<PAGE>
As filed with the Securities and Exchange Commission on March 23, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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NetIQ Corporation
(Exact name of Registrant as specified in its charter)
Delaware 7372 77-0405505
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
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)
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Copies to:
Larry W. Sonsini, Esq. William M. Kelly, Esq.
Thomas C. DeFilipps, Esq. Davis Polk & Wardwell
Steve L. Camahort, Esq. 1600 El Camino Real
Wilson Sonsini Goodrich & Rosati Menlo Park, CA 94025
Professional Corporation (650) 752-2000
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: Upon
consummation of the merger described herein.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, 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, 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. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class of
Securities to be Amount to be Proposed Maximum Amount of
Registered Registered(1) Aggregate Offering Price(2) Registration Fee
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<S> <C> <C> <C>
Common Stock $0.001 par 20,119,591
value................. shares $1,435,416,216.84 $378,949.88
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</TABLE>
(1) Based upon the maximum number of shares of common stock of the Registrant
which may be issued to stockholders of Mission Critical Software, Inc.
pursuant to the merger described herein, assuming 17,109,434 shares of
Mission Critical Software, Inc. are outstanding at the date of the merger,
and giving effect to the exercise of all vested options to purchase
Mission Critical Software, Inc. common stock and rights to purchase
Mission Critical Software, Inc. common stock under Mission Critical
Software, Inc.'s employee stock purchase plan as of September 30, 2000.
(2) Pursuant to Rule 457(c) and (f) under the Securities Act of 1933, as
amended, the registration fee has been calculated based on the average of
the high and low prices per share of Mission Critical Software, Inc.'s
common stock on March 17, 2000 as reported on the Nasdaq National Market.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
To The Stockholders of Mission Critical Software, Inc. ("MCS")
and NetIQ Corporation ("NetIQ"):
After careful consideration, the boards of directors of MCS and NetIQ have
unanimously approved a "merger of equals" between MCS and NetIQ. The combined
company will adopt the new name "Newco Corporation."
In the merger, each share of MCS common stock will be exchanged for 0.9413
share of NetIQ common stock. NetIQ common stock is traded on the Nasdaq
National Market ("Nasdaq") under the trading symbol "NTIQ," and on , 2000,
the closing price of NetIQ common stock was $ per share.
Following the merger the new company's board of directors will be composed
of nine members: four will be from the current MCS board, four will be from the
current NetIQ board, and one member will be selected jointly by MCS and NetIQ
board members. The executive leadership will include officers from both
companies, with Michael S. Bennett, current President and Chief Executive
Officer of MCS, as Executive Chairman, and Ching-Fa Hwang, current President
and Chief Executive Officer of NetIQ, as Chief Executive Officer.
Contemporaneously, MCS is acquiring Ganymede Software Inc. ("Ganymede").
The attached proxy statement/prospectus provides detailed information
concerning MCS, NetIQ, the merger, and the proposals related to the merger.
Please give all of the information contained in the proxy statement/prospectus
your careful attention. In particular, you should carefully consider the
discussion in the section entitled "Risk Factors."
After careful consideration, the boards of directors of both MCS and NetIQ
have unanimously determined the merger to be fair to you and in your best
interests. We have approved the merger agreement and unanimously recommend its
adoption to you.
Stockholders are cordially invited to attend one of two special meetings to
vote on the merger:
. The special meeting of MCS stockholders will be held on , 2000 at
10:00 a.m. local time at MCS's headquarters at 13939 Northwest Freeway,
Houston, Texas 77040. Only stockholders who hold shares of MCS at the
close of business on , 2000 will be entitled to vote at this special
meeting.
. The special meeting of NetIQ stockholders will be held on , 2000 at
10:00 a.m. local time at NetIQ's headquarters at 5410 Betsy Ross Drive,
Santa Clara, California 95054. Only stockholders who hold shares of NetIQ
at the close of business on , 2000 will be entitled to vote at this
special meeting.
Please use this opportunity to take part in the affairs of MCS and NetIQ by
voting on the merger. Whether or not you plan to attend the MCS or NetIQ
special meeting, please complete, sign, date and return the accompanying proxy
in the enclosed self-addressed stamped envelope. Returning the proxy does NOT
deprive you of your right to attend the meeting and to vote your shares in
person. YOUR VOTE IS VERY IMPORTANT.
We appreciate your consideration of this matter.
Michael S. Bennett Ching-Fa Hwang
President and Chief Executive Officer President and Chief Executive
Mission Critical Software, Inc. Officer
NetIQ Corporation
Neither the Securities and Exchange Commission nor any State Securities
Commission has Approved or Disapproved of These Securities or Passed Upon
the Adequacy or Accuracy of This Proxy Statement/Prospectus. Any
Representation to the Contrary is a Criminal Offense.
This proxy statement/prospectus is dated , 2000 and was first mailed to
stockholders on or about , 2000.
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
13939 Northwest Freeway
Houston, Texas 77040
(713) 548-1700
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 2000 AT 10:00 a.m.
To the Stockholders of Mission Critical Software, Inc.:
A special meeting of stockholders of Mission Critical Software, Inc. ("MCS")
will be held on , 2000, at 10:00 a.m. at 13939 Northwest Freeway, Houston,
Texas 77040 for the following purposes:
1. To consider and vote on the proposed merger of Planet Acquisition
Corporation, a wholly-owned subsidiary of NetIQ Corporation, with and into
MCS, as contemplated by the Agreement and Plan of Reorganization dated as
of February 26, 2000, among NetIQ, Planet Acquisition Corporation and MCS.
In the merger, NetIQ will issue 0.9413 share of its common stock in
exchange for each outstanding share of MCS common stock.
2. To transact such other business as may properly come before the
special meeting or any adjournment postponement thereof.
The accompanying proxy statement/prospectus describes the proposed merger in
more detail. You are encouraged to read the entire document carefully. In
particular, you should carefully consider the discussion entitled "Risk
Factors."
Stockholders who held shares of MCS at the close of business on , 2000,
are entitled to notice of, and to vote at, this meeting.
By Order of the Board of Directors
of
Mission Critical Software, Inc.
Stephen E. Odom
Secretary
Houston, Texas
, 2000
To assure that your shares are represented at the meeting, please complete,
date and sign the enclosed proxy and mail it promptly in the postage-paid
envelope provided, whether or not you plan to attend the meeting. You can
revoke your proxy at any time before it is voted.
<PAGE>
NETIQ CORPORATION
5410 Betsy Ross Drive
Santa Clara, California 95054
(408) 330-7000
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 2000 at 10:00 a.m.
To the Stockholders of NetIQ Corporation:
A special meeting of stockholders of NetIQ Corporation ("NetIQ") will be
held at NetIQ's headquarters at 5410 Betsy Ross Drive, Santa Clara, California
95054 on , 2000 at 10:00 a.m., local time, for the following purposes:
1. To approve the issuance of shares of NetIQ common stock in the merger
of Planet Acquisition Corporation, a wholly-owned subsidiary of NetIQ, with
and into Mission Critical Software, Inc. ("MCS"), as contemplated by the
Agreement and Plan of Reorganization dated as of February 26, 2000, among
NetIQ, Planet Acquisition Corporation and MCS. NetIQ will issue 0.9413
share of its common stock in exchange for each share of outstanding MCS
common stock, including MCS shares issued to Ganymede Stockholders.
2. To amend NetIQ's Certificate of Incorporation to change the name of
the corporation to Newco.
3. To amend the 1995 Stock Plan to increase the maximum aggregate number
of shares of common stock that may be optioned and sold under the plan to
8,000,000 shares from 5,333,332 shares, plus an annual increase of the
lowest of (i) 2,600,000 shares (currently set at 1,333,333 shares), (ii) 5%
of the outstanding shares on the first day of NetIQ's fiscal year
(currently set at 4%), and (iii) an amount determined by the board of
directors.
4. To amend the 1999 Employee Stock Purchase Plan to increase the
maximum number of shares reserved for sale under the plan to 1,000,000
shares from 500,000 shares, plus an annual increase of the lowest of (i)
800,000 shares (currently set at 666,666 shares), (ii) 2% of the
outstanding shares on the first day of NetIQ's fiscal year, and (iii) an
amount determined by the board of directors.
5. To transact any other business that properly comes before the special
meeting or any adjournments or postponements thereof.
The accompanying proxy statement/prospectus describes the proposed merger
and other proposals in more detail. We encourage you to read the entire
document carefully. In particular, you should carefully consider the
discussion entitled "Risk Factors."
Stockholders who held shares of NetIQ at the close of business on ,
2000, are entitled to notice of, and to vote at, this meeting.
By Order of the Board of Directors of
NetIQ Corporation
James A. Barth
Secretary
Santa Clara, California
, 2000
To assure that your shares are represented at the meeting, please complete,
date and sign the enclosed proxy and mail it promptly in the postage-paid
envelope provided, whether or not you plan to attend the meeting. You can
revoke your proxy at any time before it is voted.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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QUESTIONS AND ANSWERS FOR MCS STOCKHOLDERS AND NETIQ STOCKHOLDERS......... 1
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................................. 3
Forward-Looking Statements.............................................. 3
The Companies........................................................... 3
Summary of the Merger................................................... 3
SELECTED HISTORICAL AND SELECTED UNAUDITED PRO FORMA COMBINED
FINANCIAL DATA........................................................... 6
NetIQ's Selected Historical Consolidated Financial Data................. 6
MCS's Selected Historical Financial Data................................ 7
Selected Unaudited Pro Forma Condensed Combined Financial Data.......... 8
Comparative Per Share Data.............................................. 9
RISK FACTORS.............................................................. 10
THE NETIQ MEETING......................................................... 23
THE MCS MEETING........................................................... 26
THE MERGER................................................................ 29
Background of the merger................................................ 29
MCS's reasons for the merger............................................ 31
Recommendation of MCS's board of directors.............................. 32
Opinion of MCS's financial advisor...................................... 32
Fee arrangements........................................................ 37
NetIQ's reasons for the merger.......................................... 37
Recommendation of NetIQ's board of directors............................ 38
Opinion of NetIQ's financial advisor.................................... 39
Interests of certain directors, officers and affiliates in the merger... 43
Completion and effectiveness of the merger.............................. 44
Structure of the merger and conversion of MCS common stock.............. 44
Exchange of MCS stock certificates for Newco stock certificates......... 45
No dividends............................................................ 45
Material United States federal income tax considerations of the merger.. 45
Accounting treatment of the merger...................................... 46
Regulatory filings and approvals required to complete the merger........ 47
Restrictions on sales of shares by affiliates........................... 47
No appraisal rights..................................................... 47
Listing on the Nasdaq Market of NetIQ common stock to be issued in the
merger................................................................. 48
Delisting and deregistration of MCS common stock after the merger....... 48
THE MERGER AGREEMENT...................................................... 49
AGREEMENTS RELATED TO THE MERGER.......................................... 55
NetIQ stockholders' voting agreements................................... 55
MCS stockholders' voting agreements..................................... 55
MCS stock option agreement.............................................. 56
NetIQ stock option agreement............................................ 57
MCS affiliate agreements................................................ 57
MARKET PRICE AND DIVIDEND INFORMATION..................................... 58
Recent share prices..................................................... 58
Dividends............................................................... 58
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS............... 59
COMPARISON OF RIGHTS OF HOLDERS OF MCS COMMON STOCK AND NETIQ COMMON STOCK
......................................................................... 65
CERTAIN INFORMATION REGARDING NETIQ....................................... 66
</TABLE>
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<TABLE>
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Page
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NETIQ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 76
NETIQ MANAGEMENT......................................................... 85
NETIQ PRINCIPAL STOCKHOLDERS............................................. 91
CERTAIN NETIQ TRANSACTIONS............................................... 93
CERTAIN INFORMATION REGARDING MCS........................................ 99
MCS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 111
MCS MANAGEMENT........................................................... 121
MCS PRINCIPAL STOCKHOLDERS............................................... 131
CERTAIN MCS TRANSCATIONS................................................. 133
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF ONLY NETIQ STOCKHOLDERS.. 136
LEGAL MATTERS............................................................ 140
EXPERTS.................................................................. 140
STOCKHOLDER PROPOSALS.................................................... 140
WHERE YOU CAN FIND MORE INFORMATION...................................... 141
</TABLE>
<TABLE>
<S> <C>
ANNEX A Agreement and Plan of Reorganization
ANNEX B Opinion of Credit Suisse First Boston Corporation
ANNEX C Opinion of Chase H&Q
</TABLE>
ii
<PAGE>
Unless otherwise indicated, all information in this proxy
statement/prospectus assumes:
. the completion by MCS of the acquisition of 100% of Ganymede Software Inc.
. the changing of the name of NetIQ to Newco Corporation ("Newco")in
connection with the merger of MCS and NetIQ.
QUESTIONS AND ANSWERS FOR MCS STOCKHOLDERS AND NETIQ STOCKHOLDERS
Q: What is the merger? (See page 44)
A: The merger will combine the businesses of MCS and NetIQ. Upon consummation
of the merger, MCS will become a wholly-owned subsidiary of NetIQ. In
connection with the merger, NetIQ stockholders are being asked to approve
changing NetIQ's name to Newco, but approval of the name change is not a
condition to the completion of the merger. After the merger, the current
stockholders of NetIQ will own approximately 49% of Newco and the former
stockholders of MCS (before the acquisition of Ganymede) will own
approximately 44% of Newco and the former stockholders of Ganymede will own
approximately 7% of Newco.
Q: What will MCS common stockholders and optionholders receive in the merger?
(See page 45 )
A: When the merger is completed, holders of MCS common stock will receive
0.9413 share of Newco common stock in exchange for each share of MCS common
stock. MCS common stockholders who would end up receiving NetIQ fractional
shares will receive cash instead of any fractional shares in an amount based
on the average closing prices, as reported on Nasdaq, of NetIQ common stock
for the five trading days immediately preceding the effective date of the
merger.
Options and warrants to purchase shares of MCS common stock will be
converted into options and warrants to purchase shares of NetIQ common stock
after completion of the merger. The number of shares covered by, and the
exercise price for, each option or warrant will be adjusted using the merger
exchange ratio of 0.9413 share of NetIQ for each share of MCS.
Q: Does the board of directors of MCS recommend voting in favor of the merger?
(See page 32)
A: Yes. After careful consideration, MCS's board of directors unanimously
recommends that its stockholders vote in favor of the merger agreement and
the proposed merger.
Q: Does the board of directors of NetIQ recommend voting in favor of the issue
of NetIQ shares in the MCS merger? (See page 38)
A: Yes. After careful consideration, NetIQ's board of directors unanimously
recommends that its stockholders vote in favor of the issuance of shares of
its common stock to the stockholders of MCS in the merger.
Q: Are there risks I should consider in deciding whether to vote for the
merger? (See page 10)
A: Yes. In evaluating the merger, you should carefully read this proxy
statement/prospectus and especially consider the factors discussed in the
section entitled "Risk Factors."
Q: What do I need to do now?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at your meeting. If you do
not include instructions on how to vote your properly signed proxy, your
shares will be voted "FOR" approval of the merger.
MCS stockholders, please do not send your MCS stock certificates at this
time.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares only if you provide instructions on how to
vote by following the information provided to you by your broker.
Q: What do I do if I want to change my vote after I have sent in my proxy card?
(See pages 23 and 26)
A: If you want to change your vote, send the secretary of MCS or NetIQ, as
relevant, a later-dated, signed proxy card before your meeting or attend the
meeting in person. You may also revoke your proxy by sending written notice
to the relevant secretary before the meeting. If you have signed a
stockholder voting agreement, you may not revoke your proxy.
1
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Q: As an MCS stockholder, should I send in my MCS stock certificates now?
A: No. After the merger is completed, you will be sent written instructions for
exchanging your MCS stock certificates for NetIQ stock certificates.
Q: Do NetIQ stock certificates need to be exchanged after the merger?
A: No. NetIQ certificates will remain valid despite the change of the
corporation's name to Newco.
Q: When do you expect the merger to be completed?
A: MCS and NetIQ are working toward completing the merger as quickly as
possible. We hope to complete the merger shortly after the special meetings.
Q: Will I recognize an income tax gain or loss on the merger? (See page 45)
A: For both MCS stockholders and NetIQ stockholders, we expect that if the
merger is completed, you will not recognize gain or loss for United States
federal income tax purposes in connection with the merger, except that MCS
stockholders will recognize gain or loss with respect to cash received
instead of fractional shares. However, all stockholders are urged to consult
their own tax advisors to determine their particular tax consequences.
Q: Am I entitled to appraisal rights? (See page 47)
A: No.
Q: Whom should I call with questions?
A: MCS stockholders should call Shelby R. Fike, Corporate Counsel, at (713)
548-1734, with any questions about the merger.
NetIQ stockholders should call Debra Randall, Associate Counsel, at (408)
330-7116, with any questions about the merger.
2
<PAGE>
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus pertains to the merger of MCS and NetIQ, and
it is being sent to the holders of common stock of both companies. This summary
may not contain all of the information that is important to you. You should
read carefully the documents attached to and those referenced in this proxy
statement/prospectus, including the merger agreement (and the exhibits
thereto), attached as Annex A, the opinion of Credit Suisse First Boston
Corporation ("Credit Suisse First Boston"), attached as Annex B, and the
opinion of Chase Securities, Inc. ("Chase H&Q"), attached as Annex C.
Forward-Looking Statements
Except for historical information, this proxy statement/prospectus contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements involve risks and uncertainties, including, among
other things, statements regarding post-merger business strategies, anticipated
costs and expenses, product and service development and relationships with
strategic partners. These forward-looking statements include, among others,
those statements including the words "expects," "anticipates," "intends,"
"believes" and similar language. Actual results may differ significantly from
those projected in the forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in the section "Risk Factors."
The Companies
NetIQ Corporation
5410 Betsy Ross Drive
Santa Clara, CA 95054
(408) 330-7000
http://www.netiq.com
NetIQ Corporation provides eBusiness infrastructure management software that
enables businesses to optimize the performance and availability of their
Windows NT/2000-based systems and applications. NetIQ was incorporated in
California in June 1995 and reincorporated in Delaware in July 1999.
Mission Critical Software, Inc.
13939 Northwest Freeway
Houston, TX 77040
(713) 548-1700
http://www.missioncritical.com
MCS provides systems administration and operations management software
products for corporate and Internet-based Windows NT/2000 networks, designed to
improve the reliability, performance and security of complex computing
environments by simplifying and automating key systems management functions.
MCS was incorporated in Delaware in July 1996.
Summary of the Merger
The Merger (See page 29)
In the merger, MCS will merge with a wholly-owned subsidiary of NetIQ called
Planet Acquisition Corporation. Following the merger, MCS common stockholders
will exchange each of their MCS shares for 0.9413 share of NetIQ common stock.
The merger agreement is attached to this proxy statement/prospectus as Annex
A. You are encouraged to read it carefully.
3
<PAGE>
Conditions to completion of the merger (See page 49)
MCS's and NetIQ's obligations to complete the merger are subject to the
satisfaction or waiver of closing conditions.
If either MCS or NetIQ waives any conditions, we will each consider the
facts and circumstances at that time and make a determination whether a
resolicitation of proxies from each company's stockholders is appropriate.
Vote required for approval
The holders of a majority of the shares of MCS common stock outstanding must
approve the merger agreement and the merger. MCS stockholders holding
approximately 13.4% of the outstanding common stock as of February 29, 2000
have agreed to vote these shares in favor of the merger agreement and the
merger.
The holders of a majority of the shares of NetIQ common stock present or
represented by proxy at the NetIQ special meeting must approve the issuance of
NetIQ common stock in the merger. NetIQ stockholders are entitled to cast one
vote per share of NetIQ common stock owned as of the record date. NetIQ
stockholders holding 21.3% of outstanding NetIQ common stock as of February 29,
2000 have agreed to vote all their shares of NetIQ common stock in favor of the
issuance of NetIQ common stock in the merger.
Termination of the merger agreement (See page 49)
MCS and NetIQ have the right to terminate the merger agreement under certain
circumstances. In certain cases, termination of the merger agreement will
require payment of a termination fee to MCS or NetIQ.
Directors and executive officers of the combined company following the merger
(See page 49)
Following the merger, the board of directors of the combined company will
consist of nine members, including four current members of MCS's board of
directors, four current members of NetIQ's board of directors, and one director
jointly selected by MCS and NetIQ board members.
Following the merger, Michael S. Bennett, the current President and Chief
Executive Officer of MCS, will be Executive Chairman of Newco and Ching-Fa
Hwang, the current President and Chief Executive Officer of NetIQ, will be
Chief Executive Officer of Newco.
Opinions of MCS's and NetIQ's financial advisors (See pages 32 and39)
In deciding to approve the merger, MCS's board of directors considered the
opinion of Chase H&Q, as to the fairness, from a financial point of view, to
the holders of MCS common stock, of the exchange ratio. NetIQ's board of
directors considered an opinion from its financial advisor, Credit Suisse First
Boston, as to the fairness, from a financial point of view, to the holders of
NetIQ common stock, of the exchange ratio. The written opinions of the
financial advisors are attached to the back of this proxy statement/prospectus
as Annex B and Annex C, and should be read carefully in their entireties for a
description of the assumptions made, matters considered and limitations on the
review undertaken. The opinion of Chase H&Q is directed to the MCS board, and
the opinion of Credit Suisse First Boston is directed to the NetIQ board. These
opinions do not address the prices at which NetIQ's common stock will trade
after the proposed merger, nor do they constitute a recommendation as to how
any stockholder should vote with respect to any matter relating to the proposed
merger.
U.S. federal income tax consequences of the merger (See page 45)
We have structured the merger so that MCS, MCS's stockholders, NetIQ and
NetIQ's stockholders will not recognize gain or loss for United States federal
income tax purposes in the merger, except for taxes payable because of cash
received by MCS stockholders instead of fractional shares. It is a condition to
the merger that both MCS and NetIQ receive legal opinions to this effect.
Accounting treatment of the merger (See page 46)
The acquisition will be accounted for using the purchase method of
accounting. The purchase price will be allocated to assets and liabilities of
MCS and Ganymede and these assets and liabilities will be
4
<PAGE>
recorded on NetIQ's books at their fair values upon completion of the merger. A
portion of the purchase price may be identified as in-process research and
development. This amount, if any, will be charged to NetIQ's operations in the
quarter the merger is completed and the acquisition accounting and valuation
amounts are finalized. The remaining purchase price will be reflected as
goodwill and other intangible assets, which will be amortized over several
years. The results of operations and cash flows of MCS and Ganymede will be
included in NetIQ's financial statements prospectively as of the consummation
of the merger.
Interests of certain persons in the merger (See page 43)
When considering the recommendations of MCS's and NetIQ's boards of
directors, you should be aware that certain MCS and NetIQ directors, officers
and stockholders have interests in the merger that are different from, or are
in addition to, yours. These interests include options held by various
executive officers and directors, the post-merger membership of four current
MCS directors and four of the six current NetIQ directors on the board of
directors of Newco, the effect of the merger on employment arrangements with
executives of both companies and the indemnification of directors and officers
of MCS against certain liabilities both before and after the merger.
No appraisal rights
Under Delaware law, neither stockholders of MCS nor stockholders of NetIQ
are entitled to appraisal rights in connection with the merger.
Restrictions on the ability to sell Newco stock (See page 47)
All shares of Newco common stock received by MCS stockholders in connection
with the merger will be freely transferable unless the holder is considered an
affiliate of either MCS or NetIQ under the Securities Act of 1933 (the
"Securities Act"). Shares of Newco held by affiliates may only be sold pursuant
to a registration statement or an exemption from the Securities Act.
Acquisition of Ganymede Software Inc.
On March 10, 2000, MCS entered into an agreement to acquire Ganymede
Software Inc. in exchange for a total of 2,750,000 MCS shares and options to
purchase MCS common stock. MCS has already acquired 90% of the outstanding
capital stock of Ganymede, and it expects to acquire the remainder of the stock
through a merger expected to be completed in April 2000. For more information
regarding Ganymede, see the section entitled "Certain Information Regarding
MCS--Business--Ganymede." For a discussion of risks associated with the merger,
see the section entitled "Risk Factors--Newco Will Face Risks Associated with
its Acquisition of Ganymede."
Comparative market price information (See page 59)
Shares of MCS's common stock are listed on Nasdaq. On February 25, 2000,
MCS's common stock closed at $62.25 per share. On March , 2000, MCS's common
stock closed at $[ ] per share. NetIQ common stock is listed on Nasdaq. On
February 25, 2000, the last full trading day prior to the public announcement
of the proposed merger, NetIQ's common stock closed at $73.50 per share. On
March , 2000, NetIQ's common stock closed at $[ ] per share. Stockholders of
both companies should obtain current market quotations.
Regulatory approval (See page 47)
This merger is subject to review by the Department of Justice and the
Federal Trade Commission to determine whether it is in compliance with
applicable antitrust laws. In addition, the completion of the merger is subject
to the effectiveness of the registration statement, of which this proxy
statement/prospectus is a part, and compliance with applicable corporate laws
of Delaware.
5
<PAGE>
SELECTED HISTORICAL AND SELECTED PRO FORMA
COMBINED FINANCIAL DATA
NetIQ's Selected Historical Consolidated Financial Data
The following selected historical consolidated financial data should be read
in conjunction with NetIQ's Consolidated Financial Statements, and "NetIQ
Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this proxy statement/prospectus. The
consolidated statement of operations data for the years ended June 30, 1997,
1998 and 1999 and the consolidated balance sheet data as of June 30, 1998 and
1999 have been derived from NetIQ's audited consolidated financial statements
included elsewhere in this proxy statement/prospectus. The statement of
operations data for the year ended June 30, 1996 and the consolidated balance
sheet data as of June 30, 1996 and 1997 have been derived from NetIQ's audited
financial statements not included herein. The consolidated statement of
operations data for the six months ended December 31, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1999, are derived from
unaudited consolidated financial statements included elsewhere in this proxy
statement/prospectus. In the opinion of NetIQ's management, such unaudited
financial statements have been prepared on the same basis as the audited
consolidated financial statements referred to above and include all
adjustments, consisting of only 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 six months
ended December 31, 1999 are not necessarily indicative of the expected results
for the full year.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
---------------------------------- -------------------
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 $ 8,159 $ 13,600
Service revenue......... -- 19 467 3,136 1,078 3,108
------- ------- ------- ------- ------- ---------
Total revenue........ -- 388 7,070 21,569 9,237 16,708
------- ------- ------- ------- ------- ---------
Cost of software license
revenue................ -- 9 235 755 245 329
Cost of service
revenue................ -- 46 407 1,260 560 816
------- ------- ------- ------- ------- ---------
Total cost of
revenue............. -- 55 642 2,015 805 1,145
------- ------- ------- ------- ------- ---------
Gross profit............ -- 333 6,428 19,554 8,432 15,563
------- ------- ------- ------- ------- ---------
Operating expenses:
Sales and marketing.... 77 1,238 5,748 11,685 4,989 8,975
Research and
development........... 665 1,003 2,192 4,344 1,690 3,588
General and
administration........ 264 479 1,611 2,983 1,265 1,507
Stock-based
compensation.......... -- 10 250 1,928 1,025 352
Settlement of
litigation............ -- -- -- 364 -- --
------- ------- ------- ------- ------- ---------
Total operating
expenses............ 1,006 2,730 9,801 21,304 8,969 14,422
------- ------- ------- ------- ------- ---------
Income (loss) from
operations............. (1,006) (2,397) (3,373) (1,750) (537) 1,141
------- ------- ------- ------- ------- ---------
Interest and other
income, net............ 97 116 262 108 57 1,265
Income taxes............ -- -- -- -- -- 501
------- ------- ------- ------- ------- ---------
Net income (loss)....... $ (909) $(2,281) $(3,111) $(1,642) $ (480) $ 1,905
======= ======= ======= ======= ======= =========
Basic net income (loss)
per share(1)........... $ (1.55) $ (1.62) $ (1.34) $ (0.47) $ (0.15) $ 0.14
Shares used to compute
basic net income (loss)
per share(1)........... 587 1,411 2,325 3,476 3,235 13,832
Diluted net income
(loss) per share(1).... $ (1.55) $ (1.62) $ (1.34) $ (0.47) $ (0.15) $ 0.11
Shares used to compute
diluted net income
(loss) per share(1).... 587 1,411 2,325 3,476 3,235 16,868
- --------
(1) See note 6 to audited Consolidated Financial Statements and note 5 to
unaudited Condensed Consolidated Financial Statements for determination of
shares used in computing basic and diluted net income (loss) per share on
pages F-14 and F-22 of this proxy statement/prospectus.
