration Statement conformed, or will
conform, in all respects to the requirements of the Act and the Rules and
Regulations did not include, or will not include, any untrue statement of
a material fact and did not omit, or will not omit, to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading, and (C) on the date of this Agreement, the
Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and delivery
of this Agreement, the Additional Registration Statement each conforms,
and at the time of filing of the Prospectus pursuant to Rule 424(b) or
(if no such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all respects
to the requirements of the Act and the Rules and Regulations, and neither
of such documents includes, or will include, any untrue statement of a
material fact or omits, or will omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading. If the Effective Time of the Initial Registration Statement
is subsequent to the execution and delivery of this Agreement: on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement and the Prospectus will conform in all respects to
the requirements of the Act and the Rules and Regulations, neither of
such documents will
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include any untrue statement of a material fact or will omit to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading. The two preceding sentences
apply only to the extent that any non-conformity to, statements in or
omissions from a Registration Statement or the Prospectus are based on
written information furnished to the Company by such Selling
Stockholder specifically for use therein.
(iii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between such Selling
Stockholders and any person that would give rise to a valid claim
against such Selling Stockholder or any Underwriter for a brokerage
commission, finder's fee or other like payment in connection with this
offering.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and each Selling
Stockholder agrees, severally and not jointly, to sell to the Underwriters, and
the Underwriters agree, severally and not jointly, to purchase from the Company
and each Selling Stockholder, at a purchase price of $ per share, that
number of Firm Securities (rounded up or down, as determined by CSFBC in its
discretion, in order to avoid fractions) obtained by multiplying 1,500,000 Firm
Securities in the case of the Company and the number of Firm Securities set
forth opposite the name of such Selling Stockholder in Schedule A hereto, in the
case of a Selling Stockholder, in each case by a fraction of numerator of which
is the number of Firm Securities set forth opposite the name of such Underwriter
in Schedule B hereto and the denominator of which is the total number of Firm
Securities.
The Company and the Custodian (as such term is defined below) will deliver
the Firm Securities to the Representatives for the accounts of the Underwriters,
against payment of the purchase price in Federal (same day) funds by official
bank check or checks or wire transfer to an account at a bank acceptable to
CSFBC drawn to the order of the Company in the case of 1,500,000 shares of Firm
Securities and to the Custodian for the respective accounts of the Selling
Stockholders in the case of 2,000,000 shares of Firm Securities, at the office
of Wilson Sonsini Goodrich & Rosati, Professional Corporation, at 10:00 A.M.,
New York time, on December , 1999, or at such other time not later than
seven full business days thereafter as CSFBC and the Company determine, such
time being herein referred to as the "First Closing Date". For purposes of Rule
15c6-1 under the Securities Exchange Act of 1934, the First Closing Date (if
later than the otherwise applicable settlement date) shall be the settlement
date for payment of funds and delivery of securities for all the Offered
Securities sold pursuant to the offering. The certificates for the Firm
Securities so to be delivered will be in definitive form if required by CSFBC,
in such denominations and registered in such names as CSFBC requests and will be
made available for checking and packaging at the office of Wilson Sonsini
Goodrich & Rosati, Professional Corporation at least 24 hours prior to the First
Closing Date.
Certificates in negotiable form for the Offered Securities to be sold by
the Selling Stockholders hereunder have been placed in custody, for delivery
under this Agreement, under custody agreements ("Custody Agreements") made with
BancBoston, N.A., as custodian ("Custodian"). Each Selling Stockholder agrees
that the shares represented by the certificates held in custody for the Selling
Stockholders under such Custody Agreements are subject to the interests of the
Underwriters hereunder, that the arrangements made by the Selling Stockholders
for such custody are to that extent irrevocable, and that the obligations of
the Selling Stockholders hereunder shall not be terminated by operation of law,
whether by the death of any individual Selling Stockholder or the occurrence of
any other event, or in the case of a trust, by the death of any trustee or
trustees or the termination of such trust. If any individual Selling
Stockholder or any such trustee or trustees should die, or if any other such
event should occur, or if any such trusts should terminate, before the delivery
of the Offered Securities hereunder, certificates for
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<PAGE>
such Offered Securities shall be delivered by the Custodian in accordance with
the terms and conditions of this Agreement as if such death or other event or
termination had not occurred, regardless of whether or not the Custodian shall
have received notice of such death or other event or termination.
In addition, upon written notice from CSFBC given to the Company from time
to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered.
The right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of the Company, at the office of Wilson Sonsini Goodrich & Rosati,
Professional Corporation. The certificates for the Optional Securities being
purchased on each Optional Closing Date will be in definitive form if required
by CSFBC, in such denominations and registered in such names as CSFBC requests
upon reasonable notice prior to such Optional Closing Date and will be made
available for checking and packaging at the office of Wilson Sonsini Goodrich &
Rosati, Professional Corporation at a reasonable time in advance of such
Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling Stockholders. The
Company agrees with the several Underwriters and the Selling Stockholders that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this Agreement
or (B) the fifteenth business day after the Effective Date of the Initial
Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as
of such
8
<PAGE>
execution and delivery, the Company will file the additional registration
statement or, if filed, will file a post-effective amendment thereto with
the Commission pursuant to and in accordance with Rule 462(b) on or prior
to 10:00 P.M., New York time, on the date of this Agreement or, if earlier,
on or prior to the time the Prospectus is printed and distributed to any
Underwriter, or will make such filing at such later date as shall have been
consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend
or supplement the initial or any additional registration statement as filed
or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not
effect such amendment or supplementation without CSFBC's consent; and the
Company will also advise CSFBC promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order proceedings in respect of a
Registration Statement and will use its best efforts to prevent the
issuance of any such stop order and to obtain as soon as possible its
lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will promptly
notify CSFBC of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of,
any such amendment or supplement shall constitute a waiver of any of the
conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "Availability Date" means the
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 90th day after the end of such fourth fiscal
quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (four of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each
case in such quantities as CSFBC requests. The Prospectus shall be so
furnished on or prior to 3:00 P.M., New York time, on the business day
following the later of the execution and delivery of this Agreement or the
Effective Time of the Initial Registration Statement. All other documents
shall be so furnished as soon as available. The Company will pay the
expenses of printing and distributing to the Underwriters all such
documents.
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<PAGE>
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company
will furnish to the Representatives (i) as soon as available, a copy of
each report and any definitive proxy statement of the Company filed with
the Commission under the Securities Exchange Act of 1934 or mailed to
stockholders, and (ii) from time to time, such other information concerning
the Company as CSFBC may reasonably request.
(h) The Company and each Selling Stockholder agree with the
Underwriters that the Company and such Selling Stockholder will pay all
expenses incident to the performance of the obligations of the Company and
such Selling Stockholder, as the case may be, under this Agreement, for any
filing fees and other expenses (including fees and disbursements of
counsel) incurred in connection with qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and the printing of memoranda relating thereto, for the filing
fee incident to, and the reasonable fees and disbursements of counsel to
the Underwriters in connection with, the review by the National Association
of Securities Dealers, Inc. of the Offered Securities, for any travel
expenses of the Company's officers and employees and any other expenses of
the Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters and for any
transfer taxes on the sale by the Selling Stockholders of the Offered
Securities to the Underwriters.
(i) For a period of 90 days after the date of the initial public
offering of the Offered Securities, the Company and each Selling
Stockholder agree that they will not offer, sell, contract to sell, pledge
or otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Act relating to, any
additional shares of its Securities or securities convertible into or
exchangeable or exercisable for any shares of its Securities, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of CSFBC, except issuances of
Securities pursuant to the conversion or exchange of convertible or
exchangeable securities or the exercise of warrants or options, in each
case outstanding on the date hereof, grants of employee stock options or
sales of shares pursuant to the terms of a stock option or employee stock
purchase plan in effect on the date hereof, and issuances of Securities
pursuant to the exercise of such options.
(j) The Company will (i) enforce the terms of each Lock-up Agreement,
and (ii) to the extent it has not already done so, issue stop-transfer
instructions to the transfer agent for the Securities with respect to any
transaction or contemplated transaction that would constitute a breach of
or default under the applicable Lock-up Agreement. In addition, except
with the prior written consent of CSFBC, the Company agrees (i) not to
amend or terminate, or waive any right under, any Lock-up Agreement, or
take any other action that would directly or indirectly have the same
effect as an amendment or termination, or waiver of any right under any
Lock-up Agreement, that would permit any holder of Securities, or any
securities convertible into, or exercisable or exchangeable for Securities,
to make any short sale of, grant any option for the purpose of, or
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<PAGE>
otherwise transfer or dispose of, any such Securities or other securities,
prior to the expiration of the 90 days after the date of the Prospectus and
(ii) not to consent to any sale, short sale, grant of an option for the
purchase of, or other disposition or transfer of shares of Securities or
securities convertible into or exercisable or exchangeable for Securities,
subject to a Lock-up Agreement.