<CAPTION>
June 30,
---------------------------------- Dec. 31,
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 $ 4,631
Short-term investments.. -- -- -- -- 125,616
Working capital......... 1,755 7,493 4,314 4,443 126,544
Total assets............ 2,255 8,202 8,205 18,354 139,528
Long-term obligations,
net of current
portion................ -- -- -- 205 --
Total stockholders'
equity................. 1,880 7,787 4,939 5,799 128,800
</TABLE>
6
<PAGE>
MCS's Selected Historical Financial Data
The following selected historical financial data should be read in
conjunction with MCS's Financial Statements, and "MCS Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere in this proxy statement/prospectus. The statement of operations data
for the period from July 19, 1996 (inception) to June 30, 1997 and the years
ended June 30, 1998 and 1999 and the balance sheet data as of June 30, 1998 and
1999 have been derived from MCS's audited financial statements included
elsewhere in this proxy statement/prospectus. The balance sheet data as of June
30, 1997 has been derived from MCS's audited financial statements not included
herein. The statement of operations data for the six months ended December 31,
1998 and 1999 and the balance sheet data as of December 31, 1999, are derived
from MCS's unaudited financial statements included elsewhere in this proxy
statement/prospectus. In the opinion of MCS's management, such unaudited
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the information
when read in conjunction with the financial statements and notes thereto.
Results for the six months ended December 31, 1999 are not necessarily
indicative of the expected results for the full year.
<TABLE>
<CAPTION>
Period from Six Months
July 19, 1996 Year Ended Ended
(inception) June 30, December 31,
to June 30, ---------------- -----------------
1997 1998 1999 1998 1999
------------- ------- ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Software license revenue.... $ 4,087 $12,767 $21,067 $ 8,796 $ 15,963
Service revenue............. 180 1,609 3,760 1,373 3,499
------- ------- ------- ------- --------
Total revenue............ 4,267 14,376 24,827 10,169 19,462
------- ------- ------- ------- --------
Cost of software license
revenue.................... 206 392 380 192 151
Cost of service revenue..... 142 933 914 441 602
------- ------- ------- ------- --------
Total cost of revenue.... 348 1,325 1,294 633 753
------- ------- ------- ------- --------
Gross profit................ 3,919 13,051 23,533 9,536 18,709
------- ------- ------- ------- --------
Operating expenses:
Sales and marketing........ 3,554 9,590 13,480 5,391 10,375
Research and development... 1,317 3,612 5,986 2,641 4,583
General and
administration............ 973 2,228 2,458 1,197 1,965
Amortization of deferred
stock compensation........ -- -- 532 78 521
Abandoned lease costs
(recovery)................ -- -- 1,034 -- (295)
Acquired in-process
research and
development............... 1,575 -- -- -- --
------- ------- ------- ------- --------
Total operating
expenses................ 7,419 15,430 23,490 9,307 17,149
------- ------- ------- ------- --------
Income (loss) from
operations................. (3,500) (2,379) 43 229 1,560
------- ------- ------- ------- --------
Interest and other income,
net........................ 2 63 299 123 1,467
Income tax expense
(benefit).................. (175) -- -- -- 455
------- ------- ------- ------- --------
Net income (loss)........... (3,323) (2,316) 342 352 2,572
Excess of consideration paid
to redeem preferred stock
and increase in dividends
on convertible preferred
stock...................... (181) (3,714) (1,059) (528) --
------- ------- ------- ------- --------
Net income (loss) applicable
to common stockholders..... $(3,504) $(6,030) $ (717) $ (176) $ 2,572
======= ======= ======= ======= ========
Basic net income (loss) per
share applicable to common
stockholders............... $ (1.44) $ (2.47) $ (0.25) $ (0.07) $ 0.20
Shares used to compute basic
net income (loss) per
share...................... 2,431 2,440 2,814 2,614 12,659
Diluted net income (loss)
per share applicable to
common stockholders........ $ (1.44) $ (2.47) $ (0.25) $ (0.07) $ 0.15
Shares used to compute
diluted net income (loss)
per share.................. 2,431 2,440 2,814 2,614 17,382
<CAPTION>
June 30, Dec. 31,
------------------------------ --------
1997 1998 1999 1999
------------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents... $ 299 $ 4,575 $11,031 $178,705
Working capital (deficit)... (2,523) 3,241 4,176 168,316
Total assets................ 4,595 10,958 17,786 187,380
Long-term obligations, net
of current portion......... 33 352 81 --
Redeemable convertible
preferred stock............ 3,189 13,179 13,179 --
Total stockholders' equity
(deficit).................. (3,520) (8,516) (7,224) 172,344
</TABLE>
7
<PAGE>
Selected Unaudited Pro Forma Condensed Combined Financial Data
The following selected unaudited pro forma condensed combined financial data
should be read in conjunction with NetIQ's unaudited pro forma condensed
combined financial statements and related notes thereto included elsewhere in
this proxy statement/prospectus. The selected unaudited pro forma condensed
combined financial data gives effect to the proposed merger of MCS and NetIQ
and the acquisition of Ganymede by MCS.
The selected unaudited pro forma condensed combined statement of operations
data for the year ended June 30, 1999 and the six months ended December 31,
1999 gives effect to the above transactions as if they occurred on July 1,
1998. The unaudited pro forma condensed combined statement of operations data
for the year ended June 30, 1999 has been derived by combining the audited
historical statements of operations of MCS and NetIQ for the fiscal year ended
June 30, 1999 and the audited historical statements of operations of Ganymede
for the fiscal year ended March 31, 1999. The unaudited pro forma condensed
combined statement of operations data for the six months ended December 31,
1999 has been derived by combining unaudited historical statement of operations
of NetIQ, MCS and Ganymede for the six months ended December 31, 1999.
The selected unaudited pro forma condensed combined balance sheet as of
December 31, 1999 gives effect to the above transactions as if they occurred on
December 31, 1999. The unaudited pro forma condensed combined balance sheet
data as of December 31, 1999 has been derived by combining the unaudited
historical condensed consolidated balance sheets of NetIQ, MCS and Ganymede as
of December 31, 1999.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the merger had been consummated at the beginning of the
earliest period presented, nor is it necessarily indicative of future operating
results or financial position. The pro forma adjustments are based upon
information and assumptions available at the time of the filing of this
document.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, 1999 December 31, 1999
-------------------- ----------------------
(in thousands, except per share amounts)
<S> <C> <C>
Pro forma Condensed Combined
Statement of Operations
Data:
Total Revenue............... $ 54,398 $ 41,690
Net loss.................... (305,994) (146,147)
Net loss per share--basic
and diluted................ (13.98) (4.53)
Supplemental Information:
Net income (loss), excluding
goodwill amortization...... $ (4,912) $ 4,394
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------
(in thousands)
<S> <C>
Pro forma Condensed Combined Balance Sheet Data:
Cash and cash equivalents..................................... $ 185,495
Short-term investments........................................ 125,616
Working capital............................................... 272,540
Total assets.................................................. 1,836,612
Long term obligations, net of current portion................. 861
Stockholders' equity.......................................... 1,783,999
</TABLE>
8
<PAGE>
Comparative Per Share Data
The following table reflects (a) the historical net income (loss) and book
value per share of NetIQ common stock and the historical net income (loss) and
book value per share of MCS common stock in comparison with the unaudited pro
forma net loss and book value per share after giving effect to NetIQ's proposed
merger with MCS and after giving effect to acquisition of Ganymede by MCS, and
(b) the equivalent historical net loss and book value per share attributable to
0.9413 share of NetIQ common stock which will be received for each share of
MCS.
The historical book value per share is computed by dividing common
stockholders' equity as of June 30, 1999 and December 31, 1999, respectively,
by the actual common shares outstanding. The pro forma per share loss from
continuing operations is computed by dividing the pro forma loss from
continuing operations by the pro forma weighted average number of shares
outstanding, assuming NetIQ has merged with MCS at the beginning of the
earliest period presented. The pro forma combined book value per share is
computed by dividing total pro forma stockholders' equity by the pro forma
number of common shares outstanding at December 31, 1999, assuming the merger
had occurred on that date. The MCS equivalent pro forma combined per share
amounts are calculated by multiplying the NetIQ pro forma combined per share
amounts by the common stock exchange ratio of 0.9413.
The following information should be read in conjunction with the separate
historical financial statements and related notes of NetIQ, MCS and Ganymede,
the unaudited interim condensed consolidated financial statements of NetIQ, the
unaudited pro forma condensed combined financial information and related notes
of NetIQ and the selected historical and selected unaudited pro forma financial
data included elsewhere in this proxy statement/prospectus. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the merger had been consummated as of the beginning of the earliest
period presented, nor is it necessarily indicative of the future operating
results or financial position of the combined companies.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, 1999 December 31, 1999
------------- -----------------
<S> <C> <C>
HISTORICAL NETIQ:
Basic net income (loss) per share............. $ (0.47) $ 0.14
Diluted net income (loss) per share........... $ (0.47) $ 0.11
Book value per share at the end of the
period....................................... $ (1.25) $ 7.53
HISTORICAL MCS:
Basic net income (loss) per share applicable
to common stockholders....................... $ (0.25) $ 0.20
Diluted net income (loss) per share applicable
to common stockholders....................... $ (0.25) $ 0.15
Book value (deficit) per share at the end of
the period................................... $ (2.18) $10.46
NETIQ AND MCS PRO FORMA COMBINED:
Pro forma net loss per NetIQ share--basic and
diluted...................................... $(13.98) $(4.53)
Pro forma net loss per equivalent MCS share--
basic and diluted............................ $(13.16) $(4.26)
Pro forma book value per NetIQ share at
December 31, 1999............................ $50.23
Pro forma book value per equivalent MCS share
at December 31, 1999......................... $47.29
</TABLE>
9
<PAGE>
RISK FACTORS
The merger involves a high degree of risk. By voting in favor of the merger,
current MCS stockholders will be choosing to invest in NetIQ common stock, and
current NetIQ stockholders will face dilution of their ownership interest in
NetIQ. An investment in NetIQ common stock involves a high degree of risk. In
addition to the other information contained in this proxy statement/prospectus,
you should carefully consider the following risk factors in deciding whether to
vote for the merger.
General risks relating to the proposed merger
MCS and NetIQ may not achieve the benefits they expect from the merger which
may have a material adverse effect on Newco's business, financial condition and
operating results and/or could result in loss of key personnel.
Newco will need to overcome significant issues in order to realize any
benefits or synergies from the merger, including the timely, efficient and
successful execution of a number of post-merger events. Key events include:
. integrating the operations of the two companies
. retaining and assimilating the key personnel of each company
. offering the existing products of each company to the other company's
customers
. retaining existing customers and strategic partners of each company
. developing new products that utilize the assets and resources of both
companies
. creating uniform standards, controls, procedures, policies and
information systems.
The successful execution of these post-merger events will involve
considerable risk and may not be successful. These risks include:
. the potential disruption of Newco's ongoing business and distraction of
its management
. the difficulty of incorporating acquired technology and rights into
Newco's products and services
. unanticipated expenses related to technology integration
. the impairment of relationships with employees and customers as a result
of any integration of new management personnel
. potential unknown liabilities associated with the merger
Newco may not succeed in addressing these risks or any other problems
encountered in connection with the merger.
MCS stockholders will receive a fixed number of shares of NetIQ common stock
despite changes in market value of MCS common stock or NetIQ common stock.
Upon the merger's completion, each share of MCS common stock will be
exchanged for 0.9413 share of NetIQ common stock. There will be no adjustment
for changes in the market price of either MCS common stock or NetIQ common
stock. In addition, neither MCS nor NetIQ may terminate the merger agreement or
"walk away" from the merger solely because of changes in the market price of
NetIQ common stock. Accordingly, the specific dollar value of NetIQ common
stock that MCS stockholders will receive upon the merger's completion will
depend on the market value of NetIQ common stock when the merger is completed
and may decrease from the date you submit your proxy. The share price of NetIQ
common stock is by nature subject to the general price fluctuations in the
market for publicly-traded equity securities and has experienced
10
<PAGE>
significant volatility. We urge you to obtain recent market quotations for
NetIQ common stock and MCS common stock. NetIQ cannot predict or give any
assurances as to the market price of NetIQ common stock at any time before or
after the completion of the merger.
The merger could adversely affect combined financial results.
MCS and NetIQ expect to incur direct transaction costs of approximately $19
million in connection with the merger, plus approximately $4 million in
connection with the acquisition of Ganymede. If the benefits of the merger do
not exceed the costs associated with the merger, including any dilution to the
stockholders of both companies resulting from the issuance of shares in
connection with the merger, Newco's financial results, including earnings per
share, could be adversely affected. The acquisition will be accounted for using
the purchase method of accounting. The purchase price will be allocated to
assets and liabilities of MCS and Ganymede and such assets and liabilities will
be recorded at their respective fair values upon completion of the merger. A
portion of the purchase price may be identified as in-process research and
development. This amount, if any, will be charged to Newco's operations in the
quarter the merger is completed and the acquisition accounting and valuation
amounts are finalized. The remaining purchase price will be reflected as
goodwill and other intangible assets, which will be amortized to expense over
several years. The results of operations and cashflows of MCS and Ganymede will
be included in Newco's financial statements prospectively as of the
consummation of the merger.
The market price of Newco common stock may decline as a result of the merger.
The market price of Newco common stock may decline as a result of the merger
for a number of reasons including if:
. the integration of MCS and NetIQ is unsuccessful;
. Newco does not achieve the perceived benefits of the merger as rapidly or
to the extent anticipated by financial or industry analysts; or
. the effect of the merger on Newco's financial results is not consistent
with the expectations of financial or industry analysts.
MCS's and NetIQ's officers and directors have conflicts of interest that may
influence them to support or approve the merger.
The directors and officers of MCS and NetIQ participate in arrangements and
have continuing indemnification against liabilities that provide them with
interests in the merger that are different from, or in addition to, yours
including the following:
. NetIQ has agreed to cause the surviving corporation in the merger to
indemnify each present and former MCS officer and director against
liabilities arising out of such person's services as an officer or
director. NetIQ will cause the surviving corporation to maintain
officers' and directors' liability insurance to cover any such
liabilities for the next six years.
. MCS and NetIQ have agreed that MCS shall be entitled to designate four
individuals currently on MCS's board to Newco's board of directors, and
NetIQ shall be entitled to designate four of the six current NetIQ
directors to continue on the board of directors of Newco following the
merger.
. MCS and NetIQ have agreed that Michael S. Bennett, Stephen E. Odom, and
Thomas P. Bernhardt, MCS's current President and Chief Executive Officer,
Chief Operating Officer and Chief Financial Officer, and Chief Technology
Officer, respectively, shall serve as Newco's Executive Chairman, Chief
Operating Officer, and Chief Technical Officer, respectively, following
the merger. MCS and NetIQ have also agreed that Ching-Fa Hwang and James
A. Barth, NetIQ's current President and Chief Executive Officer, and
Chief Financial Officer, respectively, shall serve in their respective
capacities for Newco following the merger.
11
<PAGE>
. Michael S. Bennett, MCS's President and Chief Executive Officer, and
Stephen E. Odom, MCS's Chief Operating Officer and Chief Financial
Officer, entered into agreements with MCS at the time of their employment
under which they are entitled to acceleration of 100% of their then
unvested options if, after the first anniversary of their employment and
prior to the fourth such anniversary, MCS is acquired by another company
and they are (1) terminated, (2) assigned a position of lesser
responsibility or compensation in the resulting organization, or, in the
case of Mr. Bennett, (3) required to relocate. Both are also entitled to
severance payments in the event that they are terminated other than for
cause.
. NetIQ's officers Ching-Fa Hwang, James A. Barth, Glenn S. Winokur, Thomas
R. Kemp and Her-Daw Che have entered into change of control agreements
that provide for (1) six months of severance pay, continued coverage
under health, life and other insurance arrangements, and (2) full
acceleration of options granted to the executive in the event that the
executive is involuntarily terminated or assigned a position of lesser
responsibility or compensation following a change of control.
For the above reasons, the directors and officers of MCS and NetIQ could be
more likely to vote to approve the merger agreement than if they did not hold
these interests. MCS stockholders should consider whether these interests may
have influenced these directors and officers to support or recommend the
merger.
Failure to complete the merger could negatively impact MCS's and/or NetIQ's
stock price, future business and operations.
If the merger is not completed for any reason, MCS and NetIQ may be subject
to a number of material risks, including the following:
. MCS may be required under certain circumstances to pay NetIQ, and NetIQ
may be required under certain circumstances to pay MCS, a termination fee
of $53 million
. MCS may, under certain circumstances, be entitled to exercise an option
to acquire 19.9% of NetIQ's common stock and NetIQ may, under certain
circumstances, be entitled to exercise an option to acquire 19.9% of
MCS's common stock, in which case NetIQ or MCS, respectively, could be
precluded from participating in a pooling-of-interest business
combination
. the price of MCS and/or NetIQ common stock may decline to the extent that
the relevant current market price reflects a market assumption that the
merger will be completed
. costs related to the merger, such as legal, accounting and financial
printing fees, must be paid even if the merger is not completed
In addition, MCS's and/or NetIQ's customers and strategic partners, in
response to the announcement of the merger, may delay or defer decisions, which
could have a material adverse effect on business of the relevant company,
regardless of whether the merger is ultimately completed. Similarly, current
and prospective MCS and/or NetIQ employees may experience uncertainty about
their future roles with Newco. This may adversely affect MCS's and/or NetIQ's
ability to attract and retain key management, sales, marketing and technical
personnel. Further, if the merger is terminated and either company's board of
directors determines to seek another merger or business combination, there can
be no assurance that it will be able to find a partner on terms as attractive
as those provided for in this merger agreement. In addition, while the merger
agreement is in effect and subject to very narrowly defined exceptions, each
party is prohibited from soliciting, initiating or encouraging or entering into
certain extraordinary transactions, such as a merger, sale of assets or other
business combination, with any third party.
12
<PAGE>
Risks relating to the combined companies
Newco may not be able to sustain the revenue growth rates previously
experienced by MCS and NetIQ individually.
Although MCS's and NetIQ's revenues have grown rapidly in recent years, it
is not anticipated that Newco will experience this rate of revenue growth
because of the difficulty of maintaining high percentage increases as the base
of revenue increases. In addition, growing competition, the incremental manner
in which customers convert their networks to Windows NT and Windows 2000
("Windows NT/2000") and both companies' relatively small sales organizations
could also affect Newco's revenue growth. If Newco's revenue does not increase
at or above the rate analysts expect, the trading price for its common stock
may decline.
Additionally, Newco's efforts to expand its software product suites, sales
and marketing activities, direct and indirect distribution channels and
maintenance and support functions and to pursue strategic relationships or
acquisitions may not succeed or may prove more expensive than either company
currently anticipates. As a result, MCS and NetIQ cannot predict Newco's future
operating results with any degree of certainty and Newco's quarterly operating
results may vary significantly from quarter to quarter. MCS and NetIQ also
believe that Newco's future growth rates will depend on its ability to expand
its penetration of their existing markets, which will require significant
expenses that Newco may not have sufficient resources to undertake.
MCS and NetIQ each have a history of losses and Newco may experience losses in
the future.
Since the inception of MCS and NetIQ, they each have incurred significant
net losses. MCS has achieved only marginal profitability in the fiscal year
ended June 30, 1999 and the two most recent quarters ended December 31, 1999.
NetIQ has achieved only marginal profitability in the two most recent quarters
ended December 31, 1999. It is expected that Newco will continue to incur
significant sales and marketing, product development and administrative
expenses, as well as significant amortization of goodwill created in the
merger. As a result, Newco will need to generate significant revenue to
maintain profitability before amortization of goodwill, and it is unlikely to
generate profits after inclusion of the goodwill amortization until the
goodwill is fully amortized. Newco cannot be certain that it will achieve,
sustain or increase profitability in the future, with or without goodwill
amortization. Any failure to significantly increase its revenue as Newco
implements its product and distribution strategies would materially adversely
affect Newco's business, operating results and financial condition.
Unanticipated fluctuations in Newco's quarterly operating results due to such
factors as change in the demand for NetIQ's AppManager and MCS's OnePoint
products and changes in the market for Windows NT/2000 and related products
could affect Newco's stock price.
MCS and NetIQ believe that quarter-to-quarter comparisons of each of its
financial results are not necessarily meaningful indicators of the future
operating results of Newco and should not be relied on as an indication of its
future performance. If Newco's quarterly operating results fail to meet the
expectations of analysts, the trading price of Newco's common stock could be
negatively affected. Each of MCS's and NetIQ's quarterly operating results have
varied substantially in the past and those of Newco may vary substantially in
the future depending upon a number of factors described below and elsewhere in
this proxy statement/prospectus, including many that are beyond Newco's
control. These factors include:
. Changes in demand for AppManager and OnePoint products or for
applications management software solutions generally, including any
changes in demand for Windows NT/2000-based systems and applications
. Increased competition in general and any changes in Newco's pricing
policies, relative to the historical policies of MCS and NetIQ
individually, that may result from increased competitive pressures
. Varying budgeting cycles of Newco's customers and potential customers
13
<PAGE>
. Varying size, timing and contractual terms of enterprise-wide orders for
Newco's products
. Newco's ability to develop and introduce on a timely basis new or
enhanced versions of its products
. Potential downturns in Newco's 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
. The rate of expansion of Newco's sales and support organizations and
. Changes in the historically strong relationships of MCS and NetIQ with
Microsoft
MCS and NetIQ cannot be certain that Newco's business strategy will be
successful or that it will successfully manage these risks. If Newco fails to
address adequately any of these risks or difficulties, its business would
likely suffer.
New competitors could emerge and this could impair Newco's ability to grow its
business and sell its products.
MCS and NetIQ believe the principal factors that will draw end-users to a
systems management software product include: a depth of product functionality;
the ability to work natively with Windows NT/2000; scalability; product quality
and performance, conformance to industry standards, competitive price and
customer support. To be competitive, Newco must respond promptly and
effectively to the challenges of technological change, evolving standards and
its competitors' innovations by continuing to enhance its products and sales
channels.
Newco may face competition in the future from established companies who have
not previously entered the market for applications management software for
optimizing the performance, availability and security of Windows NT/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/2000-based applications management solutions, but
they may also acquire or establish cooperative relationships with Newco's
expected 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, Newco is likely to lose market share and its
revenue would likely decline.
Newco may also face competition from Microsoft in the future. Microsoft may
enter the market for managing the performance, availability and security of
Windows NT/2000-based systems and applications in the future. This could
materially adversely affect Newco's competitive position and hurt its ability
to sell its products. As part of its competitive strategy, Microsoft could
bundle applications management software with its Windows NT/2000 operating
system software, which could discourage potential customers from purchasing
Newco's products. MCS and NetIQ also believe that Microsoft, or systems
management software vendors, each of which is also currently competing with
them, could enhance their products to include the functionality that Newco will
provide in its products. If these vendors include such functionality as
standard features of their products, Newco's software solutions could become
obsolete. Even if the standard features of future Microsoft operating system
software were more limited than those of Newco's 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 Newco's products, which would reduce its profit margins.
Potential third party competition could also create bundling or
compatibility issues and adversely affect Newco's ability to sell its products.
In addition to Microsoft, other potential competitors may bundle their products
or incorporate applications management software for optimizing the performance,
availability and
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security of Windows NT/2000-based systems and applications into existing
products, including for promotional purposes. In addition, Newco's ability to
sell its products will depend, in part, on the compatibility of its 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 Newco's products. If
Newco's competitors bundled their products in this manner or made their
products incompatible with those of Newco, this could materially adversely
affect its ability to sell its products and could lead to price reductions for
Newco's products which could reduce its profit margins.
New product introductions and pricing strategies by Newco's competitors could
adversely affect its ability to sell its products or could result in pressure
to price its products in a manner that reduces Newco's margins.
Newco may not be able to compete successfully against its competitors and
this could impair its ability to sell its products. The market for applications
management software to help optimize the performance, availability and security
of Windows NT/2000-based systems and applications is new, rapidly evolving and
highly competitive, and Newco expects 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 Newco or its competitors that could hurt Newco's ability to
sell its products and could adversely affect its profits. Many of Newco's
current competitors have greater financial, technical, marketing, professional
services and other resources than Newco. 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 Newco can. Many of these
companies have an extensive customer base and broad customer relationships,
including relationships with many of MCS's and NetIQ's current and Newco's
potential customers. If Newco is unable to respond as quickly or effectively to
changes in customer requirements as its competition, its ability to grow its
business and sell its products will be negatively affected.
Newco will need to expand its field sales and inside sales organizations and
increase its channel partners to grow its business and increase sales of its
products.
Because each of MCS and NetIQ rely heavily on its field sales and inside
sales organizations, any failure to expand those organizations could limit its
ability to sell Newco's products and expand its market share. Newco's products
and maintenance services will require a sophisticated sales effort targeted at
people within its prospective customers' information technology departments. It
is expected that Newco will significantly expand its field sales efforts in the
U.S. and internationally. Despite these efforts, Newco may experience
difficulty in recruiting and retaining qualified field and inside sales
personnel. To date, MCS has not significantly utilized systems integrators or
consulting service providers in its selling efforts for its software products.
It is expected that Newco will explore relationships with systems integrators
and explore cross-selling products into NetIQ's consulting service provider
partner network, but MCS and NetIQ have little or no experience negotiating
agreements with systems integrators and no test marketing of MCS's products has
been done to date with NetIQ's consulting service provider partners. Newco's
business and sales may suffer if it fails to enter into agreements with systems
integrators or fails to achieve significant sales through NetIQ's consulting
service provider partners or if Newco fails to successfully and profitably
negotiate and perform its obligations under new and existing agreements. In
addition, Newco's revenue could decline if selling its products through systems
integrators or consulting service providers results in lower margins per
license and those sales replace a substantial portion of its direct sales.
The success of Newco will depend on the expansion of its distribution channels.
Newco's ability to sell its products in new markets and to increase its
share of existing markets will be impaired if it fails to significantly expand
its distribution channels. Newco's sales strategy requires establishing
multiple indirect marketing channels in the United States and internationally
through value added resellers, systems integrators, distributors and original
equipment manufacturers, and that Newco increase the number of
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customers licensing Newco's products through these channels. Moreover, Newco's
channel partners must market its 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 Newco's ability to increase revenue.
Currently, NetIQ's North American resellers order NetIQ's products through
Tech Data Corporation, which is currently NetIQ's sole North American
distributor. Newco intends to add additional U.S. and international
distributors, but it may not be able to do so and may not be able to maintain
NetIQ's existing relationship with Tech Data. Sales of NetIQ's AppManager
products through Tech Data accounted for approximately $1,163,000, or 6%, of
software license revenue for fiscal 1999 and $1,408,000, or 10% of software
license revenue for six months ended December 31, 1999, respectively. NetIQ's
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. NetIQ's current agreement with Tech Data does not prevent
Tech Data from selling products of other companies, including those of NetIQ's
competitors, and does not require that Tech Data purchase minimum quantities of
NetIQ's products. Tech Data and any of Newco's future distributors could give
higher priority to the products of other companies than they would give to
Newco's products. As a result, any significant reduction in sales volume
through any of Newco's future distribution partners could lower its 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 Newco's gross margins. Furthermore, Newco's relationships with its
distribution partners may not generate enough revenue to offset the significant
resources used to develop these channels.
If the markets for Windows NT/2000 and applications management software for
these systems and applications do not continue to develop as Newco anticipates,
Newco's ability to grow its business and sell its products will be adversely
affected.
Windows NT/2000. AppManager and OnePoint are designed to support Windows
NT/2000-based systems and applications and it is anticipated that Newco's
products will be dependent on the Windows market for the foreseeable future. If
the market for Windows 2000 does not develop or develops more slowly than MCS
and NetIQ currently anticipate, this would materially adversely affect Newco's
ability to grow its business, sell its products, and maintain profitability.
Windows 2000 may not gain market acceptance. In addition, users of previous
versions of Windows NT may decide to migrate to an operating system other than
Windows 2000 due to improved functionality of some other vendor's operating
system. Windows 2000 may address more of the needs of its customers for systems
administration and operations management, in which case Newco's customers would
not need to purchase its products to perform those functions. Although the
market for Windows NT/2000-based systems has grown rapidly in recent periods,
this growth may not continue at the same rate, or at all.
If there is broader acceptance of other existing or new operating systems
that provide enhanced capabilities or offer similar functionality to Windows
NT/2000 at a lower cost, Newco's business would likely suffer.
Applications Management Software for Windows NT/2000. The market for
applications management software for optimizing the performance and
availability of Windows NT/2000-based systems and applications may not develop
or may grow more slowly than MCS and NetIQ anticipate, and this could
materially adversely affect Newco's ability to grow its business, sell its
products, and achieve and maintain profitability. The rate of acceptance of
Newco's products is dependent upon the increasing complexity of businesses'
Windows NT/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/2000-based systems and
applications internally and only recently have become aware of the benefits of
third-party solutions as their needs have become more complex. Newco's 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.