(k) Each Selling Stockholder agrees to deliver to CSFBC, attention:
Transactions Advisory Group on or prior to the First Closing Date a
properly completed and executed United States Treasury Department Form W-9
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder and to the following
additional conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to the registration statement to
be filed shortly prior to such Effective Time), of Deloitte & Touche, LLP
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating to the effect that:
(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements comply as to
form in all material respects with the applicable accounting requirements
of the Act and the related published Rules and Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards No.
71, Interim Financial Information, on the unaudited financial statements
included in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii) above, a
reading of the latest available interim financial statements of the
Company, inquiries of officials of the Company who have responsibility
for financial and accounting matters and other specified procedures,
nothing came to their attention that caused them to believe that:
(A) the unaudited financial statements included in the
Registration Statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act
and the related published Rules and Regulations or any material
modifications should be made to such unaudited financial
statements for them to be in conformity with generally accepted
accounting principles;
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(B) at the date of the latest available balance sheet read
by such accountants, or at a subsequent specified date not more
than three business days prior to the date of such letter, there
was any change in the capital stock or any increase in short-term
indebtedness or long-term debt of the Company and its
consolidated subsidiaries or, at the date of the latest available
balance sheet read by such accountants, there was any decrease in
consolidated net current assets or net assets or any increase in
stockholders' deficit, as compared with amounts shown on the June
30, 1999 balance sheet included in the Prospectus; or
(C) for the income statement for the period from July 1,
1999 to September 30, 1999 read by such accountants there were
any decreases, as compared with the quarter ended September 30,
1998 and the quarter ended June 30, 1999 included in the
Prospectus, in consolidated net sales, increases in consolidated
loss from operations, consolidated net operating income, or in
the total or per share amounts of consolidated net loss.
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial information
are derived from the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by
analysis or computation) with the results obtained from inquiries, a
reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts,
percentages and other financial information to be in agreement with
such results, except as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective
amendment to be filed shortly prior to its Effective Time, (ii) if the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement but the Effective Time of the
Additional Registration is subsequent to such execution and delivery,
"Registration Statements" shall mean the Initial Registration Statement and
the additional registration statement as proposed to be filed or as
proposed to be amended by the post-effective amendment to be filed shortly
prior to its Effective Time, and (iii) "Prospectus" shall mean the
prospectus included in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the
date of this Agreement or such later date as shall have been consented to
by CSFBC. If the Effective Time of the Additional Registration Statement
(if any) is not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or, if earlier, the time the Prospectus
is printed and distributed to any Underwriter, or shall have occurred at
such later date
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<PAGE>
as shall have been consented to by CSFBC. If the Effective Time of the
Initial Registration Statement is prior to the execution and delivery of
this Agreement, the Prospectus shall have been filed with the Commission in
accordance with the Rules and Regulations and Section 5(a) of this
Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or, to the
knowledge of any Selling Stockholder, the Company or the Representatives,
shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as one enterprise which, in the judgment of a majority
in interest of the Underwriters including the Representatives, is material
and adverse and makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities; (ii) any downgrading in the rating of any debt
securities of the Company by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the Act), or
any public announcement that any such organization has under surveillance
or review its rating of any debt securities of the Company (other than an
announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any material
suspension or material limitation of trading in securities generally on the
New York Stock Exchange or any setting of minimum prices for trading on
such exchange, or any suspension of trading of any securities of the
Company on any exchange or in the over-the-counter market; (iv) any banking
moratorium declared by U.S. Federal or New York authorities; or (v) any
outbreak or escalation of major hostilities in which the United States is
involved, any declaration of war by Congress or any other substantial
national or international calamity or emergency if, in the judgment of a
majority in interest of the Underwriters including the Representatives, the
effect of any such outbreak, escalation, declaration, calamity or emergency
makes it impractical or inadvisable to proceed with completion of the
public offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, counsel for the Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification, except where
the failure to be so qualified would not have a Material Adverse
Effect;
(ii) The Offered Securities delivered on such Closing Date and
all other outstanding shares of the Common Stock of the Company have
been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus; and the stockholders of the Company have no preemptive
rights with respect to the Securities as such rights are set forth in
the Company's Certificate of Incorporation, Bylaws or other written
agreement to which the Company is
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a party and which agreement is required to be included as an exhibit
to the Registration Statement;
(iii) To such counsel's knowledge, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right to require the Company to include in
the securities registered pursuant to a Registration Statement any
securities of the Company owned or to be owned by such person, which
right has not expired or been waived, nor, except as filed as an
exhibit to a Registration Statement, to require the Company to include
any securities of the Company owned or to be owned by such person in
any securities being registered pursuant to any other registration
statement filed by the Company under the Act, or to file any other
registration statement under the Act with respect to any such
securities;
(iv) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of 1940.