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The lengthy sales cycle for Newco's products makes its 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 Newco's quarterly
and annual revenue. MCS and NetIQ have traditionally focused sales of their
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 Newco's products is subject to a number of significant risks over which
Newco has little or no control, including:
. customers' budgetary constraints and internal acceptance procedures
. concerns about the introduction or announcement of Newco's or its
competitors' new products, including product announcements by Microsoft
relating to Windows NT/2000
. customer requests for product enhancements
It is expected that Newco will offer a broader range of products that may
require increased selling effort for the customer's entire enterprise than has
historically been true of either MCS or NetIQ. 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 Newco's
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 of which may have specific and conflicting requirements.
This evaluation process often requires significant efforts to educate
information technology decision-makers about the benefits of Newco's products
for the Windows NT/2000 environment. In addition, enterprise-wide deployments
could also erode per-user license fees even though average sales prices might
increase.
MCS and NetIQ have each experienced significant growth in their respective
businesses in recent periods and Newco's ability to manage this growth and any
future growth will affect its ability to maintain profitability.
Newco's ability to maintain profitability will depend in part on its ability
to implement and expand operational, customer support and financial control
systems and to train and manage its employees. Newco 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, Newco will need to expand
its facilities to accommodate the growth in its personnel. Any failure to
manage growth could divert management attention from executing its business
plan and hurt its ability to successfully expand its business. MCS's and
NetIQ's historical growth has placed, and any further growth is likely to
continue to place, a significant strain on Newco's resources. NetIQ has grown
from 14 employees at June 30, 1996 to 161 employees at December 31, 1999. At
June 30, 1997 MCS had a total of 50 employees and at December 31, 1999 MCS had
a total of 206 employees. Newco's productivity and the quality of its products
may be adversely affected if it does not retain, integrate and train its new
employees quickly and effectively. Newco also cannot be sure that its revenues
will grow at a sufficient rate to absorb the costs associated with a larger
overall headcount, as well as recruiting-related expenses. It is expected that
Newco will implement new financial and accounting systems and to be successful,
it will need to expand its other infrastructure programs, including
implementing additional management information systems, improving its operating
and administrative systems and controls, training new employees and maintaining
close coordination among its executive, engineering, accounting, finance,
marketing, sales, operations and customer support organizations. In addition,
future growth of Newco will result in increased responsibilities for management
personnel. Managing this growth will require substantial resources that Newco
may not have.
Newco will need to recruit and retain additional qualified personnel to
successfully manage its business.
Newco's future success will likely depend in large part on its ability to
attract and retain experienced sales, research and development, marketing,
technical support and management personnel. New employees generally require
substantial training in the use of Newco's products, which in turn requires
significant resources and management attention. If Newco does not attract and
retain such personnel, this could materially adversely affect its ability to
grow its business.
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Moreover, the complexity of distributed, computing systems requires highly
trained customer service and technical support personnel to assist customers
with installation and deployment of our products. MCS and NetIQ each currently
have a small customer service and support organization and will need to
increase the staff to support new customers and the expanding needs of their
existing customers. The labor market for these personnel is very competitive
due to the limited number of people available with the necessary technical
skills and understanding of the Windows NT/2000 operating environments. MCS and
NetIQ have each experienced difficulty in recruiting qualified personnel,
especially technical and sales personnel. There is a risk that even if Newco
invests significant resources in attempting to attract, train and retain these
qualified personnel, it will not be successful in its efforts.
To achieve its business objectives, Newco may recruit and employ skilled
technical professionals from other countries to work in the United States.
Limitations imposed by federal immigration laws and the availability of visas
could materially adversely affect Newco's ability to attract necessary
qualified personnel. This may have a negative effect on Newco's business and
future operating results.
Newco's executive officers and other key personnel are critical to its business
and they may not remain with Newco in the future which could hurt Newco's
ability to grow its business.
Newco's success will depend to a significant extent on the continued
services of its executive officers and other key employees, including key
sales, consulting, technical and marketing personnel. If Newco loses the
services of one or more of its executives or key employees, including if one or
more of its executives or key employees decided to join a competitor or
otherwise compete directly or indirectly with Newco, this could harm Newco's
business and could affect its ability to successfully implement its business
objectives.
Newco will depend on its marketing, product development and sales relationship
with Microsoft, and if this relationship suffers, Newco's customers would
likely purchase other vendors' systems management software products.
MCS and NetIQ believe that Newco's success in penetrating its target markets
depends in part on its ability to maintain strong strategic marketing, product
development and sales relationships with Microsoft. The relationship with
Microsoft will be important in order to validate Newco's technology, facilitate
broad market acceptance of its products and enhance its sales, marketing and
distribution capabilities.
MCS and NetIQ currently rely heavily on their relationship with Microsoft
and attempt to coordinate their product offerings with the future releases of
Microsoft's operating systems. It is possible that Microsoft may not notify
Newco of feature enhancements to its products prior to new releases of its
operating systems in the future. In that case, Newco may not be able to
introduce products on a timely basis that capitalize on new operating system
releases and feature enhancements.
If Newco is unable to successfully expand on MCS's and NetIQ's international
operations, this could adversely affect Newco's ability to grow its business.
International sales outside of North America accounted for approximately 23%
of MCS's license revenue and 24% of NetIQ's license revenue for the three
months ended December 31, 1999. NetIQ and MCS expect Newco to expand the scope
of their international operations. If Newco is unable to expand its
international operations successfully and in a timely manner, this could
materially adversely affect its ability to increase revenue. Newco's continued
growth and profitability will require continued expansion of its international
operations, particularly in Europe and the Asia-Pacific region. MCS and NetIQ
have only limited experience in developing, marketing, selling and supporting
its products internationally and may not succeed in expanding Newco's
international operations. The following factors may adversely affect Newco's
ability to achieve and maintain profitability and Newco's ability to sell its
products internationally:
. Longer payment cycles and difficulty in collecting accounts receivable
. Seasonal reductions in business activity during the summer months in
Europe and other parts of the world
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. Increases in tariffs, duties, price controls or other restrictions on
foreign currencies or trade barriers imposed by foreign countries
. Difficulties in localizing Newco's products for foreign markets
. Fluctuations in currency exchange rates
. Recessionary environments in some foreign economies
. Potentially adverse tax consequences
. Burden of complying with complex and changing regulations
. Difficulties in staffing and managing international operations
. Limited or unfavorable intellectual property protection
If Newco does not respond adequately to the industry's evolving technology
standards or does not continue to meet the sophisticated needs of its
customers, sales of Newco's products may decline.
The systems management software market is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changes in customer demands and evolving
industry standards. Newco's products could be rendered obsolete if other
products based on new technologies are introduced or new industry standards
emerge.
Newco's future success will depend on its ability to address the
increasingly sophisticated needs of its customers by supporting existing and
emerging technologies, including technologies related to the development of the
Windows NT/2000 operating system generally. If Newco does not enhance its
products to meet these evolving needs, this could materially adversely affect
its ability to remain competitive and sell its products. Newco will have to
develop and introduce new products and enhancements to MCS's and NetIQ's
existing 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 Newco's products are currently dependent upon Windows
NT/2000, Newco will need to continue to respond to technology advances in these
operating systems. If Newco's introduction of new systems management software
products for Windows NT/2000-based systems and applications is not successful,
Newco's revenues could decline. Product advances could rapidly erode Newco's
position in its existing markets. Consequently, the life cycles of Newco's
products are difficult to estimate. Newco expects that its product development
efforts will continue to require substantial investments that Newco may not
have the resources to make.
In addition, if Newco is unable, for technological or other reasons, to
develop and introduce new and improved products in a timely manner, this could
affect its ability to introduce new products, maintain its competitive position
and grow its business and maintain profitability. MCS and NetIQ 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 its business.
However, future delays may have a material adverse effect on Newco's 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 Newco's products to its customers.
Newco's revenue may suffer if customers demand extensive consulting or other
support services with its software products because Newco does not have a
consulting staff as its products are designed to require little external
support or consulting to be installed and used successfully.
Newco's products are designed to require little or no support to be
implemented quickly and effectively by its customers. Many competitors offer
extensive consulting services in addition to software products. If Newco
introduced a product that required extensive consulting services for
installation and use, or if its customers wanted to purchase from a single
vendor a menu of items that includes extensive consulting services, Newco
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would be required to change its business model and would be required to hire
and train consultants, outsource the consulting services or enter into a joint
venture with another company that could provide those services. If these events
were to occur, its revenue may suffer because customers would choose another
vendor or Newco would incur the added expense of hiring and retaining
consulting personnel.
Newco's future revenue could decline substantially if its existing customers do
not continue to purchase additional licenses.
In the fiscal year ended June 30, 1999 and the three months ended December
31, 1999, additional sales to existing customers represented approximately 50%
and 78%, respectively, of MCS's license revenue and 41% and 59%, respectively,
of NetIQ's revenue. If MCS's and NetIQ's current customers do not purchase
additional products, this would reduce Newco's revenue substantially. In order
to increase software license revenue, Newco's sales efforts are expected to
target MCS's and NetIQ's existing customer base to expand these customers' use
of Newco's products. Newco will also depend on MCS's and NetIQ's installed
customer base for future revenue from maintenance renewal fees. The terms of
MCS's and NetIQ's standard license arrangements provide for a one-time license
fee and a prepayment of one year of software maintenance. These maintenance
agreements are renewable annually at the option of Newco's customers but there
are no minimum payment obligations or obligations to license additional
software.
Because NetIQ licenses technology from Summit Software that helps AppManager
run NetIQ's applications management modules, any failure to maintain
satisfactory licensing arrangements with Summit Software could result in
increased costs.
NetIQ licenses technology from Summit Software on a non-exclusive, worldwide
basis that helps AppManager run NetIQ's applications management modules.
NetIQ's AppManager product modules for Windows NT, Windows 2000, Windows NT
Workstation and Super Console incorporate the Summit Software technology.
Although NetIQ's agreement allows it to continue to sell products using the
Summit technology for a period of 24 months after the license terminates,
Newco's ability to sell these products could be adversely affected if Newco is
not able to replace this technology on commercially reasonable terms. NetIQ
licenses this technology on a year-to-year basis which is automatically renewed
each August unless otherwise terminated. NetIQ's license for this technology is
terminable by Summit upon 60 days notice in the event NetIQ breaches its
agreement with Summit, including a failure by NetIQ to pay royalty fees on a
timely basis or any other material breach by NetIQ of the license agreement.
MCS has relied, and Newco expects to continue to rely on, sales of licenses for
MCS's OnePoint Administrator products for a significant portion of its revenue,
and a decline in sales of this product could cause Newco's revenue to fall.
Historically, MCS has derived the substantial majority of its license
revenue from the sale of its OnePoint Administrator products. During the fiscal
years ended June 30, 1998 and 1999 and the three months ended December 31,
1999, sales of OnePoint Administrator products accounted for approximately 88%,
82% and 80% of MCS's license revenue, respectively. Newco expects that these
products will continue to account for a large portion of its license revenue
for the foreseeable future. Newco's future operating results depend on the
continued market acceptance and future enhancements of its OnePoint
Administrator products. Any factors adversely affecting the pricing of, demand
for or market acceptance of Newco's OnePoint Administrator products, including
competition or technological change, could cause its revenue to decline and its
business to suffer.
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Errors in Newco's products could result in significant costs to us and could
impair Newco's ability to sell its products.
Because Newco's 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 Newco's reputation, which could result
in significant costs to it and could impair Newco's ability to sell its
products in the future. The costs Newco may incur in correcting any product
errors may be substantial and could decrease its profit margins. While Newco
expects to continually test its products for errors and work with customers
through its customer support services organization to identify and correct
bugs, errors in Newco's 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 Newco's customers use these products as well as
because of the increased functionality of Newco's product offerings. Detection
of any significant errors may result in, among other things, loss of, or delay
in, market acceptance and sales of Newco's products, diversion of development
resources, injury to Newco's reputation, or increased service and warranty
costs. Moreover, because Newco's products support Windows NT/2000-based systems
and applications, any software errors or bugs in the Windows NT/2000 operating
server software or the systems and applications that Newco's products operate
with may result in errors in the performance of Newco's software.
Newco may be subject to product liability claims that could result in
significant costs.
Newco may be subject to claims for damages related to product errors in the
future. A material product liability claim could materially adversely affect
Newco's 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 Newco's reputation. MCS's and NetIQ's license agreements
with their customers typically contain provisions designed to limit exposure to
potential product liability claims. Some of MCS's and NetIQ's licensing
agreements state that if their products fail to perform, the company will
correct or issue replacement software. MCS's and NetIQ's standard license also
states that MCS and NetIQ will not be liable for indirect or consequential
damages caused by the failure of their products. Limitation of liability
provisions like these, however, may not be effective under the laws of some
jurisdictions if local laws treat those types of warranty exclusions as
unenforceable. Although neither MCS nor NetIQ has experienced any product
liability claims to date, the sale and support of Newco's products involves the
risk of such claims.
Newco may acquire technologies or companies in the future which could cause
disruption of its business or other risks.
Newco 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 Newco's business. These risks
include
. difficulty in assimilating the acquired company's personnel and
operations
. diversion of management's attention
. loss of Newco's or the acquired business's key personnel
. dilution to Newco's stockholders as a result of issuing equity securities
. assumption of liabilities of the acquired company and
. increased expenses as a result of the transaction
Newco will face risks associated with the acquisition of Ganymede.
MCS has recently acquired approximately 90% of Ganymede. Newco could have
difficulty in assimilating Ganymede's personnel and operations. In addition,
the key personnel of this acquired company may decide not to work for us.
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If Newco fails to protect its intellectual property rights, competitors may be
able to use its technology or trademarks and this could weaken Newco's
competitive position, reduce its revenue and increase costs.
Newco's success is heavily dependent upon proprietary technology. Newco
expects to rely primarily on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights and prevent competitors from using its
technology in their products. These laws and procedures provide only limited
protection. MCS and NetIQ each have a small patent portfolio. These patents may
not provide sufficiently broad protection or they may not prove to be
enforceable in actions against alleged infringers. Newco's ability to sell its
products and prevent competitors from misappropriating its proprietary
technologies, trademarks and trade names is dependent upon protecting Newco's
intellectual property. Despite precautions that Newco takes, it may be possible
for unauthorized third parties to copy aspects of its current or future
products or to obtain and use information that Newco regards as proprietary. In
particular, Newco may provide its licensees with access to proprietary
information underlying its licensed applications. Additionally, Newco's
competitors may independently develop similar or superior technology or design
around the copyrights and trade secrets Newco owns. Policing unauthorized use
of software is difficult and some foreign laws do not protect proprietary
rights to the same extent as United States laws. Litigation may be necessary in
the future to enforce Newco's intellectual property rights, to protect its
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 Newco's business, future
operating results and financial condition.
MCS and NetIQ license their software products primarily under "shrink wrap"
licenses, which are licenses included as part of the product packaging. Shrink
wrap licenses are not negotiated with or signed by individual customers and
purport to take effect upon the opening of the product package. Despite efforts
to protect proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use Newco's products or technology. Policing unauthorized
use of its products is difficult, and Newco cannot be certain that the steps it
has taken will prevent misappropriation of its technology, particularly in
foreign countries where the laws may not protect its proprietary rights as
fully as those in the United States. Newco's means of protecting its
proprietary rights may be inadequate.
Third parties could assert that Newco's products infringe their intellectual
property rights. Such claims could injure Newco's reputation and adversely
affect its ability to sell its products.
Third parties may claim that Newco's current or future products infringe
their proprietary rights, and these claims, whether they have merit or not,
could harm Newco's business by increasing its costs or reducing its revenue.
NetIQ previously litigated a claim with Compuware alleging that NetIQ 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 for
either MCS or NetIQ, any future claims could affect Newco's relationships with
existing customers and may prevent future customers from licensing its
products. The intensely competitive nature of Newco's industry and the
important nature of technology to its 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 Newco may
owe resulting from such litigation, cause product shipment delays or require
Newco to enter into royalty or licensing agreements. Royalty or license
agreements may not be available on acceptable terms or at all. Newco expects
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.
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THE NETIQ MEETING
Date, time and place of NetIQ's special meeting
The date, time and place of the special meeting of NetIQ stockholders are as
follows:
, 2000
10:00 a.m. local time
5410 Betsy Ross Drive
Santa Clara, California 95054
Purpose of the special meeting
NetIQ is furnishing this proxy statement/prospectus to NetIQ stockholders in
connection with the solicitation of proxies by NetIQ's board of directors. The
NetIQ board of directors will use the proxies at the special meeting of
stockholders and at any adjournment or postponement thereof.
The special meeting is being held so that NetIQ stockholders may consider
and vote upon the following proposals:
. to approve the issuance of shares of NetIQ common stock in connection
with the merger based on an exchange ratio of 0.9413 share of Newco
common stock for each outstanding share of MCS common stock and as set
forth in the merger agreement.
. to approve an amendment to NetIQ's Certificate of Incorporation to
change its corporate name to Newco Corporation.
. to approve an amendment to NetIQ's 1995 Stock Plan to increase the
number of shares reserved for issuance under the plan from 5,333,332 to
8,000,000 and to annually increase this reserve by the lowest of (i)
2,600,000 shares, (ii) 5% of the outstanding shares on the first day of
NetIQ's fiscal year, and (iii) an amount determined by the board of
directors.
. to approve an amendment to NetIQ's 1999 Employee Stock Purchase Plan to
increase the number of shares reserved for issuance under the plan from
500,000 to 1,000,000 and to annually increase this reserve by the lowest
of (i) 800,000 shares, (ii) 2% of the outstanding shares on the first
day of NetIQ's fiscal year, and (iii) an amount determined by the board
of directors.
Record date and outstanding shares
NetIQ's board of directors has fixed the close of business on [ ], 2000
as the record date for the special meeting. Only holders of record of NetIQ
common stock at the close of business on the record date are entitled to notice
of and to vote at the meeting. As of the close of business on the record date,
there were [ ] shares of NetIQ common stock outstanding and entitled to vote,
held of record by approximately [ ] stockholders, although NetIQ has been
informed that there are in excess of [ ] beneficial owners.
Vote and quorum required
Holders of NetIQ's common stock are entitled to one vote for each share held
as of the record date. In order to conduct business at the special meeting, a
quorum consisting of at least a majority of NetIQ's outstanding common stock
must be present in person or represented by proxy. Approval of the proposals to
issue NetIQ shares in the merger and to increase the share reserves under
NetIQ's stock plans requires the affirmative vote of a majority of the common
stock of NetIQ present in person or represented by proxy at the meeting.
Approval of the amendment of NetIQ's certificate of incorporation to change the
corporate name to Newco Corporation requires the affirmative vote of a majority
of NetIQ's outstanding common stock.
As of February 29, 2000, directors, executive officers and affiliates of
NetIQ as a group beneficially owned 27% of the outstanding shares of NetIQ
common stock. Certain major stockholders of NetIQ have entered into stockholder
voting agreements with MCS that obligate them to vote a total of approximately
21.3% of NetIQ's common stock outstanding as of the record date, in favor of
approval of the merger transaction.
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Voting of proxies
All properly executed proxies received before the vote at the special
meeting, and not revoked, will be voted in accordance with the instructions
indicated on the proxies. If no instructions are indicated, such proxies will
be voted FOR the proposal to approve the merger agreement and the merger, and
the proxy holder may vote the proxy in its discretion as to any other matter
which may properly come before the meeting.
Any abstention will have the same effect as a vote AGAINST the approval of
the merger agreement and the merger.
In the event that a broker, bank, custodian, nominee or other record holder
of NetIQ common stock indicates on a proxy that it does not have discretionary
authority to vote certain shares on a particular matter, which is called a
broker non-vote, those shares will not be considered for purposes of
determining the number of shares entitled to vote with respect to a particular
proposal on which the broker has expressly not voted, but will be counted for
purposes of determining the presence or absence of a quorum for the transaction
of business.
In addition to solicitation by mail, directors, officers and key employees
of NetIQ may solicit proxies in person or by telephone, telegram or other means
of communication. These persons will receive no additional compensation for
solicitation of proxies, but may be reimbursed for reasonable out-of-pocket
expenses.
Expenses of proxy solicitation
NetIQ will pay the expenses of soliciting proxies to be voted at the
meeting, except that MCS will share equally the expenses incurred in connection
with filing and printing this proxy statement/prospectus. Following the
original mailing of the proxies and other soliciting materials, NetIQ will
request brokers, custodians, nominees and other record holders of NetIQ common
stock to forward copies of the proxy and other soliciting materials to persons
for whom they hold shares of NetIQ common stock and to request authority for
the exercise of proxies. In such cases, upon the request of the record holders,
NetIQ will reimburse such holders for their reasonable expenses.
Proxies
The proxy accompanying this proxy statement/prospectus is solicited on
behalf of the NetIQ board of directors for use at the meeting. Please complete,
date and sign the accompanying proxy and promptly return it in the enclosed
envelope or otherwise mail it to NetIQ. All properly signed proxies that NetIQ
receives prior to the vote at the meeting and that are not revoked will be
voted at the meeting according to the instructions indicated on the proxies or,
if no direction is indicated, to approve the merger. You may revoke it at any
time before it is exercised at the meeting by taking any of the following
actions:
. delivering a written notice to the secretary of NetIQ by any means,
including facsimile, bearing a date later than the date of the proxy,
stating that the proxy is revoked
. signing and delivering a proxy relating to the same shares and bearing a
later date prior to the vote at the meeting
. attending the meeting and voting in person, although attendance at the
meeting will not, by itself, revoke a proxy. Please note, however, that
if your shares are held of record by a broker, bank or other nominee and
you wish to vote at the meeting, you must bring to the meeting a letter
from the broker, bank or other nominee confirming your beneficial
ownership of the shares
NetIQ's board of directors does not know of any matter that is not referred
to in this proxy statement/prospectus to be presented for action at the
meeting. If any other matters are properly brought before the meeting, the
persons named in the proxies will have discretion to vote on such matters in
accordance with their best judgment.
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Recommendation of the board of directors
The board of directors of NetIQ has unanimously determined that the terms of
the merger agreement and the merger are in the best interests of NetIQ and the
NetIQ stockholders. Accordingly, the NetIQ board of directors recommends that
NetIQ stockholders vote FOR the proposal to approve the merger agreement and
the merger.
To assure that your shares are represented at the meeting, please
complete, date and sign the enclosed proxy and mail it promptly in the
postage-paid envelope provided, whether or not you plan to attend the
meeting. You may revoke your proxy at any time before it is voted.
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THE MCS MEETING
Date, time and place of the MCS special meeting
The date, time and place of the special meeting of MCS stockholders are as
follows:
, 2000
10:00 a.m. local time
13939 Northwest Freeway
Houston, TX 77040
Purpose of the special meeting
MCS and NetIQ are furnishing this proxy statement/prospectus to MCS
stockholders in connection with the solicitation of proxies by MCS's board of
directors. The MCS board of directors will use the proxies at the special
meeting of stockholders and at any adjournment or postponement thereof.
The special meeting is being held so that MCS stockholders may consider and
vote upon a proposal to approve a merger of MCS with NetIQ and to transact such
other business as may properly come before the special meeting. The merger
agreement is included as Annex A to the attached proxy statement/prospectus.
Record date and outstanding shares
MCS's board of directors has fixed the close of business on [ ], 2000 as
the record date for the special meeting. Only holders of record of MCS common
stock at the close of business on the record date are entitled to notice of and
to vote at the meeting. As of the close of business on the record date, there
were [ ] shares of MCS common stock outstanding and entitled to vote, held of
record by approximately [ ] stockholders, although MCS has been informed that
there are in excess of [ ] beneficial owners.
Vote and quorum required
Holders of MCS's common stock are entitled to one vote for each share held
as of the record date. Approval of each of the proposals to be voted upon by
MCS stockholders requires the affirmative vote of a majority of the total
outstanding common stock of MCS. Attendance at the meeting in person or by
proxy of a majority of the outstanding common stock of MCS is required for a
quorum.
As of February 29, 2000, directors, executive officers and affiliates of MCS
as a group beneficially owned approximately 16.6% of the outstanding shares of
MCS common stock. Certain major stockholders of MCS have entered into
stockholder voting agreements with NetIQ that obligate them to vote a total of
approximately 13.4% of MCS's common stock outstanding as of February 29, 2000,
in favor of approval of the merger and merger agreement.
Voting of proxies
All properly executed proxies received before the vote at the special
meeting, and not revoked, will be voted in accordance with the instructions
indicated on the proxies. If no instructions are indicated, such proxies will
be voted FOR the proposal to approve the merger agreement and the merger, and
the proxy holder may vote the proxy in its discretion as to any other matter
which may properly come before the meeting.
Any abstention will have the same effect as a vote AGAINST the approval of
the merger agreement and the merger.
In the event that a broker, bank, custodian, nominee or other record holder
of MCS common stock indicates on a proxy that it does not have discretionary
authority to vote certain shares on a particular matter,
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which is called a broker non-vote, those shares will not be considered for
purposes of determining the number of shares entitled to vote with respect to a
particular proposal on which the broker has expressly not voted, but will be
counted for purposes of determining the presence or absence of a quorum for the
transaction of business.
In addition to solicitation by mail, directors, officers and key employees
of MCS may solicit proxies in person or by telephone, telegram or other means
of communication. These persons will receive no additional compensation for
solicitation of proxies, but may be reimbursed for reasonable out-of-pocket
expenses.
Expenses of proxy solicitation
MCS will pay the expenses of soliciting proxies to be voted at the meeting,
except that NetIQ will share equally the expenses incurred in connection with
filing and printing this proxy statement/prospectus. Following the original
mailing of the proxies and other soliciting materials, MCS will request
brokers, custodians, nominees and other record holders of MCS common stock to
forward copies of the proxy and other soliciting materials to persons for whom
they hold shares of MCS common stock and to request authority for the exercise
of proxies. In such cases, upon the request of the record holders, MCS will
reimburse such holders for their reasonable expenses.
Proxies
The proxy accompanying this proxy statement/prospectus is solicited on
behalf of the MCS board of directors for use at the meeting. Please complete,
date and sign the accompanying proxy and promptly return it in the enclosed
envelope or otherwise mail it to MCS. All properly signed proxies that MCS
receives prior to the vote at the meeting and that are not revoked will be
voted at the meeting according to the instructions indicated on the proxies or,
if no direction is indicated, to approve the merger. You may revoke it at any
time before it is exercised at the meeting by taking any of the following
actions:
. delivering a written notice to the secretary of MCS by any means,
including facsimile, bearing a date later than the date of the proxy,
stating that the proxy is revoked
. signing and delivering a proxy relating to the same shares and bearing a
later date prior to the vote at the meeting
. attending the meeting and voting in person, although attendance at the
meeting will not, by itself, revoke a proxy. Please note, however, that
if your shares are held of record by a broker, bank or other nominee and
you wish to vote at the meeting, you must bring to the meeting a letter
from the broker, bank or other nominee confirming your beneficial
ownership of the shares
MCS's board of directors does not know of any matter that is not referred to
in this proxy statement/prospectus to be presented for action at the meeting.
If any other matters are properly brought before the meeting, the persons named
in the proxies will have discretion to vote on such matters in accordance with
their best judgment.
You should not send in any stock certificates with your proxies. A
transmittal form with instructions for the surrender of stock certificates for
shares of MCS will be mailed to you as soon as practicable after completion of
the merger.
Appraisal Rights
Appraisal rights are not available with respect to a merger or consolidation
by a corporation the shares of which are either listed on a national securities
exchange or Nasdaq or held of record by more than 2,000 stockholders if such
stockholders are required to receive only shares of the surviving corporation,
shares of any other corporation which are either listed on a national
securities exchange or held of record by more than 2,000
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holders, cash in lieu of fractional shares or a combination of the foregoing.
Therefore, stockholders of MCS will not able to exercise any appraisal rights
in connection with this merger.
Recommendation of the board of directors
The board of directors of MCS has unanimously determined that the terms of
the merger agreement and the merger are in the best interests of MCS and the
MCS stockholders. Accordingly, the MCS board of directors recommends that MCS
stockholders vote FOR the proposal to approve the merger agreement and the
merger.
To assure that your shares are represented at the meeting, please complete,
date and sign the enclosed proxy and mail it promptly in the postage-paid
envelope provided, whether or not you plan to attend the meeting. You may
revoke your proxy at any time before it is voted.
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THE MERGER
This section of the proxy statement/prospectus describes the proposed
merger. While we believe that the description covers the material terms of the
merger and the related transactions, this summary may not contain all of the
information that is important to you. You should carefully read this entire
document and the other documents we referred to for a more complete
understanding of the merger.
Background of the merger
In late 1999, MCS management began considering opportunities to further
develop its product lines through acquisitions of or investments in products,
technologies and businesses. In connection with this activity, on December 7,
1999, MCS engaged Chase H&Q to act as its financial advisor for selected
business development opportunities.
On December 15, 1999, a representative of Chase H&Q telephoned Ching-Fa
Hwang, President and Chief Executive Officer of NetIQ and expressed an interest
in discussing potential business development opportunities between MCS and
NetIQ, including a possible merger of the two companies. Mr. Hwang expressed
interest in further discussions regarding potential business development
activities with MCS.
Michael Bennett, President and Chief Executive Officer of MCS, telephoned
Mr. Hwang during the first week of January 2000 and the two CEOs decided to
meet in Phoenix, Arizona the following week.
On January 13, 2000, Mr. Bennett and Mr. Hwang met to discuss possible
business development activities between the two companies. Mr. Bennett and Mr.
Hwang each provided overviews of their respective company's products and
product strategy, and discussed the business opportunities and challenges faced
by their respective companies, the complementary nature of their respective
businesses, and their personal philosophies and management styles. They also
discussed conceptually the idea of a combination of the two companies.
On January 17, 2000, the MCS Board of Directors met and included on the
agenda was a discussion regarding potential business development opportunities
for MCS, including an overview of discussions with NetIQ.
On January 17, 2000, Mr. Hwang discussed with the Board of Directors of
NetIQ at its regular meeting the possibility of entering into merger
discussions with MCS. The board authorized Mr. Hwang to conduct further
discussions and due diligence to determine the merits and possible terms of a
merger agreement.
Messrs. Bennett and Hwang spoke by telephone again on January 21, 2000 and
planned a second meeting. The two executives met in San Francisco on January
26, 2000. The executives agreed that it made sense for their respective teams
to more fully consider a combination and agreed to bring their two teams of
senior executives together.
NetIQ retained Credit Suisse First Boston as its financial advisor on
February 1, 2000.
During the first week of February 2000, Mr. Bennett and Mr. Hwang further
discussed telephonically the possibility of a merger between the two companies.
These discussions included consideration of the risks and issues surrounding a
transaction such as integration and potential differences in company cultures.
Mr. Bennett and Mr. Hwang agreed to have a subsequent meeting including
selected members of each company's senior management to determine if there was
merit in continuing these discussions.
On February 4, 2000, representatives of the management teams of the two
companies met in Houston. The companies entered into a mutual non-disclosure
agreement in the morning before substantive meetings, and then provided
overviews and answered questions regarding the major functional areas of each
company.
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On February 7, 2000, Mr. Hwang and Mr. Bennett agreed that their respective
management teams had interest in further pursuing a merger between the two
companies. Hwang and Bennett also agreed on their respective roles and agreed
on the most suitable Chief Financial Officer, Chief Operating Officer and Vice
President of Sales for the combined company and decided that the headquarters
of the combined company would be in Santa Clara.
Over the next ten days discussions continued between executives of the two
companies, and each company's CEO kept his board of directors apprised through
telephonic meetings and informal communications.
On February 18, 2000, a meeting among MCS and NetIQ management and their
respective financial advisors and lawyers took place at the offices of Wilson
Sonsini Goodrich & Rosati in Palo Alto, California. Discussion regarding the
terms, structure and timetable of the deal took place, as well as more detailed
discussions of the major functional areas of each company and other due
diligence matters. The companies agreed in principle that, subject to market
capitalization and other pricing considerations, the transaction would provide
each company's stockholders with an approximately equal stake in the combined
company.
On February 21, 2000, NetIQ held a management meeting and a telephonic board
meeting, attended by representatives of Credit Suisse First Boston and Wilson
Sonsini Goodrich & Rosati, to discuss the possible merger. The board agreed to
continue negotiations.
On February 21, 2000, the MCS board of directors met with senior management
and MCS's financial and legal advisors to discuss the status of the proposed
merger. The management team reviewed for the board the business of NetIQ, the
strategic rationale for the merger, the proposed management structure for the
combined company, and the approximate exchange ratio for the merger.
Representatives of Chase H&Q gave an overview of financial considerations
relating to the merger, and representatives of Davis Polk & Wardwell reviewed
with the board its legal responsibilities and the terms and conditions of the
proposed merger agreement and related agreements. The board authorized
management to continue its negotiations with NetIQ.
During the week of February 20, 2000 additional due diligence was conducted
by the two companies, and further discussions were held with respect to the
exchange ratio, among other matters.
On February 25, 2000, the NetIQ board of directors held a special meeting to
discuss the merger in detail. Wilson Sonsini Goodrich & Rosati reviewed the
draft merger agreement and related documents and advised the board of its
fiduciary duties. Representatives of Credit Suisse First Boston reviewed its
financial analysis with respect to the proposed exchange ratio in the merger.
The board unanimously expressed its approval of the continued negotiations and
proposed transaction structure, subject to satisfactory completion of due
diligence and the finalization of the merger agreement.
On February 25 and February 26, 2000 the companies finalized the principal
terms of the merger and completed their due diligence and preparation of
definitive agreements.
On February 25, 2000, the MCS board met to consider the proposed merger.
Management reported on the progress of the negotiations, and the board reviewed
a draft of the merger agreement with counsel. Representatives of Chase H&Q
presented its analysis of the proposed merger and delivered its oral opinion
(later confirmed in writing) that the exchange ratio, as of that date, was fair
to the holders of MCS common stock from a financial point of view. The board
indicated its intention to approve the transaction subject to the completion of
the agreement.
On February 26, 2000, the board of directors of MCS met and reviewed the
final draft of the definitive agreement with NetIQ and unanimously approved the
agreement, and board members and senior management of MCS entered voting and
affiliate agreements related to the transaction.
On February 26, the NetIQ board of directors held a special meeting to
consider approval of the merger. The board of directors reviewed the terms of
the definitive agreement with Wilson Sonsini Goodrich & Rosati
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and unanimously approved the terms of the agreements. Also at this meeting,
representatives of Credit Suisse First Boston rendered an oral opinion, which
opinion was subsequently confirmed by delivery of a written opinion dated
February 26, 2000, to the effect that, as of that date and based on and subject
to the matters described in its opinion, the exchange ratio was fair, from a
financial point of view, to the holders of NetIQ common stock. After full
discussion, the NetIQ board unanimously approved the merger and merger
agreement and Mr. Hwang, Dr. Che and Mr. Wong entered voting agreements related
to the merger.
During the first two weeks of February 2000, representatives of MCS and
Ganymede met to discuss a potential acquisition of Ganymede by MCS. On February
18, 2000, MCS informed NetIQ about these parallel discussions, and on February
23, MCS and NetIQ met with Ganymede's management to enable NetIQ to review
Ganymede's business. NetIQ agreed with MCS that pursuing the acquisition of
Ganymede would be complementary to the merger. The acquisition of Ganymede was
approved by the MCS board on February 26 and, pursuant to a letter of intent
signed by MCS and Ganymede on February 26, 2000 the acquisition was announced
at the same time as the merger agreement between MCS and NetIQ.
On February 28, 2000, the companies issued a press release announcing the
transaction.
On March 10, 2000, MCS signed a definitive merger agreement with Ganymede.
MCS's Reasons for the Merger
In its decision to recommend and approve the merger, the most important
benefits identified by the board of directors of MCS were the following:
. The management and board believe that given the size and growth of the
market that MCS addresses, and the presence in or near these markets of
much larger companies with greater technical, marketing and financial
resources, a combination with another significant company in the sector
can provide greater critical mass more quickly than pursuing a stand
alone strategy. As a result of the complementary strengths of MCS and
NetIQ, the combined company is expected to be a leader in providing
system management software in the Windows NT/2000 sector. The combined
company will have greater customer coverage than either MCS or NetIQ
would have alone.
. The combination of the technical and marketing resources of the two
companies is expected to lead to a broader product family that will be
attractive to customers because it will represent an integrated, more
effective solution.
. The combined company will be more attractive not only to customers but
also to important partners such as Microsoft.
The MCS board of directors consulted with management and its outside legal
and financial advisors as part of the process of approving the merger. In its
evaluation, the MCS board considered the following factors among others:
. Historical information concerning the business, financial performance and
condition, market position, technology and management of the two
companies
. MCS's management's view of the benefits of the merger and of the impact
of the merger on the combined business and operations of the two
companies
. Current and historical information concerning the trading prices and
volatility of the two companies' shares
. The consideration to be received by MCS stockholders compared to that
received by stockholders in other transactions deemed comparable
. The opinion of Chase H&Q to the effect that, as of the date of the
opinion, the exchange ratio in the merger is fair from a financial point
of view to the holders of MCS Common Stock
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. The belief that the terms of the merger agreement and the related stock
option agreement are reasonable
. The impact of the merger upon customers and employees of MCS
. Reports from management, financial and legal advisors as to the results
of their due diligence investigation of NetIQ
Potential risks or other negative factors identified by the MCS board of
directors include the following:
. The risk that the potential benefits of the merger may not be realized
. The challenges of integrating the management teams, strategies, cultures
and organizations of the two companies, especially in light of the
physical distance between MCS's headquarters in Houston and NetIQ's in
Silicon Valley
. The risk of disruption of sales momentum as a result of uncertainties
created by the announcement of the merger
. The risk of loss of key talent
. The risk that the merger might not be consummated despite the parties'
efforts, even if approved by stockholders
. The significant adverse impact to the net income of the combined company
that will arise due to the amortization of goodwill and other intangibles
in light of the impact of purchase accounting for the merger
. Other applicable risks described in this prospectus/proxy statement in
the section entitled "Risk Factors"
The MCS board concluded that on balance the potential benefits of the
merger outweighed the potential risks. This discussion of the information and
factors considered by the board is not meant to be exhaustive. Given the
complexity of the issue and the number of factors considered, the board did
not attempt to quantify or otherwise assign relative weight to specific
factors.
Recommendation of MCS's board of directors
After careful consideration, MCS's board of directors unanimously
determined that the merger is in your best interests, unanimously approved the
merger agreement and recommends that you vote for approval and adoption of the
merger agreement and the merger.
Opinion of MCS's Financial Advisor
MCS engaged Chase H&Q to act as its exclusive financial advisor in
connection with the proposed transaction and to render an opinion to the MCS
board as to the fairness, from a financial point of view, to the holders of
shares of common stock of MCS of the exchange ratio to be used in the merger.
Chase H&Q was selected by the MCS board based on Chase H&Q's qualifications,
experience and reputation, as well as Chase H&Q's and Hambrecht & Quist's
(subsequently acquired by Chase Securities, Inc.) historic investment banking
relationship and familiarity with MCS. Chase H&Q rendered its oral opinion to
the MCS board (as subsequently confirmed in writing) on February 25, 2000
that, as of that date, the exchange ratio to be used in the merger was fair,
from a financial point of view, to holders of the common stock of MCS. The
amount of the consideration was determined through negotiations between NetIQ
and MCS and not as a result of recommendations by Chase H&Q.
THE FULL TEXT OF THE OPINION DELIVERED BY CHASE H&Q TO THE MCS BOARD DATED
FEBRUARY 25, 2000, AS SUBSEQUENTLY CONFIRMED IN WRITING, WHICH SETS FORTH THE
ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
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LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY CHASE H&Q IN RENDERING ITS
OPINION, IS ATTACHED AS ANNEX C TO THIS PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. CHASE H&Q'S OPINION IS DIRECTED TO THE MCS
BOARD AND ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, TO MCS
STOCKHOLDERS OF THE EXCHANGE RATIO TO BE USED IN THE TRANSACTION. CHASE H&Q'S
OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY MCS STOCKHOLDER AS TO HOW
SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE PROPOSED TRANSACTION. IN
FURNISHING ITS OPINION, CHASE H&Q DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE
MEANING OF THE TERM "EXPERT" AS USED IN THE SECURITIES ACT, NOR DID IT ADMIT
THAT ITS OPINION CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING OF THE
SECURITIES ACT. THE SUMMARY OF CHASE H&Q'S OPINION SET FORTH BELOW IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF ITS OPINION. MCS STOCKHOLDERS
ARE URGED TO READ THE OPINION CAREFULLY IN ITS ENTIRETY.
In connection with its review of the merger, and in arriving at its opinion,
Chase H&Q has, among other things:
(i) reviewed the publicly available financial statements of MCS for
recent years and interim periods to date and certain other relevant
financial and operating data of MCS made available to Chase H&Q from
published sources;
(ii) reviewed certain internal financial and operating information
relating to MCS prepared by the senior management of MCS;
(iii) discussed the business, financial condition and prospects of MCS
with certain members of senior management;
(iv) reviewed the publicly available financial statements of NetIQ for
recent years and interim periods to date and certain other relevant
financial and operating data of NetIQ made available to Chase H&Q from
published sources;
(v) discussed the business, financial condition and prospects of NetIQ
with certain members of senior management;
(vi) reviewed the recent reported prices and trading activity for the
common stocks of NetIQ and MCS and compared such information and certain
financial information for NetIQ and MCS with similar information for
certain other companies engaged in businesses Chase H&Q considered
comparable;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(viii) reviewed the merger agreement; and
(ix) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as Chase H&Q deemed relevant.
In rendering its opinion, Chase H&Q assumed and relied upon the accuracy and
completeness of all the information concerning NetIQ and MCS considered in
connection with its review of the proposed transaction, and Chase H&Q did not
assume any responsibility for independent verification of such information. In
connection with its opinion, Chase H&Q did not prepare or obtain any
independent valuation or appraisal of any of the assets or liabilities of MCS
or NetIQ, nor did it conduct a physical inspection of the properties and
facilities of MCS or NetIQ. With respect to the financial forecasts and
projections made available to Chase H&Q and used in its analysis, Chase H&Q
assumed that they reflected the best currently available public estimates and
judgments of the expected future financial performance of NetIQ and MCS. For
purposes of this opinion, Chase H&Q assumed that neither MCS nor NetIQ was a
party to any pending transactions, including
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external financings, recapitalizations or merger discussions, other than the
proposed transaction, the potential acquisition of Ganymede as described to
Chase H&Q and those activities undertaken in the ordinary course of conducting
their respective businesses. Chase H&Q assumed that the proposed transaction
would qualify as a tax-free reorganization under the Internal Revenue Code of
1986, as amended, and that the proposed transaction would be accounted for as a
purchase transaction. Chase H&Q further assumed that the proposed transaction
would be consummated substantially on the terms specified in the merger
agreement, without any waiver of any material terms or conditions by any party
thereto.
Chase H&Q's opinion is necessarily based upon market, economic, financial
and other conditions as they existed and could be evaluated as of the date of
the opinion and any subsequent change in such conditions would require a
reevaluation of such opinion. Chase H&Q expresses no opinion as to the price at
which NetIQ common stock will trade subsequent to the completion of the merger.
The preparation of a fairness opinion is a complex process and involves
various judgments and determinations as to the most appropriate and relevant
assumptions and financial analyses and the application of these methods to the
particular circumstances involved. Such an opinion is therefore not necessarily
susceptible to partial analysis or summary description. Accordingly, Chase H&Q
believes that its analyses and the summary set forth below must be considered
as a whole and that selecting portions of its analyses, without considering all
analyses, or of the following summary, without considering all factors and
analyses, could create an incomplete and misleading view of the processes
underlying the analyses performed by Chase H&Q in connection with its opinion.
In arriving at its opinion, Chase H&Q did not attribute any particular weight
to any analyses or factors considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Chase H&Q did not form an opinion as to whether any individual analysis or
factor (positive or negative), considered in isolation, supported or failed to
support the Chase H&Q opinion. In performing its analyses, Chase H&Q made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
MCS and NetIQ. The analyses performed by Chase H&Q are not necessarily
indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. Such
analyses were prepared solely as part of the Chase H&Q analysis of the fairness
to MCS stockholders, from a financial point of view, of the exchange ratio to
be used in the proposed transaction. Additionally, analyses relating to the
values of businesses do not purport to be appraisals or to reflect the prices
at which businesses actually may be acquired. The following is a brief summary
of the material financial analyses performed by Chase H&Q in connection with
providing its opinion to the MCS board on February 25, 2000, as subsequently
confirmed in writing. Some of the summaries of the financial analyses include
information presented in tabular format. To fully understand the financial
analyses, you should read the tables together with the text of each summary.
Considering the data set forth in the tables without considering the narrative
description of the financial analyses, including the methodologies and
assumptions underlying the analyses, could create a misleading or incomplete
view of the financial analyses.
Pro Forma Merger Analysis. Chase H&Q analyzed the pro forma impact of the
merger on the projected financial results of NetIQ for NetIQ's fiscal years
ending June 30, 2000 and June 30, 2001. Projections for NetIQ and MCS were
based on published Wall Street research estimates. Chase H&Q observed that,
excluding the impact of goodwill, the pro forma accretive or dilutive impact of
the merger on NetIQ's projected fiscal 2001 earnings per share was slightly
accretive. Chase H&Q also observed that MCS's contribution to the combined
company pro forma revenues, EBIT and net income for NetIQ's fiscal year 2001
was 53.5%, 57.1% and 51.8%, respectively. This was compared to the MCS
stockholders' pro forma ownership percentage of 49.7% of the combined company
on a fully-diluted basis.
Contribution Analysis. Chase H&Q derived implied exchange ratios based on
the MCS's and NetIQ's relative contribution to the combined entity of revenues,
operating income and net income for Fiscal Year 2001 to the combined entity.
Projections were based on published Wall Street estimates. MCS's percentage
contribution of revenues, operating income, and net income to the combined
entity for the Fiscal Year 2001 were 53.5%, 57.1% and 51.8% respectively.
Multiplying these percentages by the pro forma share count
34
<PAGE>
estimates, Chase H&Q derived the implied MCS pro forma share ownership in the
combined entity. MCS's pro forma share ownership in the combined entity was
divided by MCS's current stand alone fully diluted share count estimate, to
derive an implied exchange ratio. The implied exchange ratio based on revenue
contribution, operating income contribution and net income contribution was
1.0131, 1.0815 and 0.9797 respectively.
Analysis of Selected Public Companies. Using published Wall Street
estimates, Chase H&Q compared, among other things, certain trading and
valuation statistics for MCS to corresponding measures for fourteen publicly-
traded systems management software companies. The companies that Chase H&Q
reviewed in connection with this analysis were:
.Bindview Development .Novell
.BMC Software .Net Scout
.Computer Associates .NetIQ
.Concord Communications .Packeteer
.Compuware .Quest Software
.Legato Systems .Visual Networks
.Micromuse .Veritas Software
Chase H&Q derived trading multiples of calendar year 1999 revenues,
projected calendar year 2000 revenues and projected calendar year 2001 revenues
for these public companies. The results of this analysis are as follows:
<TABLE>
<CAPTION>
Mean Multiple
Calendar Year (Excl. High and Low)
------------- --------------------
<S> <C>
CY 1999 Revenue Multiple.............................. 28.5
CY 2000 Revenue Multiple.............................. 17.7
CY 2001 Revenue Multiple.............................. 12.5
</TABLE>
Chase H&Q then applied the mean, excluding high and low, of these revenue
multiples to MCS's calendar year 1999 historic revenues, and MCS's projected
calendar year 2000 and 2001 revenues, to derive an implied value for MCS, and
an implied price per share based on an approximate MCS share count. This
methodology implied MCS per share prices of $55.87, $53.74 and $54.75 using
1999, 2000 and 2001 multiples respectively. The MCS per share offer price of
$73.24, implied by the exchange ratio of 0.9413 and the respective closing
prices of MCS and NetIQ shares as of February 24, 2000, was divided by the
various implied shares prices described above to derive an implied natural
exchange ratio of MCS per share value using mean multiples, to per share offer
price. The implied exchange ratios were 0.7180, 0.6906 and 0.7036 for the per
share revenue multiple value using 1999, 2000 and 2001 revenues and revenue
multiples, respectively. These values were compared to the transaction exchange
ratio of 0.9413 NetIQ shares for each MCS share.
Chase H&Q noted that none of the selected companies were identical to MCS
and that any analysis of the selected companies necessarily involved complex
considerations and judgments concerning differences in financial and operating
characteristics and other factors that would necessarily affect the relative
trading values.
Analysis of Selected Transactions. Chase H&Q compared the proposed
transaction with selected software company merger and acquisition transactions.
Chase H&Q derived the multiples of trailing twelve months revenues for 32
transactions over the last three years since 1996 involving companies in the
systems management software, storage software, and enterprise application
integration software markets for which relevant information was available. The
results of this analysis are indicated in the table below:
<TABLE>
<CAPTION>
Year Mean Revenue Multiple
---- ---------------------
<S> <C>
LTM (last twelve months) Revenues.................... 25.6X
First Forward Calendar Year.......................... 11.5X
Second Forward Calendar Year......................... 8.4X
</TABLE>
Applying the mean revenue multiples indicated by this analysis to MCS
revenues indicated an implied equity value per share of MCS of $50.97, $37.89
and $39.65 for the LTM, first forward calendar year and
35
<PAGE>
second forward calendar year, respectively. These implied share prices were
divided by NetIQ's price per share as of February 24, 2000 of $77.81, to derive
an implied natural exchange ratio of 0.6550, 0.4869 and 0.5095 for the LTM,
first forward and second forward year's revenue, respectively. These values
compared to a transaction exchange ratio of 0.9413 for the proposed
transaction.
No company or transaction used in the above analyses is identical to MCS or
the proposed transaction. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading values of
the companies or company to which they are compared.
Merger of Equals Transaction Premium Analysis. Chase H&Q determined the
premiums paid to target stockholders in selected technology "merger of equals"
transactions over the one day and twenty day per share market value of the
target company. Technology merger of equals transactions were defined as recent
technology or media mergers between companies with relatively equivalent market
capitalizations, in the same technology or media industry, and with relatively
equal management and board of director control following the transaction. The
merger of equals transactions included The Interactive Pictures
Corp./Bamboo.com, Inc., Earthlink Networks, Inc./Mindspring Enterprises, Inc.,
CBS Corp/Viacom, AirTouch Communications/ Vodafone Group PLC, GTE Corp./Bell
Atlantic Corp., Ameritech Corporation/SBC Communications, Bell Atlantic
Corp./NYNEX Corp., and Pacific Telesis/SBC Communications. The results of this
analysis are indicated in the table below:
<TABLE>
<CAPTION>
One Day Premium Twenty Day Premium
--------------- ------------------
<S> <C> <C>
Median Premium.......................... 11.3% 9.5%
Mean Premium (excl. high & low)......... 12.5% 13.4%
</TABLE>
These premiums were applied to the MCS share price at market close on
February 24, 2000 for the one day premium, and to the share price at market
close twenty days earlier for the twenty day premium, to derive an implied per
share premium price. These amounts were then divided by the NetIQ share prices
at close for the same days to derive an implied exchange ratio. The market
exchange ratio range was between 0.8936 NetIQ shares for each MCS share, and
1.0503 NetIQ shares for each MCS share.
Exchange Ratio Analysis. Chase H&Q observed the historical exchange ratio
implied by the trading prices of MCS and NetIQ for various periods and compared
these ratios to the proposed exchange ratio of 0.9413 NetIQ shares for each MCS
share. The average natural exchange ratios for MCS and NetIQ were:
<TABLE>
<CAPTION>
Historical
Exchange
Period Ratio
------ ----------
<S> <C>
Closing Price on 2/24/00........................................ 0.8032
5 Day Average................................................... 0.8690
10 Day Average.................................................. 0.8978
20 Day Average.................................................. 0.9077
30 Day Average.................................................. 0.9235
60 Day Average.................................................. 1.0815
90 Day Average.................................................. 1.1697
Proposed Transaction Exchange Ratio............................. 0.9413
</TABLE>
No company or transaction used in the above analyses is identical to MCS or
the proposed transaction. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading values of
the companies or company to which they are compared.
36
<PAGE>
Fee Arrangements
Chase H&Q, as part of its investment banking services, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, strategic transactions, corporate restructurings, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. Chase H&Q
has acted as a financial advisor to the MCS board in connection with the
proposed merger, and Chase H&Q will receive a fee for its services, which
include the rendering of its opinion.
In the past, Chase Securities, Inc. and Hambrecht & Quist (subsequently
acquired by Chase Securities, Inc.) have provided investment banking and other
financial advisory services to MCS and has received fees for rendering these
services. Specifically, Chase H&Q served as lead manager for MCS's initial
public offering in August 1999 and its follow-on offering in November 1999. In
the past, Chase H&Q and Hambrecht & Quist have also provided investment banking
and other financial advisory services to NetIQ and have received fees for
rendering these services. Specifically, Chase H&Q served as co-manager for
NetIQ's initial public offering in July 1999 and its follow-on offering in
December 1999. In the ordinary course of business, Chase H&Q acts as a market
maker and broker in the publicly-traded securities of MCS and NetIQ and
receives customary compensation in connection therewith, and also provides
research coverage for MCS and NetIQ. In the ordinary course of business, Chase
H&Q actively trades in the equity and derivative securities of MCS and NetIQ
for its own account and for the accounts of its customers and, accordingly, may
at any time hold a long or short position in such securities. Chase H&Q may in
the future provide investment banking or other financial advisory services to
MCS or NetIQ.
Pursuant to an engagement letter dated December 7, 1999, between MCS and
Hambrecht & Quist (subsequently acquired by Chase Securities, Inc.), MCS has
agreed to pay Chase H&Q a fee of $500,000 in connection with the delivery of
the fairness opinion rendered on February 25, 2000, subsequently confirmed in
writing. Upon consummation of the proposed transaction, MCS has also agreed to
pay Chase H&Q a fee of 0.5% of the aggregate consideration, less any fees
previously paid, including the fee paid in connection with the delivery of the
fairness opinion, assuming the aggregate consideration is in excess of $1
billion. MCS also has agreed to reimburse Chase H&Q for its reasonable out-of-
pocket expenses and to indemnify Chase H&Q against certain liabilities,
including liabilities under the federal securities laws or relating to or
arising out of Chase H&Q's engagement as financial advisor.
NetIQ's reasons for the merger
At a meeting held on February 26, 2000, the board of directors of NetIQ
concluded that the merger was in the best interests of NetIQ and its
stockholders and determined to recommend that the stockholders approve the
stockholder proposals relating to the merger. In its evaluation of the merger,
NetIQ's board of directors identified several potential benefits of the merger,
the most important of which included the board's expectation that:
. the merger would provide a growth opportunity for NetIQ, and an
opportunity to achieve industry leadership on a broader scale
. the combined company could achieve potential synergies, leverage the
complementary strengths of MCS and NetIQ and increase NetIQ's recurring
revenue base and accelerate NetIQ's revenue growth
. the combined company would achieve a critical mass of talented and highly
skilled employees with proven capabilities that each company individually
might not otherwise have been able to achieve in a tight labor market
. the combined company would be more attractive to customers and partners
37
<PAGE>
NetIQ's board of directors consulted with senior management, as well as its
legal counsel, independent accountants and financial advisors, in reaching its
decision to approve the merger. In its evaluation of the merger, the NetIQ
board reviewed several factors, including but not limited to the following:
. historical information concerning MCS's and NetIQ's respective
businesses, financial performance and condition, operations, technology
and management, including reports concerning results of operations during
the most recent fiscal quarter for each company as filed with the SEC
. NetIQ management's view of the financial condition, results of operations
and businesses of MCS and NetIQ before and after giving effect to the
merger
. current financial market conditions and historical market prices,
volatility and trading information
. the exchange ratio for the merger in light of comparable transactions
. the opinion of Credit Suisse First Boston to the effect that, as of the
date of its opinion and based on and subject to the matters described in
its opinion, the exchange ratio in the merger was fair, from a financial
point of view, to the holders of NetIQ common stock
. the belief that the terms of merger agreement are reasonable
. the impact of the merger on NetIQ's customers and employees
. reports from management and legal advisors as to the results of the due
diligence investigation of MCS
The NetIQ board also identified and considered a number of potentially
negative factors in its deliberations concerning the merger including the
following:
. the risk that the potential benefits of the merger may not be realized
. the possibility that the merger may not be consummated, even if approved
by NetIQ's and MCS's stockholders
. the negative effect that treating the merger, for accounting purposes, as
a purchase will have on NetIQ's future earnings per share due to
amortization of goodwill and other intangibles
. the effect of the public announcement of the merger on NetIQ's sales
. the risk of management and employee disruption associated with the
merger, including the risk that despite the efforts of management of the
combined company, key technical, sales and management personnel might not
remain employed by the combined company
. the risk that the merger could adversely affect NetIQ's relationship with
certain of its customers and strategic partners
. other applicable risks described in this prospectus/proxy statement under
"Risk Factors"
The board concluded however, that, on balance, the potential benefits to
NetIQ and its stockholders of the merger outweighed the risks associated with
the merger. The discussion of the information and factors considered by the
NetIQ board is not intended to be exhaustive. In view of the variety of factors
considered in connection with its evaluation of the merger, the NetIQ board did
not find it practicable to, and did not quantify or otherwise assign relative
weight to, the specific factors considered in reaching its determination.