(v) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance or sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and
such as may be required under state securities laws;
(vi) The execution, delivery and performance of this Agreement
and the issuance and sale of the Offered Securities will not result in
a breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or, to
such counsel's knowledge, order of any governmental agency or body or
any court having jurisdiction over the Company or any of its
properties, or any agreement or instrument required to be included as
an exhibit to the Registration Statement, or the charter or by-laws of
the Company, and the Company has full power and authority to
authorize, issue and sell the Offered Securities as contemplated by
this Agreement;
(vii) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b) specified in
such opinion on the date specified therein or was included in the
Initial Registration Statement or the Additional Registration
Statement (as the case may be), and, to the knowledge of such counsel,
no stop order suspending the effectiveness of a Registration Statement
or any part thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the
Act, and each Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective effective or
issue dates, complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations; such counsel
have no reason to believe that any part of a Registration Statement or
any amendment thereto, as of its effective date or as of such Closing
Date, contained any untrue statement of a material fact or omitted to
state any
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<PAGE>
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus or any
amendment or supplement thereto, as of its issue date or as of such
Closing Date, contained any untrue statement of a material fact or
omitted to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; the descriptions in the Registration
Statements and Prospectus of statutes, legal and governmental
proceedings and contracts and other documents are accurate and fairly
present the information required to be shown; and such counsel do not
know of any legal or governmental proceedings required to be described
in a Registration Statement or the Prospectus which are not described
as required or of any contracts or documents of a character required
to be described in a Registration Statement or the Prospectus or to be
filed as exhibits to a Registration Statement which are not described
and filed as required; it being understood that such counsel need
express no opinion or belief as to the financial statements or other
financial or statistical data contained in the Registration Statements
or the Prospectus;
(viii) This Agreement has been duly authorized, executed and
delivered by the Company;
(ix) The statements set forth under the heading "Description
of Capital Stock" in the Prospectus, insofar as such statements
purport to summarize certain provisions of the capital stock of the
Company, provide a fair summary of such provisions;
(x) The execution and delivery of the Merger Agreement,
effecting the reincorporation of the California Corporation under the
laws of the State of Delaware, was duly authorized by all necessary
corporate action on the part of each of the California Corporation and
the Company;
(e) The Representatives shall have received the opinion contemplated
in the Power of Attorney executed and delivered by each Selling Stockholder
and an opinion, dated such Closing Date, of Wilson Sonsini Goodrich and
Rosati, Professional Corporation, counsel for the Selling Stockholder[s],
to the effect that:
(i) Each Selling Stockholder had valid and unencumbered title
to the Offered Securities delivered by such Selling Stockholder on
such Closing Date and had full right, power and authority to sell,
assign, transfer and deliver the Offered Securities delivered by such
Selling Stockholder on such Closing Date hereunder; and the several
Underwriters have acquired valid and unencumbered title to the Offered
Securities purchased by them from the Selling Stockholders on such
Closing Date hereunder;
(ii) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by any Selling Stockholder for the consummation of
the transactions contemplated by the Custody Agreement or this
Agreement in connection with the sale of the Offered Securities sold
by the Selling Stockholders, except such as have been obtained and
made under the Act and such as may be required under state securities
laws;
(iii) The execution, delivery and performance of the Custody
Agreement and this Agreement and the consummation of the transactions
therein and herein contemplated will
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<PAGE>
not result in a breach or violation of any of the terms and provisions
of, or constitute a default under, any statute, any rule, regulation
or order of any governmental agency or body or any court having
jurisdiction over any Selling Stockholder or any of their properties
or any agreement or instrument to which any Selling Stockholder is a
party or by which any Selling Stockholder is bound or to which any of
the properties of any Selling Stockholder is subject, or the charter
or by-laws of any Selling Stockholder which is a corporation;
(iv) The Power of Attorney and related Custody Agreement with
respect to each Selling Stockholder has been duly authorized, executed
and delivered by such Selling Stockholder and constitute valid and
legally binding obligations of each such Selling Stockholder
enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles; and
(v) This Agreement has been duly authorized, executed and
delivered by each Selling Stockholder.