Recommendation of NetIQ's Board of Directors
After careful consideration, the NetIQ board of directors has determined the
merger agreement and the merger to be fair to and in the best interests of the
stockholders. In connection with the merger, NetIQ's board of directors
recommends approval of the issuance of shares of NetIQ common stock in the
merger as described in this prospectus/proxy statement.
38
<PAGE>
Opinion of NetIQ's financial advisor
Credit Suisse First Boston has acted as NetIQ's exclusive financial advisor
in connection with the merger. NetIQ selected Credit Suisse First Boston based
on Credit Suisse First Boston's experience, expertise and reputation, and
familiarity with NetIQ's business. Credit Suisse First Boston is an
internationally recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes.
In connection with Credit Suisse First Boston's engagement, NetIQ requested
that Credit Suisse First Boston evaluate the fairness, from a financial point
of view, to the holders of NetIQ common stock of the exchange ratio provided
for in the merger. On February 26, 2000, at a meeting of the NetIQ board of
directors held to evaluate the merger, Credit Suisse First Boston rendered to
the NetIQ board of directors an oral opinion, which opinion was confirmed by
delivery of a written opinion dated February 26, 2000, to the effect that, as
of that date and based on and subject to the matters described in its opinion,
the exchange ratio was fair, from a financial point of view, to the holders of
NetIQ common stock.
The full text of Credit Suisse First Boston's written opinion, dated
February 26, 2000, to the NetIQ board of directors, which sets forth, among
other things, the procedures followed, assumptions made, matters considered and
limitations on the review undertaken, is attached as Annex B and is
incorporated into this document by reference. Holders of NetIQ common stock are
urged to, and should, read this opinion carefully and in its entirety. Credit
Suisse First Boston's opinion is addressed to the NetIQ board of directors and
relates only to the fairness of the exchange ratio from a financial point of
view, does not address any other aspect of the proposed merger or any related
transaction and does not constitute a recommendation to any stockholder as to
any matter relating to the merger. The summary of Credit Suisse First Boston's
opinion in this document is qualified in its entirety by reference to the full
text of the opinion.
In arriving at its opinion, Credit Suisse First Boston reviewed the merger
agreement and related documents, as well as publicly available business and
financial information relating to MCS and NetIQ. Credit Suisse First Boston
also reviewed other information relating to MCS and NetIQ, including financial
forecasts, that were provided to or discussed with Credit Suisse First Boston
by MCS and NetIQ. Credit Suisse First Boston also met with the managements of
MCS and NetIQ to discuss the businesses and prospects of MCS and NetIQ,
including the ability to integrate the businesses of MCS and NetIQ. Credit
Suisse First Boston considered financial and stock market data of MCS and
NetIQ, and compared those data with similar data for other publicly held
companies in businesses similar to those of MCS and NetIQ. Credit Suisse First
Boston considered, to the extent publicly available, the financial terms of
other business combinations and other transactions which have recently been
effected. Credit Suisse First Boston also considered other information,
financial studies, analyses and investigations and financial, economic and
market criteria which it deemed relevant.
In connection with its review, Credit Suisse First Boston did not assume any
responsibility for independent verification of any of the foregoing information
and relied on such information being complete and accurate in all material
respects. With respect to the publicly available financial forecasts for MCS
and NetIQ, Credit Suisse First Boston was advised, and assumed, that the
managements of MCS and NetIQ reviewed the forecasts and that the forecasts
represented reasonable estimates and judgments as to the future financial
performance of MCS and NetIQ and the strategic benefits anticipated to result
from the merger. In addition, Credit Suisse First Boston relied upon, without
independent verification, the assessment of the managements of MCS and NetIQ as
to MCS's existing technology and products, the validity of, and risks
associated with, MCS's future technology and products, and the ability to
integrate the businesses of MCS and NetIQ. Credit Suisse First Boston also
assumed, with the consent of the NetIQ board of directors, that the merger
would be treated as a tax-free reorganization for federal income tax purposes.
In addition, Credit Suisse First Boston was not requested to make, and did not
make, an independent evaluation or appraisal of the assets or liabilities,
contingent or otherwise, of MCS or NetIQ, nor was Credit Suisse First Boston
furnished with any evaluations or appraisals.
39
<PAGE>
Credit Suisse First Boston's opinion is necessarily based upon information
available to it, and financial, economic, market and other conditions as they
exist and can be evaluated, on the date of the Credit Suisse First Boston
opinion. In addition, Credit Suisse First Boston's opinion does not relate to
any other transaction contemplated by MCS or its effect on NetIQ or the merger.
Credit Suisse First Boston did not express any opinion as to what the value of
the NetIQ common stock actually will be when issued pursuant to the merger or
the prices at which the NetIQ common stock will trade subsequent to the merger.
No other limitations were imposed on Credit Suisse First Boston with respect to
the investigations made or procedures followed in rendering its opinion.
In preparing its opinion to the NetIQ board of directors, Credit Suisse
First Boston performed a variety of financial and comparative analyses,
including those described below. The summary of Credit Suisse First Boston's
analyses described below is not a complete description of the analyses
underlying Credit Suisse First Boston's opinion. The preparation of a fairness
opinion is a complex process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, a fairness
opinion is not readily susceptible to partial analysis or summary description.
In arriving at its opinion, Credit Suisse First Boston made qualitative
judgments as to the significance and relevance of each analysis and factor that
it considered. Accordingly, Credit Suisse First Boston believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and factors or focusing on information presented in tabular format,
without considering all analyses and factors or the narrative description of
the analyses, could create a misleading or incomplete view of the processes
underlying its analyses and opinion.
In its analyses, Credit Suisse First Boston considered industry performance,
regulatory, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of MCS and NetIQ. No
company, transaction or business used in Credit Suisse First Boston's analyses
as a comparison is identical to MCS or Net IQ or the proposed merger, and an
evaluation of the results of those analyses is not entirely mathematical.
Rather, the analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions being analyzed. The estimates contained in Credit Suisse First
Boston's analyses and the ranges of valuations resulting from any particular
analysis are not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable
than those suggested by the analyses. In addition, analyses relating to the
value of businesses or securities do not purport to be appraisals or to reflect
the prices at which businesses or securities actually may be sold. Accordingly,
Credit Suisse First Boston's analyses and estimates are inherently subject to
substantial uncertainty.
Credit Suisse First Boston's opinion and financial analyses were only one of
many factors considered by the NetIQ board of directors in its evaluation of
the proposed merger and should not be viewed as determinative of the views of
the NetIQ board of directors or management with respect to the merger or the
exchange ratio.
The following is a summary of the material financial analyses performed by
Credit Suisse First Boston in connection with the preparation of its opinion
and reviewed with the NetIQ board of directors at a meeting of the NetIQ board
of directors held on February 25, 2000. The financial analyses summarized below
include information presented in tabular format. In order to fully understand
Credit Suisse First Boston's financial analyses, the tables must be read
together with the text of each summary. The tables alone do not constitute a
complete description of the financial analyses. Considering the data set forth
in the tables below without considering the full narrative description of the
financial analyses, including the methodologies and assumptions underlying the
analyses, could create a misleading or incomplete view of Credit Suisse First
Boston's financial analyses.
Historical Stock Price Analysis. Credit Suisse First Boston analyzed the
prices at which NetIQ common stock traded since NetIQ's initial public offering
on July 30, 1999 through February 24, 2000. Credit Suisse First Boston noted
that the all-time high price for NetIQ common stock was $77.81 on February 24,
2000, and the all-time low price for NetIQ common stock was $14.94 on August 4,
1999.
40
<PAGE>
Credit Suisse First Boston also analyzed the prices at which MCS common
stock traded since MCS's initial public offering on August 5, 1999 through
February 24, 2000. Credit Suisse First Boston noted that the all-time high
price for MCS common stock was $76.50 on December 7, 1999, and the all-time low
price for MCS common stock was $20.38 on August 9, 1999.
Peer Group Comparison. Credit Suisse First Boston compared financial,
operating and stock market data of MCS and NetIQ to corresponding data of the
following publicly-traded companies in the internet infrastructure, traditional
network systems management and high growth software business categories:
<TABLE>
<CAPTION>
Traditional Network Systems High Growth
Internet Infrastructure Companies Management Companies Software Companies
--------------------------------- --------------------------- ------------------
<S> <C> <C>
. Citrix . Computer Associates International, Inc. . VERITAS Software Corp.
Systems,
Inc.
. Quest
Software,
Inc. .BMC Software, Inc. .BEA Systems, Inc.
. Micromuse,
Inc. .Network Associates, Inc. .Legato Systems
. Marimba,
Inc. .BindView Development Corp. .SilverStream Software, Inc.
.Visual Networks, Inc. .Informatica Corp.
.Concord Communications, Inc. .Bluestone Software, Inc.
.Allaire Corp.
.Packeteer, Inc.
.WebTrends Corp.
</TABLE>
Credit Suisse First Boston compared, among other things, stock prices as
multiples of earnings per share for estimated calendar year 2000 and enterprise
values, calculated as equity value, plus debt, less cash, as multiples of
estimated calendar year 2000 revenues. All multiples were based on closing
stock prices on February 24, 2000. Estimated financial data for the selected
companies, MCS and NetIQ were based on publicly available research analysts'
estimates. This analysis indicated the following implied median multiples for
the groups of companies, as compared to the implied multiples for MCS and
NetIQ:
<TABLE>
<CAPTION>
2000 Revenue Multiples 2000 Earnings Multiples
---------------------- -----------------------
<S> <C> <C>
Internet Infrastructure
Companies..................... 27.1x 148.6x
Traditional Network Systems
Management Companies.......... 5.5x 37.2x
High Growth Software
Companies..................... 33.3x 308.9x
NetIQ.......................... 30.6x 237.2x
MCS............................ 21.2x 188.0x
</TABLE>
Comparative Stock Price Performance. Credit Suisse First Boston also
reviewed the recent stock price performance of NetIQ and compared its
performance with indices comprised of the selected companies in each of the
internet infrastructure, traditional network systems management and high growth
software business categories and with the Nasdaq composite index over the
period from August 5, 1999 through February 24, 2000. The results of this
analysis were as follows:
<TABLE>
<CAPTION>
Increase/(Decrease) in
Market Price
per Share from
Company Or Index 8/5/99 to 2/24/00
---------------- ----------------------
<S> <C>
NetIQ................................................. 309.5%
Internet Infrastructure Index......................... 227.8%
Traditional Network Systems Management Index.......... 31.3%
High Growth Software Index............................ 355.2%
NASDAQ Composite Index................................ 80.0%
MCS................................................... 145.7%
</TABLE>
Contribution Analysis. Credit Suisse First Boston analyzed the relative
contributions of MCS and NetIQ to the revenue, gross profit, operating income
and net income of the combined company for the quarter ended
41
<PAGE>
December 31, 1999, estimated calendar year 2000 and estimated fiscal years 2000
and 2001, based on estimates prepared by securities research analysts. Credit
Suisse First Boston then analyzed the pro forma ownership of the combined
company implied by NetIQ's relative contribution. This analysis indicated the
following:
<TABLE>
<CAPTION>
Implied NetIQ Stockholder Pro Forma
Ownership Level Based on Various Periods
------------------------------------------------
Quarter
ended Fiscal Calendar Fiscal
Operating Metric 12/31/99 2000 2000 2001
---------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue....................... 46.5% 46.4% 46.6% 46.6%
Gross Profit.................. 46.0% 45.6% 45.5% 45.4%
Operating Income.............. 50.8% 42.8% 39.7% 39.2%
Net Income.................... 50.5% 47.1% 47.0% 45.5%
</TABLE>
Credit Suisse First Boston noted that the pro forma fully diluted ownership
of the NetIQ stockholders in the combined company implied by the exchange ratio
was 50.7%.
Exchange Ratio Analysis. Credit Suisse First Boston reviewed the average of
the ratios of the closing price of MCS common stock divided by the closing
price of NetIQ common stock over various periods ending February 24, 2000 and
computed the premium (discount) represented by the exchange ratio and the ratio
of the closing price of MCS common stock over the closing price of the NetIQ
common stock as of February 24, 2000, referred to as the current market
exchange ratio, in relation to the average of the ratios over the various
periods covered. The following table sets forth the average of the exchange
ratios over the various periods covered and the premium (discount) implied by
the current market exchange ratio and the exchange ratio in the merger in
relation to such averages:
<TABLE>
<CAPTION>
Premium (Discount)
Represented by Premium (Discount)
the Current Market Represented by
Average Exchange Ratio the Exchange Ratio in the
Period ending Exchange Over Average Merger Over Average
February 24, 2000 Ratios Exchange Ratios Exchange Ratios
----------------- -------- ------------------ -------------------------
<S> <C> <C> <C>
Current Market Exchange
Ratio.................. 0.803x 0.0% 17.2 %
10 Trading Days......... 0.887x (9.5)% 6.1 %
20 Trading Days......... 0.913x (12.1)% 3.0 %
30 Trading Days......... 0.929x (13.5)% 1.3 %
60 Trading Days......... 1.099x (26.9)% (14.3)%
90 Trading Days......... 1.198x (33.0)% (21.5)%
Since August 5, 1999.... 1.272x (36.8)% (26.0)%
</TABLE>
Precedent Merger-of-Equals Transactions Analysis. Credit Suisse First Boston
reviewed 58 merger-of-equal transactions across a wide range of industries and
compared publicly available statistics for the selected merger-of-equals
transactions to the comparable financial statistics for MCS and NetIQ based on
the exchange ratio and the closing prices of MCS common stock and NetIQ common
stock as of February 24, 2000.
The following table presents the median exchange ratio premium to the
closing stock price of the target company both one trading day and 30 trading
days prior to the announcement of the transaction:
<TABLE>
<CAPTION>
1 Day Prior To 30 Days Prior To
Announcement Announcement
-------------- ----------------
<S> <C> <C>
Median Exchange Ratio Premium................ 11.7% 15.5%
</TABLE>
No transaction utilized as a comparison in the precedent merger-of-equals
transactions analysis is identical to the merger. In evaluating the merger,
Credit Suisse First Boston made judgments and assumptions with
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regard to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
MCS and NetIQ, such as the impact of competition on the businesses of MCS and
NetIQ and the industry generally, industry growth and the absence of any
adverse material change in the financial condition and prospects of MCS, NetIQ
or the industry or in the financial markets in general. Mathematical analysis,
such as determining the average or median, is not in itself a meaningful method
of using comparable transaction data.
Pro Forma Earnings Impact Analysis. Credit Suisse First Boston analyzed the
potential pro forma effects of the merger on, among other things, the estimated
earnings per share for MCS and NetIQ for calendar year 2000 and fiscal years
2000 and 2001. This analysis was performed based on securities research
analysts' estimates. This analysis indicated the following accretion (dilution)
to MCS's and NetIQ's estimated earnings per share:
<TABLE>
<CAPTION>
Accretion/(Dilution) to NetIQ and MCS
Earnings Per Share for Various Periods
----------------------------------------------------
Fiscal 2000 Calendar 2000 Fiscal 2001
------------ -------------- -------------
<S> <C> <C> <C>
MCS................. (6.9)% (8.2)% (11.0)%
NetIQ............... 7.8 % 9.3 % 13.3 %
</TABLE>
Illustrative Future Trading Analysis. Credit Suisse First Boston calculated
the equivalent per share value of NetIQ common stock both on a stand alone
basis and assuming the merger is consummated. This analysis was based on
publicly available research analysts' estimates and assumed a range of
multiples of price to earnings for NetIQ on a stand alone basis and for the
combined company. This analysis indicated the following ranges of approximate
equivalent per share present values of NetIQ common stock based on estimated
earnings for fiscal years 2000 and 2001:
<TABLE>
<CAPTION>
Estimated Per Share
Present Value for
NetIQ Common Stock
----------------------------
Estimated Estimated
Fiscal 2000 Fiscal 2001
------------- --------------
<S> <C> <C>
NetIQ Stand Alone............................... $57.07-$78.81 $80.27-$110.85
Combined Company................................ $61.51-$84.94 $90.91-$125.55
</TABLE>
Pursuant to an engagement letter dated February 1, 2000, NetIQ has agreed to
pay Credit Suisse First Boston for its financial advisory services a fee of
approximately $1.8 million upon delivery of its opinion and approximately $7
million upon consummation of the merger, less any fees previously paid,
including the fee paid in connection with the delivery of the opinion. NetIQ
also has agreed to reimburse Credit Suisse First Boston for its out-of-pocket
expenses, including fees and expenses of legal counsel and any other advisor
retained by Credit Suisse First Boston, and to indemnify Credit Suisse First
Boston and related parties against liabilities, including liabilities under the
federal securities laws, arising out of its engagement.
Credit Suisse First Boston and its affiliates have in the past provided
financial services to NetIQ unrelated to the proposed merger, for which
services Credit Suisse First Boston and its affiliates have received
compensation. In the ordinary course of business, Credit Suisse First Boston
and its affiliates may actively trade the debt and equity securities of both
MCS and NetIQ for their own accounts and for the accounts of customers and,
accordingly, may at any time hold long or short positions in such securities.
Interests of certain directors, officers and affiliates in the merger
When considering the recommendation of MCS's and NetIQ's boards of
directors, you should be aware that both companies' directors and officers have
interests in the merger that are different from, or are in addition to, your
interests. Both companies' boards of directors were aware of these potential
conflicts and considered them.
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<PAGE>
In accordance with the terms of the merger agreement, the Newco board of
directors will be comprised of nine members. It is expected that Michael S.
Bennett, Thomas P. Bernhardt, Scott D. Sandell and Michael J. Maples from MCS's
board and Ching-Fa Hwang, Hon Wong, Her-Daw Che and Alan R. Kaufman from
NetIQ's board will join Newco's board of directors. After the merger, Michael
S. Bennett will be the Executive Chairman of the combined company, Ching-Fa
Hwang will be the Chief Executive Officer, Stephen E. Odom will be Chief
Operating Officer, James A. Barth will be the Chief Financial Officer and
Thomas P. Bernhardt will be Chief Technical Officer.
Michael S. Bennett, MCS's President and Chief Executive Officer, and Stephen
E. Odom, MCS's Chief Operating Officer and Chief Financial Officer, entered
into agreements with MCS at the time of their employment under which they are
entitled to acceleration of 100% of their then unvested options if, after the
first anniversary of their employment and prior to the fourth such anniversary,
MCS is acquired by another company and they are (1) terminated, (2) assigned a
position of lesser responsibility or compensation in the resulting
organization, or, in the case of Mr. Bennett, (3) required to relocate. Both
are also entitled to severance payments in the event that they are terminated
other than for cause.
NetIQ's officers Ching-Fa Hwang, James A. Barth, Glenn S. Winokur, Thomas R.
Kemp and Her-Daw Che have entered into change of control agreements that
provide for (1) six months of severance pay, continued coverage under health,
life and other insurance arrangements, and (2) full acceleration of options
granted to the executive in the event that the executive is involuntarily
terminated or assigned a position of lesser responsibility or compensation
following a change of control.
In addition, the directors and officers of MCS have continuing
indemnification against liabilities that provide them with interests in the
merger that are different from, or are in addition to, your interests. NetIQ
has agreed to honor MCS's obligations under indemnification agreements between
MCS and its directors and officers in effect before the completion of the
merger and any indemnification provisions of MCS's certificate of incorporation
and bylaws. NetIQ has also agreed to provide for indemnification provisions in
the certificate of incorporation and bylaws of the surviving corporation of the
merger that are at least as favorable as MCS's provisions and to maintain these
provisions for six years from the completion of the merger.
In addition, NetIQ has agreed to maintain MCS's directors' and officers'
liability insurance for six years from the completion of the merger, provided
that NetIQ is not required to pay more than $500,000 per year of the annual
premium for MCS's insurance. NetIQ has agreed to guarantee these obligations or
make arrangements to have them assumed in the event of a subsequent sale of MCS
to a third party.
As a result of these interests, these directors and officers could be more
likely to vote to approve the merger agreement than if they did not hold these
interests. You should consider whether these interests may have influenced
these directors and officers to support or recommend the merger.
Completion and effectiveness of the merger
The merger will be completed when all of the conditions to completion of the
merger are satisfied or waived, including approval and adoption of the merger
agreement and the merger by the stockholders of MCS and approval of the
issuance of NetIQ common stock in the merger by stockholders of NetIQ. The
merger will become effective upon the filing of the certificate of merger with
the State of Delaware.
Structure of the merger and conversion of MCS common stock
Pursuant to the merger agreement, Planet Acquisition Corporation, a wholly-
owned subsidiary of NetIQ, will merge with and into MCS. MCS will then be a
wholly-owned subsidiary of NetIQ.
Upon completion of the merger, each outstanding share of MCS common stock
will be converted into the right to receive 0.9413 share of NetIQ common stock.
No fractional shares of NetIQ common stock will be
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<PAGE>
issued pursuant to the merger. In lieu of the issuance of any fractional shares
of NetIQ common stock, MCS stockholders will receive cash equal to the product
of such fractional share amount, after aggregating all fractional shares to
which a former holder of MCS common stock would be entitled, and the average
closing price of NetIQ common stock as reported on Nasdaq for the five trading
days immediately preceding the last full trading day prior to the effectiveness
of the merger.
Exchange of MCS stock certificates for Newco stock certificates
When the merger is completed, Newco's exchange agent will mail to MCS
stockholders a letter of transmittal and instructions for use in surrendering
MCS stock certificates in exchange for Newco stock certificates. When former
MCS stockholders deliver their MCS stock certificates to the exchange agent
along with an executed letter of transmittal and any other required documents,
the MCS stock certificates will be canceled and former MCS stockholders will
receive Newco stock certificates representing the number of full shares of
Newco common stock to which they are entitled under the merger agreement. They
will receive payment in cash, without interest, in lieu of any fractional
shares of Newco common stock which would have been otherwise issuable to them
in the merger.
MCS stockholders should not submit their MCS stock certificates for exchange
until they receive the transmittal instructions and a form of letter of
transmittal from the exchange agent.
No dividends
Until they have exchanged their certificates for Newco stock certificates,
MCS stockholders are not entitled to receive any dividends or other
distributions on Newco common stock.
Subject to applicable laws, promptly following surrender of MCS stock
certificates and the issuance of the corresponding Newco certificates, MCS
stockholders will be paid the amount of dividends or other distributions,
without interest, with a record date after the completion of the merger which
were previously paid with respect to their whole shares of Newco common stock.
Newco will only issue MCS stockholders a Newco stock certificate or a check
in lieu of a fractional share in the name in which the surrendered MCS stock
certificate is registered. If MCS stockholders wish to have their certificates
issued in another name, they must present the exchange agent with all documents
required to show and effect the unrecorded transfer of ownership and show that
they paid any applicable stock transfer taxes.
Material United States federal income tax considerations of the merger
The following discussion summarizes the material federal income tax of the
merger that are generally applicable to holders of MCS stock exchanging their
MCS stock for Newco common stock. This discussion is based on the Internal
Revenue Code of 1986, as amended, (the "Code"), applicable Treasury
Regulations, judicial authority and administrative rulings and practice, any of
which could change retroactively.
Stockholders of MCS should be aware that the following discussion does not
deal with all federal income tax considerations that may be relevant to MCS
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, who are non-U.S. residents or who acquired their
MCS stock through stock option or stock purchase programs or in other
compensatory transactions. In addition, the following discussion does not
address the tax consequences of the merger under foreign, state or local tax
laws. Finally, the following discussion does not address the tax consequences
of transactions occurring prior to or after the merger (whether or not such
transactions are in connection with the merger) including, without limitation,
the exercise of options or rights to purchase MCS stock prior to the merger.
Accordingly, MCS stockholders are urged to consult their own tax advisors as to
the specific tax consequences to them of the merger, including the applicable
federal, state, local and foreign tax consequences to them of the merger.
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<PAGE>
As a condition to the completion of the merger, MCS must receive an opinion
of Davis Polk & Wardwell, and NetIQ must receive an opinion of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, to the effect that the merger will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code. These opinions will neither bind the
IRS, nor preclude the IRS or the courts from adopting a contrary position.
Neither MCS nor NetIQ intends to obtain a ruling from the IRS on the tax
consequences of the merger.
In delivering their opinions, tax counsel will rely on certain customary
representations made by MCS and NetIQ, including those contained in
certificates of officers of MCS and NetIQ. Provided that such representations
are correct as of the time the certificate of merger is filed with the state of
Delaware, that the merger is consummated in the manner described in the merger
agreement and this proxy statement/prospectus and that there are no changes in
the Code or other applicable law, the merger will be a reorganization within
the meaning of Section 368(a) of the Code. Assuming that the merger is a
reorganization, the merger will have the following income tax consequences:
. The holders of MCS Stock will recognize no gain or loss upon the receipt
of Newco common stock solely in exchange for their MCS stock in the
merger, except with respect to cash received in lieu of fractional shares
of Newco common stock
. The aggregate tax basis of the common stock received by the MCS
stockholders in the merger will be the same as the aggregate tax basis of
the MCS stock surrendered in exchange therefor (reduced by any basis
allocable to fractional shares for which cash is received)
. The holding period of the Newco common stock received by each MCS
stockholder in the merger will include the holding period of the MCS
Stock surrendered in exchange therefor, provided that the MCS stock
surrendered is held as a capital asset at the time of the merger
. A holder of MCS stock receiving cash in the merger in lieu of a
fractional interest in Newco common stock will be treated as if such
holder actually received such fractional share interest which was
subsequently redeemed by Newco. An MCS stockholder should recognize gain
or loss with respect to a cash payment in lieu of a fractional share
measured by the difference, if any, between the amount of cash received
and the basis in such fractional share
. Neither MCS nor NetIQ will recognize gain or loss solely as a result of
the merger
This discussion of material federal income tax consequences is intended to
provide only a general summary, and is not a complete analysis or description
of all potential federal income tax consequences of the merger. This discussion
does not address tax consequences that may vary with, or are contingent on,
individual circumstances. In addition, it does not address any non-income tax
or any foreign, state or local tax consequences of the merger. ACCORDINGLY,
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES OF THEM OF THE MERGER IN THEIR PARTICULAR
CIRCUMSTANCES.
Accounting treatment of the merger
The acquisition will be accounted for using the purchase method of
accounting. The purchase price will be allocated to assets and liabilities of
MCS and such assets and liabilities will be recorded at their respective fair
values upon completion of the merger. A portion of the purchase price may be
identified as in-process research and development. This amount, if any, will be
charged to Newco's operations in the quarter the merger is completed and the
acquisition accounting and valuation amounts are finalized. The remaining
purchase price will be reflected as goodwill and other intangible assets. The
results of operations and cashflows of MCS and Ganymede will be included in
Newco's financial statements prospectively as of the consummation of the
merger.
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<PAGE>
Regulatory filings and approvals required to complete the merger
This merger is subject to review by the Department of Justice and the
Federal Trade Commission to determine whether it is in compliance with
applicable antitrust laws. Under the provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, the merger may not be
consummated until the specified waiting period requirements of that Act have
been satisfied. MCS and NetIQ filed notification reports, together with
requests for early termination for the waiting period, with the Department of
Justice and the Federal Trade Commission under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, on March 14, 2000. In addition, the
completion of this merger is subject to the effectiveness of the registration
statement of which this proxy statement/prospectus is a part, and compliance
with applicable corporate laws of Delaware.
Restrictions on sales of shares by affiliates
The shares of Newco common stock to be issued in the merger will be
registered under the Securities Act. These shares will be freely transferable
under the Securities Act, except for shares of Newco common stock issued to
any person who is an affiliate of MCS. Persons who may be deemed to be
affiliates include individuals or entities that control, are controlled by, or
are under common control of MCS and may include some of their respective
officers and directors, as well as their respective principal stockholders.
Affiliates may not sell their shares of Newco common stock acquired in the
merger except pursuant to (1) an effective registration statement under the
Securities Act covering the resale of those shares, (2) an exemption under
paragraph (d) of Rule 145 under the Securities Act or (3) any other applicable
exemption under the Securities Act.
As an inducement to NetIQ to enter into the merger agreement, MCS has
agreed to use its best efforts to cause its affiliates to execute affiliate
agreements as promptly as possible. Under these affiliate agreements, Newco
will be entitled to place appropriate legends on the certificates evidencing
any Newco common stock to be received by these persons, or entities, and to
issue stop transfer instructions to the transfer agent for the Newco common
stock. Further, these individuals have also acknowledged the resale
restrictions imposed by Rule 145 under the Securities Act on shares of Newco
common stock to be received by them in the merger.