(f) The Representatives shall have received from Morrison & Foerster
LLP, counsel for the Underwriters, such opinion or opinions, dated such
Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the Selling Stockholders and the Company
shall have furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(g) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to
the best of their knowledge after reasonable investigation, shall state
that: the representations and warranties of the Company in this Agreement
are true and correct; the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied hereunder
at or prior to such Closing Date; no stop order suspending the
effectiveness of any Registration Statement has been issued and no
proceedings for that purpose have been instituted or are contemplated by
the Commission; the Additional Registration Statement (if any) satisfying
the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed
pursuant to Rule 462(b), including payment of the applicable filing fee in
accordance with Rule 111(a) or (b) under the Act, prior to the time the
Prospectus was printed and distributed to any Underwriter; and, subsequent
to the date of the most recent financial statements in the Prospectus,
there has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(h) The Representatives shall have received a letter, dated such
Closing Date, of Deloitte & Touche LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to
in such subsection will be a date not more than three days prior to such
Closing Date for the purposes of this subsection.
The Company and the Selling Stockholders will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. CSFBC may
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<PAGE>
in its sole discretion waive on behalf of the Underwriters compliance with any
conditions to the obligations of the Underwriters hereunder, whether in respect
of an Optional Closing Date or otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each
Underwriter, its partners, directors and officers and each person, if any,
who controls such Underwriter within the meaning of Section 15 of the Act,
against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any Registration
Statement, the Prospectus, or any amendment or supplement thereto, or any
related preliminary prospectus, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the Company
will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and
agreed that the only such information furnished by any Underwriter consists
of the information described as such in subsection (b) below; and provided,
further, that with respect to any untrue statement or alleged untrue
statement in or omission or alleged omission from any preliminary
prospectus the indemnity agreement contained in this subsection (a) shall
not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages or liabilities purchased the Offered
Securities concerned, to the extent that a prospectus relating to such
Offered Securities was required to be delivered by such Underwriter under
the Act in connection with such purchase and any such loss, claim, damage
or liability of such Underwriter results from the fact that there was not
sent or given to such person, at or prior to the written confirmation of
the sale of such Offered Securities to such person, a copy of the
Prospectus if the Company had previously furnished copies thereof to such
Underwriter.
(b) The Selling Stockholders, severally and not jointly, will
indemnify and hold harmless each Underwriter, its partners, directors and
officers and each person who controls such Underwriter within the meaning
of Section 15 of the Act, against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that
the Selling Stockholders will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement in or omission or
alleged omission from any of such documents in reliance upon and in
conformity with written information furnished to the Company by an
Underwriter through the Representatives specifically for use therein, it
being
17
<PAGE>
understood and agreed that the only such information furnished by any
Underwriter consists of the information described as such in subsection (c)
below; and provided further that the liability of each Selling Stockholder
pursuant to this subsection shall not exceed the product of the number of
shares of Securities sold by such Selling Stockholder and the price of per
share of Securities set forth in Section 3 hereof.
(c) Each Underwriter will severally and not jointly indemnify
and hold harmless the Company, its directors and officers and each person,
if any, who controls the Company within the meaning of Section 15 of the
Act, and each Selling Stockholder against any losses, claims, damages or
liabilities to which the Company or such Selling Stockholder may become
subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or
arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will
reimburse any legal or other expenses reasonably incurred by the Company
and each Selling Stockholder in connection with investigating or defending
any such loss, claim, damage, liability or action as such expenses are
incurred, it being understood and agreed that the only such information
furnished by any Underwriter consists of (i) the following information in
the Prospectus furnished on behalf of each Underwriter: the concession and
reallowance figures appearing in the fourth paragraph under the caption
"Underwriting" and the information contained in the sixth and eleventh
paragraphs under the caption "Underwriting."
(d) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying
party under subsection (a), (b) or (c) above, notify the indemnifying party
of the commencement thereof; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under subsection (a), (b) or (c) above. In
case any such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party),
and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Section for any legal or
other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party unless such settlement (i) includes an unconditional
release of such indemnified party from all liability on any claims that are
the subject matter of such action and (ii) does not include a statement as
to, or an admission of, fault, culpability or a failure to act by or on
behalf of an indemnified party.
18
<PAGE>
(e) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in
subsection (a), (b) or (c) above (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other from the
offering of the Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company and the Selling
Stockholders on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company and the
Selling Stockholders bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Selling Stockholders or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim
which is the subject of this subsection (e). Notwithstanding the provisions
of this subsection (e), no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders
under this Section shall be in addition to any liability which the Company
and the Selling Stockholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act (provided further that the
liability of each Selling Stockholder shall not exceed the product of the
number of shares of Securities sold by such Selling Stockholder and the
price per share of Securities set forth in Section 3 hereof); and the
obligations of the Underwriters under this Section shall be in addition to
any liability which the respective Underwriters may otherwise have and
shall extend, upon the same terms and conditions, to each director of the
Company, to each officer of the Company who has signed a Registration
Statement and to each person, if any, who controls the Company within the
meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters
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<PAGE>
are obligated to purchase on such Closing Date, CSFBC may make arrangements
satisfactory to the Company and the Selling Stockholders for the purchase of
such Offered Securities by other persons, including any of the Underwriters, but
if no such arrangements are made by such Closing Date, the non-defaulting
Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the Offered Securities that such defaulting
Underwriters agreed but failed to purchase on such Closing Date. If any
Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
CSFBC, the Company and the Selling Stockholders for the purchase of such Offered
Securities by other persons are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any non-
defaulting Underwriter, the Company or the Selling Stockholders, except as
provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Stockholders, the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, any Selling
Stockholders, the Company or any of their respective representatives, officers
or directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by it pursuant to
Section 5 and the respective obligations of the Company and the Underwriters
pursuant to Section 7 shall remain in effect, and if any Offered Securities have
been purchased hereunder the representations and warranties in Section 2 and all
obligations under Section 5 shall also remain in effect. If the purchase of the
Offered Securities by the Underwriters is not consummated for any reason other
than solely because of the termination of this Agreement pursuant to Section 8
or the occurrence of any event specified in clause (iii), (iv) or (v) of Section
6(c), the Company will reimburse the Underwriters for all out-of-pocket expenses
(including fees and disbursements of counsel) reasonably incurred by them in
connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, NY 10010-3629, Attention: Investment Banking Department--
Transactions Advisory Group, or, if sent to the Company or any of the Selling
Stockholders, will be mailed, delivered or telegraphed and confirmed to them at
5410 Betsy Ross Drive, Santa Clara, CA 95054, Attention: Ching-Fa Hwang, or, if
sent to the Selling Stockholders, any such notice shall be addressed to the
Selling Stockholders at the addresses set forth in the records of the Company's
transfer agent or in the Custody Agreement executed by such Selling Stockholder;
provided, however, that any notice to an Underwriter pursuant to Section 7 will
be mailed, delivered or telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective personal representatives and
successors and the officers and directors and controlling persons referred to in
Section 7, and no other person will have any right or obligation hereunder.
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<PAGE>
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters. Ching-Fa Hwang and James A. Barth will act for the
Selling Stockholders in connection with such transactions, and any action under
or in respect of this Agreement taken by Ching-Fa Hwang or James A. Barth will
be binding upon all the Selling Stockholders.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
NetIQ Corporation
By___________________________________
Title:_______________________________
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Selling Shareholders
By_________________________________
Attorney-in-Fact
22
<PAGE>
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
Credit Suisse First Boston Corporation
Hambrecht & Quist LLC
BancBoston Robertson Stephens, Inc.
SoundView Technology Group, Inc.
C. E. Unterberg, Towbin
Acting on behalf of themselves and as the Representatives of the several
Underwriters
By Credit Suisse First Boston Corporation
By___________________________________
Title:_______________________________
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SCHEDULE A
Number of Offered
Selling Stockholder Securities to be Sold
---------------------
______________________
Total........................................
24
<PAGE>
SCHEDULE B
Number of
Underwriter Firm Securities
----------- ---------------
Credit Suisse First Boston Corporation..........
Hambrecht & Quist LLC...........................
BancBoston Robertson Stephens, Inc..............
SoundView Technology Group, Inc.................
C. E. Unterberg, Towbin.........................
---------------
Total.......................
===============
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-90935 of NetIQ Corporation on Form S-1 of our report dated July 9, 1999
(August 4, 1999 as to Note 13), appearing in the Prospectus, which is part of
this Registration Statement, and of our report dated July 9, 1999 relating to
the financial statement schedule appearing elsewhere in this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
San Jose, California
November 23, 1999