No appraisal rights
Appraisal rights under Delaware law are not available to stockholders of a
Delaware corporation if:
. the securities of the corporation are listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc.; and
. in the case of the stockholders of the corporation who are required to
take consideration different from that previously held by them, such
stockholders accept in exchange for their stock (a) stock in the
surviving corporation and (b) cash in lieu of fractional shares.
MCS's stockholders will not have appraisal rights under Delaware law with
respect to the merger because:
. MCS's common stock is traded on Nasdaq
. MCS stockholders are being offered only shares of common stock of NetIQ,
the surviving corporation and cash in lieu of fractional shares
NetIQ's stockholders will not have appraisal rights under Delaware law with
respect to the merger because:
. NetIQ's common stock is traded on Nasdaq
. NetIQ stockholders will continue to hold their shares after the merger
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<PAGE>
Listing on Nasdaq of NetIQ common stock to be issued in the merger
NetIQ has agreed to cause the shares of common stock to be issued in the
merger to be approved for listing on Nasdaq, subject to official notice of
issuance prior to the effective time of the merger as defined in the merger
agreement.
Delisting and deregistration of MCS common stock after the merger
If the merger is completed, MCS's common stock will be delisted from Nasdaq
and will be deregistered under the Securities Exchange Act of 1934.
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<PAGE>
THE MERGER AGREEMENT
This section of the proxy statement/prospectus describes the merger
agreement. While we believe that the description covers the material terms of
the merger agreement, this summary may not contain all of the information that
is important to you. The merger agreement is attached to this proxy
statement/prospectus as Annex A and we urge you to read it carefully.
Representations and warranties
MCS and NetIQ each has made a number of representations and warranties in
the merger agreement regarding aspects of its respective business, financial
condition, structure and other facts pertinent to the merger.
Each party has made representations and warranties as to:
. corporate organization and its qualification to do business
. certificate of incorporation and bylaws
. capitalization
. authorization of the merger agreement
. regulatory approvals required to complete the merger
. the permissibility of the merger under applicable laws and other
contracts to which each company is a party
. filings and reports with the Securities and Exchange Commission
. financial statements
. changes in business since December 31, 1999
. taxes
. intellectual property
. compliance with applicable laws
. restrictions on the conduct of business
. litigation
. payments required to be made to brokers and agents on account of the
merger
. employee benefit plans
. title to properties
. environmental matters
. labor matters
. material contracts
. information supplied in this proxy statement/prospectus and the related
registration statement
. board approval
. the inapplicability of state anti-takeover statutes
. the fairness opinion received from its financial advisor
49
<PAGE>
The representations and warranties expire at the effective time of the
merger.
The representations and warranties in the merger agreement are complicated
and not easily summarized. You are urged to carefully read the articles of the
merger agreement entitled "Representations and Warranties of MCS" and
"Representations and Warranties of NetIQ and Merger Sub."
MCS's and NetIQ's conduct of business before completion of the merger
MCS and NetIQ agreed that each of them will:
. carry on its business diligently and consistent with past practice
. pay its debts and taxes when due
. pay or perform material obligations when due
. preserve its current business organization
. retain its present officers and employees
. preserve its relationships with customers, suppliers, distributors,
licensors, licensees, and others with which it has business dealings
MCS and NetIQ also agreed that each of them would conduct its business in
compliance with certain specific restrictions relating to:
. restricted stock and stock options
. partnership arrangements, joint development agreements or strategic
alliances
. employee severance and termination payments and arrangements
. intellectual property
. dividends or other distributions
. the issuance and redemption of securities, other than in connection with
previously-issued and certain newly-issued options
. modification of charter documents and bylaws
. the merger with another entity or the acquisition of assets or other
entities
. liquidation or reorganization
. the sale, lease, license and disposition of assets
. the incurrence or guaranteeing of indebtedness
. employees and employee benefits
. payment or settlements of liabilities
. waiver or modification of material agreements
. entrance into or modification of contracts
. revaluation of assets or modification of accounting policies and
procedures
. actions jeopardizing the tax-free status of the merger
. making of tax elections or settling tax liabilities
. hiring of employees
. granting exclusive rights to third parties
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<PAGE>
The provisions in the merger agreement related to the conduct of MCS's and
NetIQ's business are complicated and not easily summarized. You are urged to
carefully read the section of the merger agreement entitled "Conduct Prior to
the Effective Time."
No other negotiations; no solicitation
Under the merger agreement, each party agreed to terminate any other
discussions relating to any of the following transactions:
. the acquisition or purchase of more than a 5% interest in either party
. any tender offer or exchange offer that would result in any person or
group beneficially owning 5% or more of either party
. any merger, consolidation, business combination or similar transaction
under which the stockholders of either party would hold less than 95% of
the equity interests in the surviving or resulting entity
. any sale or other transfer of more than 5% of the assets of either party
. any liquidation or dissolution of either party
In addition, the parties agreed, subject to limited exceptions, not to start
any new discussions with a third party relating to any transaction listed
above. The parties further agreed not to provide any non-public information to
any third party in connection with any such transaction, or to approve or
recommend any such transaction to its stockholders until the merger is
completed or terminated.
The board of directors of either company may, however, change its unanimous
recommendations in favor of the merger if that company has received an
unsolicited bid from a third party to consummate any of the following
transactions, and that party's board of directors has determined that such
offer would be more favorable financially to that company's stockholders and
that changing its recommendation is required to comply with its fiduciary
duties:
. a merger or similar transaction under which the stockholders just before
the transaction would hold less than 50% of the surviving entity
. a sale or other disposition of assets representing more than 50% of the
fair market value of the business just before the sale
. the acquisition by any person or group of 30% of the voting power of the
outstanding shares
If a party has not breached its nonsolicitation obligations, and its board
has determined that its fiduciary obligations require it, that party may
provide non-public information to, enter into a confidentiality agreement with,
or engage in discussions with third parties relating to one of the transactions
described above so long as that party:
. provides at least three days notice to the other party to this merger
before furnishing the information, entering into the confidentiality
agreement or commencing discussions with such third party
. obtains a confidentiality agreement covering any nonpublic information
to be disclosed
. gives the same information to the other party to this merger
Each party has agreed to inform the other within 24 hours if it receives any
request for nonpublic information that it believes would lead to any of the
transactions outlined above, and to keep the other party informed of the status
and details of any such request or transaction.
Each party has also agreed to provide the other with at least as much notice
as is provided to its own board of directors, of any meeting of its board of
directors at which a proposed transaction more favorable financially than this
merger is expected to be considered or recommended.
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Regardless of whether either company's board of directors has received an
offer to proceed with a proposed transaction more favorable financially than
this merger, or has withdrawn its unanimous recommendation of the merger, each
company is obligated under the merger agreement to hold and convene its special
meeting.
MCS's employee benefit plans
Employees of MCS when the merger is completed will become employees of
Newco. Upon completion of the merger, Newco will credit MCS employees for all
service and waiting period requirements under Newco's comparable employee
benefit plans.
Treatment of MCS stock options
Upon completion of the merger, each outstanding option to purchase MCS
common stock will be converted into an option to purchase the number of shares
of NetIQ common stock adjusted based on the exchange ratio, rounded down to the
nearest whole number of shares. The exercise price will be equal to the
exercise price per share of MCS common stock divided by the exchange ratio,
rounded up to the nearest whole cent.
Newco will file a registration statement for the shares of NetIQ common
stock issuable with respect to options under the MCS stock option plans and
Ganymede stock option plans.
Conditions to completion of the merger
MCS's and NetIQ's obligations to complete the merger and the other
transactions contemplated by the merger agreement are subject to the
satisfaction or waiver of each of the following conditions before completion of
the merger:
. approval of proposals related to the merger by stockholders of both
companies
. NetIQ's registration statement must be effective and no proceedings for
suspension of or stop order suspending its effectiveness will be pending
before or threatened by the Securities and Exchange Commission
. no law, regulation or order is enacted or issued making the merger
illegal or otherwise prohibiting completion of the merger on
substantially the same terms as the merger agreement
. all waiting periods under applicable antitrust laws must have expired or
been terminated
. MCS and NetIQ must each receive from its tax counsel an opinion stating
that the merger will constitute a tax-free reorganization under the
Internal Revenue Code
. the shares of NetIQ common stock to be issued in the merger must be
authorized for listing on Nasdaq
. the other party's representations and warranties must be true and correct
as of February 26, 2000 and as of the effective time of the merger
except:
--for changes contemplated by the merger agreement
--to the extent the other party's representations and warranties address
matters only as of a particular date, they must be true and correct as
of that date
--if any of these representations and warranties are not true and correct
but the effect of the inaccuracies (other than as to certain
representations concerning the other party's capital structure, which
must be true and correct in all respects) is not material and adverse
with respect to the other party, then this condition will be deemed
satisfied
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. the other party must perform or comply in all material respects with all
of its agreements and covenants required by the merger agreement to be
performed or complied with at or before completion of the merger
. no material adverse effect with respect to the other party shall have
occurred since February 26, 2000
Termination of the merger agreement
The merger agreement may be terminated at any time prior to completion of
the merger, whether before or after approval and adoption of the merger
agreement and approval of the merger by MCS stockholders:
. by written consent of MCS and NetIQ
. by MCS or NetIQ, if the merger is not completed before July 31, 2000
. by MCS or NetIQ, if a court or governmental order permanently restrains
the merger
. by MCS or NetIQ, if the merger agreement fails to receive the requisite
stockholder approval
. by either party, upon a breach of any representation, warranty, covenant
or agreement on the part of the other party
. by MCS or NetIQ, if:
- the board of directors of the other party changes adversely its
recommendations concerning the merger
- the board of directors of the other party fails to reaffirm its
unanimous recommendation in favor of the merger following the
announcement of a competing merger proposal
- the board of directors of the other party approves or recommends any
competing merger proposal
- the other party accepts any competing merger proposal
- a tender or exchange offer for the other party's securities is
commenced by a third party and the other party to this merger has not
told its stockholders they should reject such tender or exchange offer
- the other party breaches the non-solicitation provisions of the merger
agreement
Payment of termination fees
If the merger agreement is terminated by one party because any of the
following events has occurred, it will pay the other party a termination fee of
$53 million:
. the board of directors of the other party changes its recommendations to
its stockholders concerning the merger
. the board of directors of the other party fails to reaffirm its
unanimous recommendation in favor of the merger following the
announcement of a competing merger proposal
. the board of directors of the other party approves or recommends any
competing merger proposal
. the other party accepts any competing merger proposal
. a tender offer or exchange offer for the other party's securities is
commenced by a third party and the other party to this merger has not
told its stockholders they should reject such tender or exchange offer,
or
. the other party breaches the non-solicitation provisions of the merger
agreement
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Further, MCS or NetIQ will pay to the other party a termination fee of $53
million if the merger is not consummated by July 31, 2000 because MCS's
stockholders do not approve the merger agreement or NetIQ's stockholders do not
approve the issuance of common stock in this merger, respectively, and either
of the following occur:
. prior to the termination of the merger agreement, a third party has
announced an intention to
- acquire or purchase more than a 5% interest in MCS or NetIQ,
respectively,
- initiate any tender offer or exchange offer that would result in any
person or group beneficially owning 5% or more of either party
- initiate any merger or similar transaction under which the
stockholders of either party would hold less than 95% of the equity
interests in the surviving or resulting entity
and within 12 months following the termination of the merger agreement
one of the following transactions is consummated or MCS or NetIQ,
respectively, enters into an agreement or letter of intent providing
for one of the following transactions:
- a merger or similar transaction in which the stockholders
immediately preceding such transaction hold less than 50% of the
surviving entity
- a sale of assets of either company representing more than 50% of the
fair market value of that company just before such sale
- the acquisition by any person or group of beneficial ownership or a
right to acquire beneficial ownership of more than 50% of the voting
power of either company
Extension, waiver and amendment of the merger agreement
MCS and NetIQ may amend the merger agreement before completion of the merger
by mutual written consent.
Either MCS or NetIQ may extend the other's time for the performance of any
of the obligations or other acts under the merger agreement, waive any
inaccuracies in the other's representations and warranties and waive compliance
by the other with any of the agreements or conditions contained in the merger
agreement.
54
<PAGE>
AGREEMENTS RELATED TO THE MERGER
This section of the proxy statement/prospectus describes agreements related
to the merger agreement, including the NetIQ stockholders' voting agreements,
the MCS stockholders' voting agreements, the NetIQ stock option agreement, the
MCS stock option agreement and the MCS affiliate agreements. While we believe
that these descriptions cover the material terms of these agreements, these
summaries may not contain all of the information that is important to you.
Forms of these agreements are attached as exhibits to Annex A to this proxy
statement prospectus.
NetIQ stockholders' voting agreements
As an inducement for MCS to enter into the merger agreement, MCS and each of
Her-Daw Che, Ching-Fa Hwang and Wongfratris Investment Company have entered
into voting agreements. By entering into the voting agreements, each of these
NetIQ stockholders has agreed, and has also irrevocably appointed
representatives of MCS as his lawful attorneys-in-fact and proxies with the
limited right to vote the shares of NetIQ common stock beneficially owned by
such stockholder, including any additional shares of NetIQ common stock
acquired after the date of the voting agreements:
. in favor of the approval of the merger and the merger agreement
. in favor of the issuance of NetIQ shares in connection with the merger
. in favor of any matter that could reasonably be expected to facilitate
the foregoing
. or in the manner that MCS directs with respect to all other proposals
submitted to the stockholders of NetIQ that in any way relate to the
merger, the merger agreement, or the issuance of NetIQ shares in
connection with the merger
As of February 29, 2000, these stockholders collectively beneficially owned
3,745,150 shares of NetIQ common stock, of which 3,745,150 shares, or
approximately 21.3%, of the outstanding NetIQ common stock, are subject to the
voting agreements. None of the NetIQ stockholders who are parties to the voting
agreements were paid additional consideration in connection with the voting
agreements.
Under the voting agreements, each of these stockholders agrees not to sell
the NetIQ common stock and options owned, controlled or acquired, either
directly or indirectly, by that person until the earlier of the termination of
the merger agreement or the completion of the merger, unless the transfer is in
accordance with the voting agreement and each person to whom any shares or any
interest in any shares is transferred agrees to be bound by the terms and
provisions of the voting agreement. The voting agreements will terminate upon
the earlier to occur of the termination of the merger agreement and the
completion of the merger.
MCS stockholders' voting agreements
As an inducement for NetIQ to enter into the merger agreement, NetIQ and
each of John Moores, Michael S. Bennett, Stephen E. Odom, Thomas P. Bernhardt,
Brian J. McGrath, entities related to New Enterprise Associates, entities
related to Austin Ventures, and International Capital Partners, Inc. entered
into voting agreements. By entering into the voting agreements, each of these
MCS stockholders has agreed, and has also irrevocably appointed representatives
of NetIQ as his lawful attorneys-in-fact and proxies with the limited right to
vote the shares of MCS common stock beneficially owned by these MCS
stockholders, including any additional shares of MCS common stock acquired
after the date of the voting agreements:
. in favor of the approval and adoption of the merger and the merger
agreement
. in favor of any other matters that could reasonably be expected to
facilitate the foregoing
. or in the manner that NetIQ directs with respect to all other proposal
submitted to the stockholders of MCS that in any way relate to the merger
or the merger agreement.
55
<PAGE>
As of February 29, 2000, these stockholders collectively beneficially owned
2,841,654 shares of MCS common stock, of which 2,300,447 shares, or
approximately 13.4% of the outstanding MCS common stock, are subject to the
voting agreements. None of the stockholders who are parties to the voting
agreements were paid additional consideration in connection with the voting
agreements.
Under the voting agreements, each of these MCS stockholders agreed not to
sell the MCS common stock and options owned, controlled or acquired, either
directly or indirectly, by that person until the earlier of the termination of
the merger agreement or the completion of the merger, unless the transfer is in
accordance with the voting agreement and each person to which any shares or any
interest in any shares is transferred agrees to be bound by the terms and
provisions of the voting agreement. The voting agreements will terminate upon
the earlier to occur of the termination of the merger agreement and the
completion of the merger.
MCS stock option agreement
MCS granted to NetIQ an option to acquire up to 3,416,032 shares of MCS
common stock which represented approximately 19.9% of the issued and
outstanding MCS common stock as of the date of the merger agreement. The
exercise price of the option is $69.1855 per share of MCS common stock, payable
in cash. The number of shares issuable upon exercise of the option and the
exercise price of the option are subject to adjustment to prevent dilution.
NetIQ required MCS to enter into the stock option agreement as a condition to
entering into the merger agreement.
The option is intended to increase the likelihood that the merger will be
completed. Some of the aspects of the stock option agreement may have the
effect of discouraging persons who might now or at any time be interested in
acquiring all or a significant interest in MCS or its assets before completion
of the merger.
If the option becomes exercisable, MCS would not be able to account for
future transactions under the pooling-of-interests accounting method for some
period of time.
Exercise events. NetIQ may exercise the option if the merger agreement is
terminated under circumstances under which MCS receives its termination fee.
Termination. The option will terminate upon the earliest of any of the
following:
. the effective time of the merger
. 12 months after termination of the merger agreement if no event causing a
termination fee to become payable has occurred, and
- the merger agreement is terminated for any reason other than because
the merger is not consummated by July 31, 2000
- or the merger agreement is terminated because the required approval of
MCS stockholders is not obtained
. 12 months after termination of the merger agreement if it is terminated:
- by MCS or NetIQ, if:
- the board of directors of the other party changes its
recommendations concerning the merger
- the board of directors of the other party fails to reaffirm its
unanimous recommendation in favor of the merger following the
announcement of a competing merger proposal
- the board of directors of the other party approves or recommends any
competing merger proposal
- the other party accepts any competing merger proposal
56
<PAGE>
- a tender or exchange offer for the other party's securities is
commenced by a third party and the other party to this merger has
not told its stockholders they should reject such tender or exchange
offer
- the other party breaches the non-solicitation provisions of the
merger agreement
. 12 months after payment of the termination fee if the reorganization
agreement is terminated because the merger is not completed by July 31,
2000 or because the required approval of MCS stockholders is not obtained
and an event causing a termination fee to become payable has occurred
. the date the merger agreement is otherwise terminated
. or if the option becomes exercisable but cannot be exercised by NetIQ
because of a government order or because a waiting period under antitrust
laws has not expired, ten business days after prohibition to exercise if
the prohibition has been removed or has become final and not subject to
any appeal
Repurchase at the option of NetIQ. During the period when the option is
exercisable, NetIQ may require MCS to repurchase from NetIQ the unexercised
portion of the option and all the shares of MCS common stock purchased by NetIQ
under the option that NetIQ then owns.
Economic benefit to NetIQ is limited. The stock option agreement limits the
cash payment, including the amount, if any, paid to NetIQ as a termination fee
under the merger agreement, which may be received by NetIQ on exercise of its
repurchase right, to $66 million plus the amount paid by NetIQ to exercise the
option minus any amount paid by MCS to NetIQ as a termination fee or otherwise
in connection with the termination of the merger agreement.
Registration rights. The stock option agreement grants registration rights
to NetIQ with respect to the shares of MCS common stock represented by the
option, including the right to demand that MCS register all or part of the
shares with the Securities and Exchange Commission, provided that NetIQ will
only be able to make three such demands, and the right to register all or part
of the shares if MCS registers other shares.
NetIQ stock option agreement
NetIQ granted to MCS the option to acquire up to 3,520,234 shares of NetIQ's
common stock which represented approximately 19.9% of the issued and
outstanding NetIQ common stock as of the date of the merger agreement. The
exercise price of the option is $73.50 per share of NetIQ common stock. MCS
required NetIQ to enter into the stock option agreement as a condition to
entering into the merger agreement. An option was granted by NetIQ to MCS on
reciprocal terms, where applicable, and otherwise on substantially identical
terms as the MCS Option Agreement.
MCS affiliate agreements
As an inducement to NetIQ to enter into the merger agreement, MCS agreed to
use its best efforts to cause its affiliates to execute affiliate agreements as
promptly as possible. Under these affiliate agreements, NetIQ will be entitled
to place appropriate legends on the certificates evidencing any NetIQ common
stock to be received by these persons, or entities, and to issue stop transfer
instructions to the transfer agent for the NetIQ common stock exchanged for MCS
common stock owned by these affiliates as a result of the merger. Further,
these individuals acknowledged the resale restrictions imposed by Rule 145
under the Securities Act on shares of NetIQ common stock to be received by them
in the merger.
57
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
MCS common stock has been traded on Nasdaq under the symbol "MCSW" since
August 5, 1999, the date of MCS's initial public offering. NetIQ common stock
has been traded on Nasdaq under the symbol "NTIQ" since July 30, 1999, the date
of NetIQ's initial public offering. Prior to such dates, there was no
established public trading market for either company's common stock. The
following table sets forth for the periods indicated the quarterly high and low
sale prices per share of MCS common stock and NetIQ common stock as reported on
Nasdaq.
<TABLE>
<CAPTION>
MCS NetIQ
--------------- ---------------
High Low High Low
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal Year Ended June 30, 2000:
First Quarter................................. $44.500 $20.375 $33.750 $14.938
Second Quarter................................ 76.500 41.000 59.000 23.500
Third Quarter (through March 21, 2000)........ 72.266 52.500 77.813 51.000
</TABLE>
Recent Share Prices
The table below presents the per share closing prices of MCS common stock
and NetIQ common stock on Nasdaq and the pro forma equivalent market value of
NetIQ common stock to be issued for MCS common stock in the merger as of the
dates specified. February 25, 2000 was the last trading date before
announcement of the merger. The table also sets forth the equivalent per share
price for MCS common stock, which was determined by multiplying the closing
prices of the NetIQ common stock as of the specified dates by the exchange
ratio of 0.9413. March , 2000 was the most recent practicable date before the
date of this proxy statement/prospectus.
<TABLE>
<CAPTION>
MCS MCS Common Stock NetIQ
Common Stock Equivalent Value Common Stock
------------ ---------------- ------------
<S> <C> <C> <C>
February 25, 2000.................... $62.250 $69.186 $73.500
March , 2000........................
</TABLE>
Both MCS and NetIQ stockholders are advised to obtain current market
quotations for MCS common stock and NetIQ common stock. No assurance can be
given as to the market prices of MCS common stock or NetIQ common stock at any
time before the consummation of merger or as to the market price of NetIQ
common stock at any time after merger. Because the exchange ratio is fixed, the
exchange ratio will not be adjusted to compensate MCS stockholders for
decreases in the market price of NetIQ common stock which could occur before
the merger becomes effective. In the event the market price of NetIQ common
stock decreases or increases prior to the consummation of merger, the value of
the NetIQ common stock to be received in merger in exchange for MCS common
stock would correspondingly decrease or increase.
Dividends
Neither MCS nor NetIQ has ever declared or paid cash dividends on its
capital stock. Pursuant to the merger agreement, each of MCS and NetIQ has
agreed not to pay cash dividends pending the consummation of merger without
written consent of the other. If the merger is not consummated, the MCS and
NetIQ boards anticipate that they would continue their policy of retaining all
earnings to finance the expansion of their businesses. MCS and NetIQ expect
Newco to retain all earnings for use in the operation and expansion of Newco's
business and they do not anticipate Newco will pay any cash dividends after the
merger.
58
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to the proposed merger between NetIQ and MCS and the acquisition of
Ganymede by MCS, both accounted for as business purchase combinations. The pro
forma combined condensed statements of operations assume the merger and
acquisition occurred at the beginning of the earliest period presented.
On February 26, 2000 NetIQ entered into a merger agreement with MCS for
consideration preliminarily valued at $1.67 billion, consisting of NetIQ common
stock valued at $1.35 billion, options to purchase NetIQ common stock valued at
$302.0 million, and estimated direct acquisition costs of $19.0 million. The
estimated merger related costs consist primarily of investment banker, legal
and accounting fees and printing costs to be incurred which are directly
related to the merger. The actual consideration for the merger with MCS cannot
yet be determined since the merger has not been completed. There can be no
assurance that NetIQ and MCS will not incur additional charges related to the
merger or that management will be successful in its efforts to integrate the
operations of the two companies. For the purpose of the following pro forma
financial information, the number of shares of NetIQ common stock assumed to be
issued in the merger with MCS is approximately 18.4 million. This amount is
based on the number of common shares of MCS outstanding as of February 26,
2000, the date of the merger agreement, and the number of shares of common
stock to be issued in connection with the acquisition of Ganymede by MCS.
Similarly, the estimated value of options to purchase NetIQ common stock to be
issued in the merger with MCS is based on the outstanding options to purchase
MCS common shares as of February 26, 2000, and the number of MCS options to be
issued in April in connection with the acquisition of Ganymede. The actual
number of NetIQ common shares and options to be issued will be based on the
actual outstanding common shares and options of MCS as of the date of
completion of the merger.
In February 2000, MCS entered into an agreement to acquire all the
outstanding capital stock of Ganymede, a developer of network and application
performance management solutions, for consideration preliminarily valued at
$175.4 million. In March 2000 MCS completed the acquisition of a majority
interest in Ganymede. The remaining capital stock of Ganymede is expected to be
acquired in April. To acquire 100% of the outstanding capital stock of
Ganymede, MCS will issue 2,466,882 shares of its common stock and exchange
options to purchase 283,118 shares of MCS's common stock. MCS common stock and
stock options issued to Ganymede are valued at $171.2 million. In addition, the
direct acquisition-related costs are estimated to be approximately $4.2
million.
The accompanying pro forma financial statements are presented in accordance
with Article 11 of Regulation S-X.
The unaudited pro forma combined condensed balance sheet combines the
unaudited historical condensed balance sheets of NetIQ, MCS and Ganymede as of
December 31, 1999.
The unaudited pro forma combined condensed statements of operations give
effect to the transactions as if they had been consummated at the beginning of
the earliest period presented. The unaudited pro forma combined statement of
operations of NetIQ for the six months ended December 31, 1999 combines the
unaudited historical statement of operations of NetIQ for the six months ended
December 31, 1999, the unaudited historical statement of operations of MCS for
the six months ended December 31, 1999, and the unaudited statement of
operations of Ganymede for the six months ended December 31, 1999. The
unaudited pro forma combined statement of operations of NetIQ for the fiscal
year ended June 30, 1999 combines audited historical statements of operations
of NetIQ and MCS for the fiscal year ended June 30, 1999 and audited historical
statements of operations of Ganymede for the fiscal year ended March 31, 1999.
The historical statement of operations for Ganymede for the three months ended
June 30, 1999 which has been excluded from these pro forma financial statements
included revenues, loss from operations and net losses of $2.4 million,
$1.0 million and $1.0 million, respectively.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the merger and the acquisition had been consummated at
the beginning of the earliest period presented, nor is it necessarily
indicative of future operating results or financial position. The pro forma
adjustments are based upon information and assumptions available at the time of
the filing of this document. The pro forma information should be read in
conjunction with the accompanying notes thereto and with NetIQ's historical
financial statements and related notes thereto, MCS's historical financial
statements and related notes and Ganymede's historical financial statements and
related notes included elsewhere in this proxy statement/prospectus.
59
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
AS OF DECEMBER 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Pro Forma MCS Pro Forma Total
Historical Historical Adjustments Pro Forma Historical Adjustments Pro Forma
MCS Ganymede (A) Combined NetIQ (A) Combined
---------- ---------- ----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $178,705 $2,159 $ -- $180,864 $ 4,631 $ -- $ 185,495
Short-term
investments........... -- -- -- -- 125,616 -- 125,616
Accounts receivable,
net................... 3,771 1,471 -- 5,242 6,200 -- 11,442
Prepaid expenses....... 611 303 -- 914 825 -- 1,739
-------- ------ -------- -------- -------- ---------- ----------
Total current assets... 183,087 3,933 -- 187,020 137,272 -- 324,292
-------- ------ -------- -------- -------- ---------- ----------
Property and equipment,
net.................... 3,780 777 -- 4,557 1,895 -- 6,452
Goodwill and other
intangible assets...... 463 -- 174,281 174,744 -- 1,330,667 1,505,411
Other assets............ 50 46 -- 96 361 -- 457
-------- ------ -------- -------- -------- ---------- ----------
Total assets............ $187,380 $4,756 $174,281 $366,417 $139,528 $1,330,667 $1,836,612
======== ====== ======== ======== ======== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........ $ 197 $ 498 $ -- $ 695 $ -- $ -- $ 695
Accounts payable....... 1,180 124 -- 1,304 964 -- 2,268
Accrued compensation
and related benefits.. 1,691 191 -- 1,882 2,082 -- 3,964
Other liabilities...... 4,903 554 4,200 9,657 1,790 19,000 30,447
Deferred revenue....... 6,800 1,686 -- 8,486 5,892 -- 14,378
-------- ------ -------- -------- -------- ---------- ----------
Total current
liabilities........... 14,771 3,053 4,200 22,024 10,728 19,000 51,752
-------- ------ -------- -------- -------- ---------- ----------
Deferred revenue, less
current portion........ 265 81 -- 346 -- -- 346
Long-term debt, less
current maturities..... -- 515 -- 515 -- -- 515
-------- ------ -------- -------- -------- ---------- ----------
Total liabilities...... 15,036 3,649 4,200 22,885 10,728 19,000 52,613
-------- ------ -------- -------- -------- ---------- ----------
Stockholders' equity:
Preferred stock........ -- 4 (4) -- -- -- --
Common stock........... 16 3 -- 19 136,451 1,655,180 1,791,650
Additional paid-in-
capital............... 179,317 10,067 161,118 350,502 -- (350,502) --
Deferred stock-based
compensation.......... (1,359) -- -- (1,359) (1,643) 1,359 (1,643)
Accumulated other
comprehensive income.. -- -- -- -- 30 -- 30
Accumulated deficit.... (5,630) (8,967) 8,967 (5,630) (6,038) 5,630 (6,038)
-------- ------ -------- -------- -------- ---------- ----------
Total stockholders'
equity................ 172,344 1,107 170,081 343,532 128,800 1,311,667 1,783,999
-------- ------ -------- -------- -------- ---------- ----------
Total liabilities and
stockholders' equity... $187,380 $4,756 $174,281 $366,417 $139,528 $1,330,667 $1,836,612
======== ====== ======== ======== ======== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
60
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
MCS Total
Historical Historical Pro Forma Pro Forma Historical Pro Forma Pro Forma
MCS Ganymede Adjustments Combined NetIQ Adjustments Combined
---------- ---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Software license
revenue................ $21,067 $ 6,688 $ -- $ 27,755 $18,433 $ -- $ 46,188
Service revenue......... 3,760 1,314 -- 5,074 3,136 -- 8,210
------- ------- -------- -------- ------- --------- ---------
Total revenue.......... 24,827 8,002 -- 32,829 21,569 -- 54,398
------- ------- -------- -------- ------- --------- ---------
Cost of software license
revenue................ 380 208 -- 588 755 -- 1,343
Cost of service
revenue................ 914 135 -- 1,049 1,260 -- 2,309
------- ------- -------- -------- ------- --------- ---------
Total cost of revenue.. 1,294 343 -- 1,637 2,015 -- 3,652
------- ------- -------- -------- ------- --------- ---------
Gross profit............ 23,533 7,659 -- 31,192 19,554 -- 50,746
------- ------- -------- -------- ------- --------- ---------
Operating expenses:
Sales and marketing.... 13,480 7,352 -- 20,832 11,685 -- 32,517
Research and
development........... 5,986 3,616 -- 9,602 4,344 -- 13,946
General and
administration........ 2,458 920 -- 3,378 2,983 -- 6,361
Stock-based
compensation.......... 532 -- -- 532 1,928 (532)(C) 1,928
Settlement of
litigation............ -- -- -- -- 364 -- 364
Abandoned lease costs
(recovery)............ 1,034 -- -- 1,034 -- -- 1,034
Amortization of
goodwill.............. -- -- 34,856 (D) 34,856 -- 266,226 (B) 301,082
------- ------- -------- -------- ------- --------- ---------
Total operating
expenses.............. 23,490 11,888 34,856 70,234 21,304 265,694 357,232
------- ------- -------- -------- ------- --------- ---------
Income (loss) from
operations............. 43 (4,229) (34,856) (39,042) (1,750) (265,694) (306,486)
------- ------- -------- -------- ------- --------- ---------
Interest and other
income, net............ 299 85 -- 384 108 -- 492
Net income (loss)....... 342 (4,144) (34,858) (39,717) (1,642) (265,694) (305,994)
Excess of consideration
paid to redeem
preferred stock and
increase in dividends
on convertible
preferred stock........ (1,059) -- -- (1,059) -- 1,059 (F) --
------- ------- -------- -------- ------- --------- ---------
Net loss applicable to
common stockholders.... $ (717) $(4,144) $(34,856) $(39,717) $(1,642) $(264,635) $(305,994)
======= ======= ======== ======== ======= ========= =========
Basic net loss per
share.................. $ (0.25) $ (0.47) $ (13.98)
Shares used to compute
basic net loss per
share.................. 2,814 3,476 21,884 (F)
Diluted net loss per
share.................. $ (0.25) $ (0.47) $ (13.98)
Shares used to compute
diluted net loss per
share.................. 2,814 3,476 21,884 (F)
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
61
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
MCS Total
Historical Historical Pro Forma Pro Forma Historical Pro Forma Pro Forma
MCS Ganymede Adjustments Combined NetIQ Adjustments Combined
---------- ---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Software license
revenue................ $15,963 $4,251 $ -- $ 20,214 $13,600 $ -- $ 33,814
Service revenue......... 3,499 1,269 -- 4,768 3,108 -- 7,876
------- ------ -------- -------- ------- --------- ---------
Total revenue.......... 19,462 5,520 -- 24,982 16,708 -- 41,690
------- ------ -------- -------- ------- --------- ---------
Cost of software license
revenue................ 151 163 -- 314 329 -- 643
Cost of service
revenue................ 602 178 -- 780 816 -- 1,596
------- ------ -------- -------- ------- --------- ---------
Total cost of revenue.. 753 341 -- 1,094 1,145 -- 2,239
------- ------ -------- -------- ------- --------- ---------
Gross profit............ 18,709 5,179 -- 23,888 15,563 -- 39,451
------- ------ -------- -------- ------- --------- ---------
Operating expenses:
Sales and marketing.... 10,375 3,649 -- 14,024 8,975 -- 22,999
Research and
development........... 4,583 1,872 -- 6,455 3,588 -- 10,043
General and
administration........ 1,965 520 -- 2,485 1,507 -- 3,992
Stock-based
compensation.......... 521 -- -- 521 352 (521)(C) 352
Abandoned lease costs
(recovery)............ (295) -- (295) -- -- (295)
Amortization of
goodwill.............. -- -- 17,428 (D) 17,428 -- 133,113 (B) 150,541
------- ------ -------- -------- ------- --------- ---------
Total operating
expenses.............. 17,149 6,041 17,428 40,618 14,422 132,592 187,632
------- ------ -------- -------- ------- --------- ---------
Income (loss) from
operations............. 1,560 (862) (17,428) (16,730) 1,141 (132,592) (148,181)
------- ------ -------- -------- ------- --------- ---------
Interest and other
income, net............ 1,467 (2) -- 1,465 1,265 -- 2,730
Income taxes............ 455 -- (260)(E) 195 501 -- 696
------- ------ -------- -------- ------- --------- ---------
Net income (loss)....... $ 2,572 $ (864) $(17,168) $(15,460) $ 1,905 $(132,592) $(146,147)
======= ====== ======== ======== ======= ========= =========
Basic net income (loss)
per share.............. $ 0.20 $ 0.14 $ (4.53)
Shares used to compute
basic net income (loss)
per share.............. 12,659 13,832 32,240 (F)
Diluted net income
(loss) per share....... $ 0.15 $ 0.11 $ (4.53)
Shares used to compute
diluted net income
(loss) per share....... 17,382 16,868 32,240 (F)
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
62
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS
(A) The following represents the allocations of the purchase prices over the
historical net book values of the acquired assets and assumed liabilities of
the combined business of MCS and Ganymede and Ganymede as of the date of the
pro forma balance sheet, and is for illustrative purposes only. The actual
purchase price allocation will be based on fair values of the acquired assets
and assumed liabilities as of the actual acquisition dates. Assuming the
transactions occurred on December 31, 1999, the allocation would have been as
follows (in thousands):
<TABLE>
<CAPTION>
MCS
Pro forma
Combined Ganymede
---------- --------
<S> <C> <C>
Working capital........................................ $ 164,996 $ 880
Other non-current assets............................... 4,653 823
Non-current liabilities................................ (861) (596)
Goodwill and other intangible assets................... 1,505,411 174,281
---------- --------
Purchase price......................................... $1,674,199 $175,388
========== ========
</TABLE>
The purchase price reflects the accrual of direct costs arising from the
pending merger of NetIQ and MCS, estimated at approximately $19.0 million, and
the acquisition of Ganymede, estimated at approximately $4.2 million. The
adjustment also reflects the elimination of the equity of MCS and Ganymede and
the issuance of NetIQ shares and options.
(B) The pro forma adjustment represents amortization of goodwill and other
intangible assets (per the allocation in (A) above) that would have been
recorded during the year ended June 30, 1999, and the six months ended December
31, 1999.
The pro forma adjustment is based on the assumption that the entire amount
identified as goodwill and other intangible assets in NetIQ's merger with the
MCS and Ganymede businesses will be amortized on a straight-line basis over a
five-year period. NetIQ has not yet completed the valuation of the actual
intangible assets acquired. When completed, certain amounts identified as
intangible assets may be amortized over periods other than the five-year period
represented in the pro forma statement of operations. Additionally, a portion
of the purchase price may be identified as in-process research and development.
This amount, if any, will be charged to operating results of NetIQ in the
period the merger is completed and the acquisition accounting and valuation
amounts are finalized. The pro forma statement of operations does not give
effect to any potential in-process research and development charge related to
the acquisition of the MCS and Ganymede businesses.
(C) The pro forma adjustment is based on the assumption that there would be
no deferred stock-based compensation for options issued by MCS for the year
ended June 30, 1999, and for the six months ended December 31, 1999, had the
merger occurred as of July 1, 1999.
(D) The pro forma adjustment represents amortization of goodwill and other
intangible assets (per the allocation in (A) above) that would have been
recorded during the six months ended December 31, 1999 and the year ended June
30, 1998.
The pro forma adjustment is based on the assumption that the entire amount
on the total consideration exceeding the net assets acquired has been
identified as goodwill and other intangible assets in MCS's acquisition of the
Ganymede business will be amortized on a straight-line basis over a five-year
period. MCS has not yet completed the valuation of the actual intangible assets
acquired. When completed, certain amounts identified as intangible assets may
be amortized over periods other than the five-year period represented in the
pro forma statement of operations. Additionally, a portion of the purchase
price may be identified as in-process
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research and development. This amount, if any, will be charged to operating
results in MCS's fiscal year 2000 financial statements when the acquisition
accounting and valuation amounts are finalized. The pro forma statement of
operations does not give effect to any potential in-process research and
development charge related to the acquisition of the Ganymede business.
(E) The pro forma adjustment is based on the tax benefit that would have
accrued to MCS if the acquisition of the business of Ganymede had occurred as
of July 1, 1998.
(F) Reflects the elimination of dividends in arrears to redeemable preferred
stockholders as if the preferred stock was converted to common stock as of July
1, 1998.
Additionally, reflects the issuance of approximately 18.4 million shares of
NetIQ common stock to MCS stockholders (including Ganymede stockholders) based
on the number of MCS shares outstanding as of February 26, 2000, the date of
the merger agreement. The computation of diluted net loss per share excludes
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.
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COMPARISON OF RIGHTS OF HOLDERS OF
MCS COMMON STOCK AND
NETIQ COMMON STOCK
This section of the proxy statement/prospectus describes certain differences
between MCS common stock and NetIQ common stock. While we believe that the
description covers the material differences between the two, this summary may
not contain all of the information that is important to MCS stockholders,
including the certificate of incorporation and bylaws of NetIQ and the
certificate of incorporation and bylaws of MCS. MCS stockholders should read
this entire document and the other documents referred to carefully for a more
complete understanding of the differences between MCS common stock and NetIQ
common stock.
MCS's certificate of incorporation and bylaws currently govern the rights of
stockholders of MCS. After the completion of the merger, MCS's common
stockholders will become stockholders of NetIQ. As a result, former MCS
stockholders' rights will be governed by NetIQ's certification of incorporation
and bylaws. The following paragraphs summarize certain differences between the
rights of MCS stockholders and NetIQ stockholders under the certificate of
incorporation and bylaws of MCS and articles of incorporation and bylaws of
NetIQ.
<TABLE>
<CAPTION>
MCS NETIQ
--------------------------------- ---------------------------------
<S> <C> <C>
Special meeting of
stockholders............ Under Delaware law, a special NetIQ's bylaws authorize the
meeting of stockholders may be board of directors, the Chairman
called by the board of directors of the Board, the President, the
or any other person authorized to Chief Executive Officer or one or
do so in the certificate of more stockholders holding shares
incorporation or the bylaws. in the aggregate entitled to cast
MCS's bylaws authorize a majority not less than 50% of the votes at
of the board of directors or the that meeting, to call a special
chairman of the board to call a meeting of stockholders.
special meeting of stockholders.
Voting by written
ballot.................. Under Delaware law, the right to NetIQ's certificate of
vote by written ballot may be incorporation and bylaws do not
restricted if so provided in the restrict the right to vote by
certificate of incorporation. ballot.
MCS's certificate of
incorporation does not ensure the
right to vote by written ballot
unless a stockholder demands
election by written ballot at the
meeting and before voting begins,
or, pursuant to the bylaws, upon
the request of the chairman of
the meeting. MCS's bylaws also
provide that all elections of
directors shall be by written
ballots.
Notice provisions for
stockholder meetings.... No comparable provision. Stockholders proposing to
nominate candidates for the board
of directors or to transact other
business must generally give
NetIQ 90 days written notice.
</TABLE>
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CERTAIN INFORMATION REGARDING NETIQ
Overview
NetIQ provides eBusiness infrastructure management software that enables
businesses to optimize the performance and availability of their Windows
NT/2000-based systems and applications.
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/2000-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/2000 operating
systems. In addition to e-mail, businesses are increasingly using Windows
NT/2000 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, an industry 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. NetIQ's 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/2000-based e-mail and web servers. In addition
to managing e-mail and web servers, AppManager also manages database
applications such as SQL Server, Oracle and SAP R/3, hardware management tools
and the underlying Windows NT/2000 operating systems. By helping ensure the
availability of a wide range of Windows NT/2000-based systems and applications
through automated monitoring, correction and reporting features, AppManager
helps lower the total cost of ownership of Windows NT/2000-based eBusiness
infrastructures.
Industry Background
The use of the Internet to promote 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. These
applications and products, which include electronic messaging, or e-mail, web
servers, database servers and applications and the underlying hardware, are
referred to 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/2000 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/2000-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/2000 has been driven by, among other things, businesses'
increasing reliance on e-mail and web servers and related applications. For
example, businesses are increasingly deploying e-mail servers using Windows
NT/2000. According to International Data Corporation, the percentage of all e-
mail server software deployed on Windows NT/2000, as opposed to other operating
systems will grow from approximately 43% in 1998 to approximately 65% in 2001.
Forrester Research, an industry research firm, estimated that 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 was first commercially released in February 2000.
Because businesses rely on Windows NT/2000-based systems and applications to
help them compete in an eBusiness environment, these systems and applications
require high performance and availability standards,
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including around-the-clock uptime. However, the growth and deployment of
Windows NT/2000-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, in a survey of more than 100
companies, Windows NT/2000-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/2000-based systems, 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.
NetIQ believes 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/2000 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/2000, UNIX and AS/400,
with a single product suite. According to the Gartner Group, these framework
products have generally performed poorly and have been difficult to implement,
and the Gartner Group estimates that 36 months after purchase, 70% of
enterprise management framework implementations fail to be fully and
successfully implemented and utilized. In addition, UNIX-based systems
management vendors have attempted to modify their UNIX-based platforms to
address specific systems and applications management needs for Windows NT/2000.
However, because these framework and UNIX-based systems management solutions
have not been designed specifically for the Windows NT/2000 platform, they
often are more difficult to use because they do not incorporate the "look and
feel" of Windows NT/2000, and they 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/2000 servers and applications that 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 organizations' total cost of ownership.
The unique challenges for managing Windows NT/2000-based eBusiness systems
and applications have created the need for eBusiness infrastructure management
software that is designed specifically for the Windows NT/2000 environment.
NetIQ believes a complete eBusiness infrastructure management software solution
for the distributed Windows NT/2000 and Windows 2000 environment must
incorporate the following characteristics:
. Comprehensive breadth and depth of performance and availability
management capabilities optimized for the Windows NT/2000 environment
. Familiar "look and feel" of Microsoft Windows NT/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/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
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The NetIQ Solution
NetIQ's AppManager products provide a comprehensive solution for centrally
managing the performance of businesses' Windows NT/2000 environments. Utilizing
a centralized console with automated monitoring, correction and reporting
capabilities, NetIQ's products help optimize the performance and availability
of Windows NT/2000 systems and applications and reduce associated support
costs. Key features of NetIQ's solution include:
Comprehensive Windows NT/2000-Based Systems and Application Management
Functionality
AppManager consists of fully integrated product modules known as
"AppManagers" that provide comprehensive functionality for managing Windows
NT/2000-based systems and the popular applications that run on Windows NT/2000.
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/2000 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.
Scalable Product; Centralized Control
AppManager's architecture scales easily to accommodate growth in the number
of Windows NT/2000 servers and Windows NT/2000-based applications that
organizations deploy in their computing environments. Many of NetIQ's customers
gradually adopt and roll out Windows NT/2000 throughout their enterprise on a
server-by-server basis, and they deploy additional Windows NT/2000-based
applications on an application-by-application basis. As customers increase
their use of Windows NT/2000-based systems and applications, NetIQ's
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/2000 products, it is easier
for information technology professionals to deploy and maintain NetIQ's
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/2000 environments relative to other system management solutions. NetIQ's
Knowledge Scripts enable information technology professionals to quickly
implement AppManager, and NetIQ's product 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 NetIQ's customers have made significant investments in legacy
system and network management applications, NetIQ has designed its products to
integrate closely with these solutions. NetIQ has
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developed "connectors" that integrate with leading enterprise management
framework products by sharing performance and event information. In addition,
because many organizations have purchased Windows NT/2000 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/2000 systems.
Optimized for Microsoft's Channel
Because NetIQ focuses exclusively on Windows NT/2000-based systems and
applications, NetIQ understands and can address the needs of this marketplace.
NetIQ targets its sales efforts on the Windows NT/2000 segments of its
customers' information technology departments where the need for products and
expertise similar to NetIQ's is particularly acute. Moreover, because NetIQ's
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 NetIQ products easy to market, sell and support.
Strategy
NetIQ's objective is to be the leading provider of eBusiness infrastructure
management software which enables businesses to optimize the performance and
availability of their Windows NT/2000-based systems and applications. Key
elements of NetIQ's strategy include:
Enhance Position as a Leading Provider of Windows NT/2000 eBusiness
Infrastructure Management Solutions
NetIQ intends to strengthen its technology leadership position in the
Windows NT/2000 eBusiness infrastructure management software market by
continuing to focus on managing applications upon which businesses are
increasingly relying on to perform critical business functions, including
electronic messaging, Internet, group collaboration and database applications.
NetIQ intends to enhance its comprehensive solutions by offering broader "out-
of-the box" functionality and closer integration with third-party system,
network and hardware management products. NetIQ also intends to continue to
introduce additional AppManager modules for managing additional important
applications such as Microsoft's Commerce Server.
Target Enterprise-wide Deployment within Existing Customer Base
As of the date of this proxy statement/prospectus, NetIQ licenses its
products to over 700 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/2000-based systems or applications. NetIQ has
focused and will continue to focus on expanding existing customers' use of
AppManager to an enterprise-wide deployment managing multiple applications.
Expand Distribution Channels
NetIQ has formed relationships with value-added resellers, system
integrators, original equipment manufacturers and distributors. NetIQ intends
to build upon these relationships and to pursue new ones. In particular, NetIQ
intends to continue to focus on relationships with third-party resellers of
Microsoft products that constitute the most significant distribution channel
for Windows NT/2000-based systems and applications.
Increase International Presence
NetIQ believes that international markets present a substantial growth
opportunity for NetIQ as the worldwide market for Windows NT/2000-based systems
and applications continues to expand and as organizations increasingly
recognize the advantages of eBusiness infrastructure management software
solutions. NetIQ intends to expand its field and inside sales forces and
establish additional field offices in the United
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States and internationally. NetIQ plans to complement its current international
distribution channels by developing relationships with additional international
resellers, distributors and original equipment manufacturers. Working with
NetIQ's Japanese original-equipment manufacturers, NetIQ has developed branded
Japanese versions of its AppManager products for each of these original-
equipment manufacturers to market, sell and support and intends to develop
additional localized versions of its products in the future.
Expand Relationships with Microsoft
NetIQ intends to expand its relationships with Microsoft to further develop
its eBusiness infrastructure management solutions for Windows NT/2000-based
systems and applications and expand its penetration of the Windows NT/2000
market. NetIQ participates in Microsoft's testing and feedback programs for new
systems and applications and intends to support all current and future Windows
NT/2000 technologies and standards. NetIQ plans to continue to participate in
joint marketing programs with Microsoft, expand Microsoft's use of NetIQ's
products and continue to support new Microsoft Windows NT/2000-based
applications.
Products and Technology
NetIQ develops, markets and supports the NetIQ AppManager Suite, a leading
eBusiness infrastructure management software solution for distributed Windows
NT/2000 environments. AppManager's automated monitoring, correction and
reporting features help information technology professionals optimize the
performance and increase the availability of their Windows NT/2000-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/2000 systems. By
using NetIQ's AppManager connector integration products, information technology
professionals can use AppManager with system and network management framework
products to share performance and event information.
Native Windows NT/2000 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.
NetIQ's use of widely accepted Microsoft standards also makes its AppManager
products easy to customize and implement in a customer's existing information
technology environment. NetIQ intends 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/2000 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
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. 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/2000-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
Customers
As of the date of this proxy statement/prospectus, NetIQ licenses its
AppManager products to more than 700 customers. Included in this group are
governmental agencies and companies in the financial services, high technology,
utilities, manufacturing, pharmaceuticals, health care, retail and
telecommunications industries.
In fiscal 1998, fiscal 1999 and the six months ended December 31, 1999, no
single customer comprised more than 10% of NetIQ's revenue.
Sales, Marketing and Distribution
Field and Inside Sales
NetIQ markets its software and services through its field sales organization
located at its headquarters facility in Santa Clara, California, its domestic
field offices in Atlanta, Boston, Bellevue, Denver, Fairfax and New York City,
and international field offices in London, Munich, Singapore, Sydney, Tokyo and
Toronto. Each of the field sales offices includes a territory manager and one
or more systems engineers. The territory manager and system engineers
concentrate on Fortune 1000-sized accounts that have at least 100 Windows NT
servers.
Channel sales representatives focus on managing sales activities of NetIQ's
regional channel partners and branch sales offices of NetIQ's national reseller
partners. Typically, the 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 NetIQ's products to potential customers on a
trial basis. NetIQ's sales process typically takes 90 to 180 days, but this
process can be longer for large, enterprise-wide sales.
NetIQ's field sales organization is complemented by an inside sales
organization with offices at NetIQ's Santa Clara, California headquarters and
in NetIQ's London and Sydney field offices. NetIQ's 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. NetIQ's 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
NetIQ has implemented a channel partner program, the NetIQ Partner Network,
that provides training, certification, technical support, priority
communications regarding upcoming activities and products and joint
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sales and marketing activities. In North America, Tech Data is the primary
distributor of NetIQ's product and its sole U.S. two-tier distributor as of the
date of this proxy statement/prospectus, and, as of December 31, 1999, NetIQ
had over 60 third party channel partners who have purchased its products
through Tech Data. NetIQ sells its products to Tech Data based upon previously-
negotiated prices. Tech Data, in turn, resells NetIQ's products to their
resellers at previously-negotiated prices. NetIQ's 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. NetIQ
has also established a network of direct value added resellers and system
integrators in North America, 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 NetIQ's products directly
to the customer and/or through other resellers. NetIQ had 69 channel partners
in North America and 68 outside of North America as of December 31, 1999. In
addition, NetIQ has 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
NetIQ has a number of marketing programs designed to inform customers about
the capabilities and benefits of NetIQ's AppManager products. NetIQ's 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
NetIQ has 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, NetIQ often develops joint marketing programs with these
software and hardware vendors. NetIQ's relationship with Microsoft is an
example of this type of product-based relationship. Microsoft is one of NetIQ's
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 six months ended December 31, 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 NetIQ's engineers to work with its Windows NT development group at its
Redmond, Washington headquarters. Microsoft also contracts for one of NetIQ's
engineers to provide support for Microsoft's use of NetIQ's products. Another
example of NetIQ's product-based relationships is NetIQ's relationship with
Compaq, whose service organization is a worldwide reseller of AppManager.
International Sales
International sales did not account for any revenue in fiscal 1997, but
represented 10% of total revenue in fiscal 1998, 20% of total revenue in fiscal
1999 and 25% of total revenue in the six months ended December 31, 1999. NetIQ
anticipates that as it expands its international sales efforts, the percentage
of revenue derived from international sources, will continue to increase.
Currently, a majority of NetIQ's international business is conducted in U.S.
dollars. However, as NetIQ expands its international operations, it expects
that its 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 NetIQ expects such fluctuation to increasingly
cause, currency transaction gains and losses. NetIQ cannot predict the effect
of exchange rate fluctuations upon future quarterly and annual operating
results. NetIQ may experience currency losses in the future. To date, NetIQ has
not adopted a hedging program to protect it from risks associated with foreign
currency fluctuations.
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Customer Support
NetIQ's technical support organization provides ongoing technical support
for its customers and for prospective customers during the period in which a
prospective customer evaluates AppManager. NetIQ offers technical support
services 24 hours a day, seven days a week via its Internet site, telephone, e-
mail 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.
NetIQ also offers training courses for the implementation and administration
of its products. Product training is provided on a periodic basis at NetIQ's
headquarters in Santa Clara, California, at the offices of members of the NetIQ
Partner Network and also at customer sites throughout the United States and
Europe.
NetIQ's professional services group provides product training, consulting
and implementation services for a fee in order to assist customers in
maximizing the benefits of NetIQ's products. A significant focus of NetIQ's
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
NetIQ's research and development organization is responsible for the design,
development and release of its 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, NetIQ has a well-
developed information feedback loop with its customers to respond to and
address their changing system and application management requirements. When
appropriate, NetIQ also utilizes third parties to expand the capacity and
technical expertise of its internal research and development team. On occasion,
NetIQ has licensed third party technology which NetIQ believes shortens time-
to-market without compromising competitive position or product quality.
NetIQ has made substantial investments in research and development. NetIQ's
research and development expenses were $1.0 million, $2.2 million and $4.3
million in fiscal 1997, 1998 and 1999, respectively. NetIQ's research and
development expenses were $3.6 million in the six months ended December 31,
1999. The dollar increase in fiscal 1998 and fiscal 1999 and the annualized
dollar increase for the six months ended December 31, 1999 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 the sections entitled "NetIQ Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Risk
Factors--If we do not respond adequately to our industry's evolving technology
standards . . ."
Competition
The market for applications management software for optimizing the
performance and availability of Windows NT/2000-based systems and applications
is new, rapidly evolving and highly competitive, and NetIQ expects competition
in this market to persist and intensify. New products for this market are
frequently introduced and existing products are continually enhanced. NetIQ may
not be able to compete successfully against current and/or future competitors
and such inability would materially adversely affect its business, future
quarterly and annual operating results and financial condition. See the section
entitled "Risk Factors--New product introductions and pricing strategies by
Newco's competitors . . ." regarding risks associated with current competitive
pressures.
Existing Competition. NetIQ currently faces competition from a number of
sources, including:
. Providers of network and systems management framework products such as
IBM, Computer Associates and Hewlett-Packard
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. 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. NetIQ 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/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/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 NetIQ's 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 NetIQ in the market for
applications management software for optimizing the performance and
availability of Windows NT/2000-based systems and applications. However,
Microsoft may enter this market in the future, and this could materially
adversely affect NetIQ's 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/2000-based operating system software, and this could discourage
potential customers from purchasing NetIQ's products. Even if the functionality
provided as standard features by future Microsoft operating system software
were more limited than that of NetIQ's 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 NetIQ's products which would reduce NetIQ's margins and could materially
adversely affect NetIQ's business, quarterly and annual operating results and
financial condition.
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/2000-based systems and applications
into existing products including for promotional purposes. In addition, NetIQ's
ability to sell its products will depend, in part, on the compatibility of
NetIQ's products with other third party products. These third party software
developers may change their products so that they will no longer be compatible
with NetIQ's products. If NetIQ's competitors were to bundle their products in
this manner or make their products non-compatible with those of NetIQ, this
could materially adversely affect NetIQ's ability to sell its products and
could lead to price reductions for NetIQ's products, which in turn could reduce
NetIQ's profit margins.
Intellectual Property
NetIQ's success is heavily dependent upon proprietary technology. NetIQ
relies primarily on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
its proprietary rights. These laws and procedures provide only limited
protection. NetIQ has received three patents relating to its engineering work.
NetIQ licenses technology that helps AppManager Suite run its applications
management modules from Summit Software on a non-exclusive, worldwide basis.
NetIQ's AppManager product modules for Windows NT, Windows NT Workstation and
Super Console incorporate the Summit Software technology. Under the terms of
NetIQ's license agreement, NetIQ pays limited royalties to Summit. NetIQ
licenses this technology on a year-to-year basis which is automatically renewed
each August and, in the event the license agreement for this technology is
terminated, NetIQ may continue to sell the AppManager Suite with the Summit
technology for a period of 24 months following the termination of the license
agreement. This license is terminable upon 60 days notice in the event a
default under the licensing agreement occurs, including a failure by NetIQ to
pay the royalty fees on a timely basis or any other material breach by NetIQ of
the license agreement.
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Employees
As of February 29, 2000, NetIQ had 185 employees, 58 of whom were engaged in
research and development, 94 in sales and marketing, 12 in customer support and
21 in finance and administration. None of NetIQ's employees is represented by a
collective bargaining agreement. NetIQ has not experienced any work stoppages
and considers its relations with its employees to be good. For a discussion of
NetIQ's need to attract and retain additional qualified personnel, see the
section entitled "Risk Factors--Newco will need to recruit and retain
additional qualified personnel . . ."
Facilities
NetIQ's principal administrative, sales, marketing, customer support and
research and development facility is located at NetIQ's headquarters facility
in Santa Clara, California. NetIQ currently occupies 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, NetIQ has leased approximately 8,000
square feet of additional space in the same building through August 2000. NetIQ
is currently evaluating additional space in the local area and believes that
suitable additional facilities will be available as needed.
NetIQ also leases space for sales and marketing offices in Atlanta, Boston,
Bellevue, Denver, Fairfax and New York City, and has international field
offices in London, Munich, Singapore, Sydney, Tokyo and Toronto.
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NETIQ MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
NetIQ provides eBusiness infrastructure management software that allows
businesses to optimize the performance and availability of their Windows
NT/2000-based systems and applications.
From NetIQ's incorporation in June 1995 until the first sales of AppManager
in February 1997, NetIQ was principally engaged in development-stage
activities, including product development, sales and marketing efforts and
recruiting qualified management and other personnel. NetIQ's 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 to $16.7 million in the six months ended
December 31, 1999. This rapid revenue growth reflects NetIQ's relatively early
stage of development, and NetIQ does 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 to $14.4 million in the
six months ended December 31, 1999. NetIQ's operating expenses increased as
NetIQ expanded NetIQ's operations, including growing NetIQ's employee base from
14 at June 30, 1996, to 133 at June 30, 1999, and to 161 at December 31, 1999.
NetIQ's 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 two
most recent quarters ended December 31, 1999. This reflects NetIQ's 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. NetIQ's cumulative losses have resulted in
an accumulated deficit of $6.0 million at December 31, 1999.
NetIQ has derived the large majority of its revenue from software licenses.
NetIQ also derives 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
NetIQ's installed base has grown. NetIQ expects service revenue to increase as
a percentage of total revenue in the future and, as a consequence, NetIQ's cost
of service revenue to increase in absolute dollars. The pricing of the
AppManager suite is based on the number of systems and applications managed,
although volume and enterprise pricing is also available. NetIQ's customers
typically purchase one year of product software maintenance with their initial
license of NetIQ's 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 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 declined to 2% in the six months ended December 31, 1999. Cost of
service revenue, as a percentage of service revenue, has declined from 242% in
fiscal 1997, to 87% in fiscal 1998, to 40% in fiscal 1999, and to 26% in the
six months ended December 31, 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 to 19% in the six months ended December 31, 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 93%
in the six months ended December 31, 1999.
NetIQ anticipates that service revenue will increase as a percentage of
total revenue in the future as customers continue to renew maintenance service
contracts and, if NetIQ is unable to reduce the costs of service revenue,
NetIQ's margins may decline.
NetIQ sells its products through both its direct sales force, which includes
NetIQ's 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 NetIQ's sales have resulted from the
efforts of NetIQ's field
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and inside sales personnel. However, license revenue through NetIQ's third-
party channel partners represented approximately 10% of total revenue in fiscal
1998 and 32% of total license revenue in fiscal 1999 and 35% of total revenue
in the six months ended December 31, 1999, and NetIQ's 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 six months ended December 31, 1999, no single customer accounted for
more than 10% of NetIQ's total revenue. International sales did not account for
any of NetIQ's revenue in fiscal 1997, but represented 10% of total revenue in
fiscal 1998, 20% of total revenue in fiscal 1999 and 25% of total revenue in
the six months ended December 31, 1999. NetIQ anticipates that as it expands
its international sales efforts, the percentage of revenue derived from
international sources will continue to increase.
Generally, NetIQ sells perpetual licenses and recognizes 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 NetIQ's distributors,
resellers and original equipment manufacturers, NetIQ recognizes revenue at the
time these partners report to NetIQ 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 NetIQ
alleging misappropriation of trade secrets, copyright infringement, unfair
competition and other claims. Compuware asserted these claims after a number of
prior Compuware employees founded the company or later joined NetIQ 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, NetIQ 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 NetIQ $5.0 million,
subordinated to NetIQ's bank credit facility, with interest at 6% per year.
Additionally, as part of the settlement in March 1999, NetIQ 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 NetIQ's initial public offering. Compuware
exercised the warrant in full upon the closing of NetIQ's initial public
offering, paying $11.70 per share and sold all of their shares in the follow-on
public offering in December 1999. Pursuant to the completion of NetIQ's initial
public offering NetIQ paid approximately $1.8 million to satisfy NetIQ's note
and interest obligation to Compuware, and the remaining $3.3 million was
cancelled in connection with Compuware's exercise of the warrant. Additionally,
as part of NetIQ's settlement agreement, NetIQ 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.
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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 six month periods ended December 31, 1998 and 1999.
<TABLE>
<CAPTION>
Percentage of Total Revenue
Six Months
Ended
Year Ended June 30, December 31,
-------------------------- ------------
1997 1998 1999 1998 1999
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Software license revenue..... 95 % 93 % 85 % 89 % 81 %
Service revenue.............. 5 7 15 11 19
------- ------ ------ ------ ------
Total revenue............ 100 100 100 100 100
Cost of software license
revenue..................... 2 3 3 3 2
Cost of service revenue...... 12 6 6 6 5
------- ------ ------ ------ ------
Total cost of revenue.... 14 9 9 9 7
------- ------ ------ ------ ------
Gross margin:................ 86 91 91 91 93
Operating expenses:
Sales and marketing........ 319 81 54 54 54
Research and development... 259 31 20 18 21
General and
administrative............ 123 23 14 14 9
Stock-based compensation... 3 4 9 11 2
Settlement of litigation... -- -- 2 -- --
------- ------ ------ ------ ------
Total operating
expenses................ 704 139 99 97 86
------- ------ ------ ------ ------
Income (loss) from
operations.................. (618) (48) (8) (6) 7
Interest income, net......... 30 4 -- 1 7
Income taxes................. -- -- -- -- (3)
------- ------ ------ ------ ------
Net income (loss)............ (588)% (44)% (8)% (5)% 11 %
======= ====== ====== ====== ======
Cost of software license
revenue, as a percentage of
software license revenue.... 2 % 4 % 4 % 3 % 2 %
Cost of service revenue, as a
percentage of service
revenue..................... 242 % 87 % 40 % 52 % 26 %
</TABLE>
Comparison of the Six Months Ended December 31, 1998 and 1999
Revenue
Software License Revenue--NetIQ's software license revenue increased from
$8.2 million for the six months ended December 31, 1998 to $13.6 million for
the six months ended December 31, 1999, representing growth of 67%. This
increase was due primarily to increases in the number of software licenses
sold, reflecting increased acceptance of NetIQ's AppManager products and
expansion of NetIQ's field and inside sales organizations and NetIQ's third-
party channel partners.
Service Revenue--Service revenue increased from $1.1 million for the six
months ended December 31, 1998 to $3.1 million for the six months ended
December 31, 1999, representing growth of 188%. 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
NetIQ's base of installed licenses and due to a significant majority of NetIQ's
customers renewing their maintenance service agreements.
Cost of Revenue
Cost of Software License Revenue--NetIQ's 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-
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employee commissions and royalties. NetIQ's cost of software license revenue
has changed from $245,000, or 3% of software license revenue, for the six
months ended December 31, 1998, to $329,000, or 2% of software license revenue,
for the six months ended December 31, 1999. The increase in absolute dollar
amount was due principally to increases in software license revenue. The
decrease in percentage is due to leveraging the fixed costs over a larger
revenue base.
Cost of Service Revenue--Cost of service revenue consists primarily of
personnel costs and expenses incurred in providing telephonic and on-site
maintenance services, consulting services and training. Cost of service revenue
was $560,000 and $816,000 for the six months ended December 31, 1998 and 1999,
respectively, representing 52% and 26% of service revenue, respectively. The
increase in dollar amount of cost of service revenue is primarily attributable
to the growth in NetIQ's installed customer base. Cost of service revenue as a
percentage of service revenue declined due primarily to economies of scale
achieved as NetIQ's revenue and installed base have grown. NetIQ expects
service revenue to increase as a percentage of total revenue as NetIQ's
installed license base grows and, as a consequence, NetIQ's cost of service
revenue to increase in absolute dollars and as a percentage of total revenue.
Operating Expenses
Sales and Marketing--NetIQ's sales and marketing expenses consist primarily
of personnel costs, including salaries and employee commissions, as well as
expenses relating to travel, advertising, public relations, seminars, marketing
programs, trade shows and lead generation activities. Sales and marketing
expenses increased from $5.0 million for the six months ended December 31,
1998, to $9.0 million for the six months ended December 31, 1999. This increase
in dollar amount was due primarily to the hiring of additional field sales,
inside sales and marketing personnel, which increased from 55 people to 82
people between December 31, 1998 and December 31, 1999, and expanding NetIQ's
sales infrastructure and third-party channel partners. Sales and marketing
expenses represented 54% of total revenue for the six months ended December 31,
1998 and 1999, respectively. NetIQ expects to continue hiring additional sales
and marketing personnel and to increase promotion, advertising and other
marketing expenditures in the future. Accordingly, NetIQ expects sales and
marketing expenses will increase in absolute dollars in future periods.
Research and Development--NetIQ's 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 $1.7
million, or 18% of total revenue, for the six months ended December 31, 1998,
to $3.6 million, or 21% of total revenue, for the six months ended December 31,
1999. This increase in dollar amount resulted principally from increases in
engineering and technical writing personnel, which increased from 31 people to
53 people at the end of each period, together with increases in third party
development 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 NetIQ's current software development process is
essentially completed concurrent with the establishment of technological
feasibility. NetIQ expects 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--NetIQ's general and administrative expenses
consist primarily of personnel costs for finance and administration,
information systems and human resources, as well as professional services
expenses such as legal and accounting, and provision for doubtful accounts.
General and administrative expenses increased from $1.3 million for the six
months ended December 31, 1998 to $1.5 million for the six months ended
December 31, 1999. General and administrative expenses represented 14% of total
revenue for the six months ended December 31, 1998, and 9% of total revenue for
the six months ended December 31, 1999. The increase in dollar amount was due
primarily to increased staffing necessary to manage and support NetIQ's growth.
General and administrative personnel increased from 10 people at December 31,
1998 to 18 people at December 31, 1999. Legal expense was a significant cost
for the six months ended December 31, 1998, amounting to $554,000, 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
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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
expenses to $125,000 for the six months ended December 31, 1999. NetIQ believes
that NetIQ's general and administrative expenses will increase in absolute
dollars as NetIQ expands its administrative staff, adds new financial and
accounting software systems, and incurs additional costs related to being a
public company, such as expenses related to directors' and officers' liability
insurance, investor relations, stock administration programs and increased
professional fees.
Stock-Based Compensation--During the six months ended December 31, 1998,
NetIQ recorded deferred stock-based compensation of $1.9 million relating to
stock option grants to employees and non-employees. No deferred stock-based
compensation was recorded in the six months ended December 31, 1999. However,
due to employee attrition, approximately $126,000 of the deferred stock-based
compensation was reversed. These net amounts are being amortized over the
vesting periods of the granted options, which is generally four years for
employees. During the six months ended December 31, 1998 and 1999, NetIQ
recognized stock-based compensation expense of $1,025,000 and $352,000,
respectively. At December 31, 1999, total deferred stock-based compensation was
$1.6 million.
Interest Income (Expense)--Interest income (expense), represents interest
income earned on NetIQ's cash and cash equivalent balances, interest expense on
NetIQ's equipment loans and loan subordinated to NetIQ's bank line of credit,
and gain on foreign exchange transactions. For the six months ended
December 31, 1998 and 1999, interest income (expense) was $57,000 and
$1,265,000, respectively. The increase in interest income (expense) is the
result primarily of increased cash and cash equivalent balances due to the
proceeds from NetIQ's public offerings in July and December 1999.
Income Taxes--NetIQ incurred net operating losses during the six months
ended December 31, 1998 and consequently paid no federal, state or foreign
income taxes. NetIQ recorded income tax expense of $501,000 for the six months
ended December 31, 1999, representing the expected effective tax rate for
fiscal year 2000.
Comparison of Fiscal Years Ended June 30, 1998 and 1999
Revenue
NetIQ's 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,
NetIQ's software license revenue increased from $6.6 million to $18.4 million,
representing growth of 179%. These increases were due primarily to increases in
the number of software licenses sold, reflecting increased acceptance of
NetIQ's AppManager products and expansion of NetIQ's field and inside sales
organizations and its third party channel partners. Service revenue increased
from $467,000 in fiscal 1998 to $3.1 million in fiscal 1999, representing
growth of 562%. This increase was due primarily to maintenance fees associated
with new software licenses. Service revenue increased as a percentage of total
revenue due to the compounding effect of NetIQ's base of installed licenses and
due to a significant majority of NetIQ's early customers renewing their
maintenance service agreements.
Cost of Revenue
Cost of Software License Revenue. NetIQ's 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. NetIQ's cost of software license revenue has increased from
$235,000, or 4% of software license revenue, in fiscal 1998, to $755,000, or 4%
of software license revenue, in fiscal 1999. The increase in absolute dollar
amount was due principally to increases in software license revenue.
Cost of Service Revenue. Cost of service revenue consists primarily of
personnel costs and expenses incurred in providing telephonic and on-site
maintenance services and consulting services. Costs associated with training
activities consist principally of allocated labor and departmental expenses as
well as training materials. Cost of service revenue was $407,000 and $1,260,000
in fiscal 1998 and fiscal 1999, respectively,
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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
NetIQ's installed customer base. Cost of service revenue as a percent of
service revenue declined due primarily to economies of scale achieved as
NetIQ's revenue and installed base have grown.
Operating Expenses
Sales and Marketing. NetIQ's sales and marketing expenses consist primarily
of personnel costs, including salaries and employee commissions, as well as
expenses relating to travel, advertising, public relations, seminars, marketing
programs, trade shows and lead generation activities. Sales and marketing
expenses increased from $5.7 million in fiscal 1998, to $11.7 million in fiscal
1999. This increase in dollar amount was due primarily to the hiring of
additional field sales, inside sales and marketing personnel, which increased
from 34 people to 66 people at the end of each year, and expanding our sales
infrastructure and third party channel partners, as well as higher commissions.
Sales and marketing expenses represented 81% and 54% of total revenue for
fiscal 1998 and fiscal 1999, respectively. The decline in sales and marketing
expenses as a percentage of total revenue was principally the result of
economies of scale resulting from the increased number of sales transactions,
including follow-on sales to existing customers, as well as the allocation of
marketing expenses over a substantially increased revenue base.
Research and Development. NetIQ's research and development expenses consist
primarily of salaries and other personnel-related costs, as well as facilities
costs, consulting fees and depreciation. These expenses increased from $2.2
million, or 31% of total revenue, in fiscal 1998, to $4.3 million, or 20%, of
total revenue in fiscal 1999. This increase in dollar amount resulted
principally from increases in engineering and technical writing personnel,
which increased from 30 people to 43 people at the end of each year, together
with increases in facility costs relating to NetIQ's new facility which it
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. NetIQ's general and administrative expenses
consist primarily of personnel costs for finance and administration,
information systems and human resources, as well as professional services
expenses such as legal and accounting, and provision for doubtful accounts.
General and administrative expenses increased from $1.6 million in fiscal 1998,
to $3.0 million in fiscal 1999, representing 23% and 14% of total revenues,
respectively. The increase in dollar amount was due primarily to increased
staffing necessary to manage and support NetIQ's growth. General and
administrative personnel increased from 8 people at June 30, 1998, to 14 people
at June 30, 1999. Legal expenses have been a significant cost in both periods,
amounting to $762,000 and $966,000 for fiscal 1998 and fiscal 1999,
respectively. These legal costs have principally been due to the Compuware
litigation, for which a settlement was reached in January 1999 and final
documentation was entered into and the claims dismissed in March 1999. In
addition, occupancy costs charged to general and administrative expense
increased by $705,000 during the year as a result of the lease of NetIQ's 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, NetIQ recorded
deferred stock-based compensation of $1.2 million and $3.0 million,
respectively, relating to stock option grants to employees and non-employees.
These amounts are being amortized over the vesting periods of the granted
options, which is generally four years for employees. During fiscal 1998 and
fiscal 1999, NetIQ recognized stock-based compensation expense of $250,000 and
$1.9 million, respectively. At June 30, 1999, total deferred stock-based
compensation was $2.1 million. NetIQ expects to amortize up to approximately
$200,000 of deferred stock-based compensation each quarter through June 30,
2003.
Settlement of Litigation. During fiscal 1999 NetIQ recorded an expense of
$364,000 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.
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Interest Income, Net. Interest income, net, represents interest income
earned on NetIQ's cash and cash equivalent balances and interest expense on its
equipment loans and loan subordinated to its bank line of credit. For fiscal
1998 and fiscal 1999, interest and other income, net, was $262,000 and
$108,000, respectively. The decline in interest income, net is the result
primarily of lower cash and cash equivalent balances in fiscal 1999 coupled
with interest on the $5.0 million subordinated debt, commencing in the quarter
ended March 31, 1999. The subordinated loan plus accrued interest was repaid
subsequent to the closing of NetIQ's initial public offering.
Income Taxes. NetIQ incurred net operating losses in fiscal 1998 and fiscal
1999, and consequently paid no federal, state or foreign income taxes.
Comparison of Fiscal Years Ended June 30, 1997 and 1998
The trends discussed in the comparisons of operating results for fiscal 1998
and fiscal 1999 generally apply to the comparison of results of operation for
fiscal 1997 and 1998, except for differences discussed below.
Revenue
NetIQ began selling software licenses for the AppManager Suite in February
1997, and NetIQ's 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. NetIQ's 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 NetIQ's reserve for product returns by $50,000 in fiscal 1998.
Cost of Service Revenue. NetIQ's 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. NetIQ's sales and marketing expenses increased $1.2
million in fiscal 1997, to $5.7 million in fiscal 1998. The increase reflects
the hiring of additional sales and marketing personnel in connection with the
building of our direct, reseller and original equipment manufacturer channels,
and higher commissions associated with increased sales volume. NetIQ's
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 NetIQ's 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. NetIQ's 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 NetIQ's total revenue.
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General and Administrative. General and administrative expenses increased
from $479,000 in fiscal 1997 to $1.6 million in fiscal 1998. These costs, which
represented 123% of total revenue in fiscal 1997 and 23% of total revenue in
1998, were the result of increases in personnel, facility-related costs and
legal expenses. NetIQ's 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 NetIQ's total revenue.
Stock-Based Compensation. In fiscal 1998, NetIQ 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. NetIQ 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 NetIQ's two preferred stock financings in
September 1995 and May 1997.
Income Taxes. NetIQ incurred net operating losses in fiscal 1997 and fiscal
1998, and consequently paid no federal, state or foreign income taxes.
Liquidity and Capital Resources
NetIQ has 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 and
option exercises.
In July 1999, NetIQ 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.
Proceeds from the initial public offering were used to pay off the short-
term and long-term debts to Compuware and a financial institution.
In December 1999, NetIQ sold 1,500,000 shares of common stock in an
underwritten offering for net proceeds of approximately $75.5 million.
In January 2000, the underwriters of NetIQ's follow-on public offering of
common stock exercised their over-allotment option and NetIQ issued 387,000
additional shares for net proceeds of approximately $19.6 million.
NetIQ's operating activities resulted in net cash outflows of $2.0 million
and $3.9 million in fiscal 1997 and fiscal 1998, respectively, and cash inflows
of $2.0 million in fiscal 1999 and $7.1 million in the six months ended
December 31, 1999. Sources of cash during these periods were principally from
increases in deferred revenue, accrued compensation and other liabilities. Uses
of cash in these periods were principally for net losses and increases in
accounts receivable and prepaid expenses.
NetIQ's investing activities, after excluding the purchase and maturity of
temporary cash investments in fiscal 1997, resulted in net cash outflows,
principally related to the acquisition of capital assets, of $238,000, $529,000
and $1,353,000 in the fiscal 1997, fiscal 1998, and fiscal 1999, respectively.
NetIQ's investing activities resulted in net cash outflow of $126.6 million,
principally for net purchases of short-term investments.
Financing activities provided cash of $7.9 million in fiscal year 1997,
principally related to the proceeds from the issuance of preferred stock.
Financing activities provided cash of $13,000 in fiscal 1998 from the
83
<PAGE>
exercise of stock options. Financing activities provided cash of $5.6 million
in fiscal 1999, principally from the proceeds of the $5.0 million loan from
Compuware, proceeds from NetIQ's bank credit facility and the exercise of stock
options. Financing activities provided net cash of $114.5 million in the six
months ended December 31, 1999, principally from the proceeds of NetIQ's public
offerings, net of cash paid to Compuware and cash paid to a financial
institution to retire short-term and long-term debt.
At December 31, 1999 NetIQ does not have any significant capital commitments
outstanding.
Effect of Recent Accounting Pronouncements
In June 1998 and June 1999, FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities: Deferral of the Effective Date
of SFAS No. 133. These statements define derivatives, require that all
derivatives be carried at fair value, and provide for hedge accounting when
certain conditions are met. SFAS No. 133, as amended, is effective for NetIQ in
fiscal 2001. Although NetIQ has not fully assessed the implications of SFAS No.
133, it does not believe that adoption of this statement will have a material
impact on its financial position, results of operations or cash flows.
Quantitative And Qualitative Disclosures About Market Risk
NetIQ does not use derivative financial instruments in NetIQ's investment
portfolio and has no foreign exchange contracts. NetIQ's financial instruments
consist of cash and cash equivalents, short-term investments, trade accounts
and contracts receivable, accounts payable, and long-term obligations. NetIQ
considers investments in highly liquid instruments purchased with a remaining
maturity of 90 days or less at the date of purchase to be cash equivalents.
NetIQ's exposure to market risk for changes in interest rates relates primarily
to NetIQ's 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.
NetIQ's business is principally transacted in the United States dollar.
During the six months ended December 31, 1999, 6% of NetIQ's invoices were in
currencies other than the United States dollar.
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<PAGE>
NETIQ MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding the executive officers
and directors of NetIQ who will serve as executive officers and directors
subsequent to the merger:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Ching-Fa Hwang.......... 51 President, Chief Executive Officer and Director
James A. Barth.......... 57 Vice President, Finance, Chief Financial Officer and Secretary
Her-Daw Che............. 51 Vice President, Engineering and Director
Thomas R. Kemp.......... 34 Vice President, Marketing
Glenn S. Winokur........ 41 Vice President, Worldwide Sales
Alan 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 NetIQ's
President and Chief Executive Officer and as a director since its inception.
From June 1995 to March 1999, Mr. Hwang also served as NetIQ's 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 an M.S. in computer science from the University of Utah.
James A. Barth has served as NetIQ's 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 NetIQ's Vice President,
Engineering and as a director since November 1995. From September 1993 to July
1995, Mr. Che served as the Director of Engineering of the EcoSystems Business
Group at Compuware. Mr. Che co-founded EcoSystems and served as its Director of
Engineering from its inception until its sale to Compuware. Mr. Che holds a
B.S. in electrical engineering from National Taiwan University and an M.S. in
computer science and a Ph.D. in computer science from the University of
Pennsylvania.
Thomas R. Kemp has served as NetIQ's Vice President, Marketing since May
1997. From January 1996 to April 1997, Mr. Kemp served as NetIQ's 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.
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<PAGE>
Glenn S. Winokur has served as NetIQ's Vice President, Worldwide Sales since
October 1999. Prior to his promotion to Vice President, Worldwide Sales, Mr.
Winokur had served as NetIQ's Vice President, Sales since May 1997 and from May
1996 to April 1997, Mr. Winokur served as NetIQ's 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.
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 its 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 an M.B.A. from the Wharton School of Business at the University
of Pennsylvania.
Classified Board
NetIQ's 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. Of the current
NetIQ directors who will be directors after the merger, Alan Kaufman and Her-
Daw Che have been designated Class II directors whose terms expire at the 2000
annual meeting of stockholders, Ching-Fa Hwang has been designated a Class III
director whose term expires at the 2001 annual meeting of stockholders, and
Ying-Hon Wong has been designated a Class I director whose term expires at the
2002 annual meeting of stockholders.
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 NetIQ's directors, officers or
key employees.
Audit Committee
NetIQ has established an audit committee, which includes Mr. Kaufman. The
audit committee reviews NetIQ's internal accounting procedures and consults
with and reviews the services provided by NetIQ's independent auditors.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee includes Mr. Kaufman. The Compensation Committee
is responsible for determining salaries, incentives and other forms of
compensation for NetIQ's 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 NetIQ's board of
directors, participates in all discussions and decisions regarding salaries and
incentive compensation for all of NetIQ's 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 NetIQ's
compensation committee and any member of any other company's board of directors
or compensation committee.
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<PAGE>
Director Compensation
NetIQ reimburses each member of the board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. No member of the
board of directors currently receives any additional cash compensation for
serving as a member of the Board.
In November 1998, NetIQ 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, NetIQ 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.
NetIQ's 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 NetIQ's total
voting power. NetIQ's 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 when he or she first becomes a director. Each non-employee
director who serves on the board of directors for at least six months is
granted another option to purchase 8,333 shares of common stock on the date of
each subsequent annual meeting of NetIQ's stockholders in any year in which he
serves at least six months on the board of directors. 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.
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<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation
earned during the fiscal year ended June 30, 1999 by NetIQ's President and
Chief Executive Officer and NetIQ's other executive officers who will be
officers of the company post-merger whose salary and bonus for fiscal 1999
exceeded $100,000. These individuals are referred to elsewhere in this
prospectus as named executive officers. Unless otherwise specified, other
annual compensation figures represent commissions. Commissions are cash-based
incentive compensation for our sales executives that are earned as licenses are
sold.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------------------- ------------
Securities
Name and Principal Underlying All Other
Position Year Salary Bonus Commission Options Compensation
------------------ ---- -------- ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current Executive
Officers
Ching-Fa Hwang.......... 1999 $ 93,749 $ -- $ -- 80,000 $2,069(2)
President and Chief 1998 90,000 -- -- -- 1,739
Executive Officer 1997 90,000 -- 1,731(1) -- 1,308
Thomas R. Kemp.......... 1999 113,699 -- -- 33,333 2,790(3)
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(4)
Vice President,
Worldwide Sales 1998 85,008 12,249 224,638 16,666 2,425
1997 80,004 25,000 -- 136,666 2,033
</TABLE>
- --------
(1) Represents compensation of $1,731 paid by NetIQ in fiscal 1997 in lieu of
excess accrued vacation time.
(2) 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.
(3) 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.
(4) 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.
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<PAGE>
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 NetIQ's estimate of future stock price. Actual gains, if any, on
stock option exercises will be dependent on the future performance of NetIQ's
common stock. In fiscal 1999, NetIQ granted options to acquire up to an
aggregate of 1,299,216 shares to employees and directors, all under NetIQ's
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 on 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 on a quarterly
basis thereafter.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options/Rights Exercise Price Appreciation
Underlying Granted to Price for Option Term
Options/Rights Employees in Per Expiration ---------------------
Granted Fiscal Year Share Date 5% 10%
-------------- -------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 S. Winokur........ 33,333 2.57 11.25 04/30/09 330,851 748,948
</TABLE>
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.
Aggregated Option Exercise in Last Fiscal Year and
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Number of Underlying Unexercised in-the-Money Options at
Shares Options at Fiscal Year End Fiscal Year End
Acquired on Value ------------------------------- -------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- --------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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 S. Winokur........ 90,208 1,167,292 22,290 74,167 287,433 583,725
</TABLE>
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<PAGE>
Change in Control Agreements
NetIQ has entered into change of control severance agreements with each of
its 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:
. NetIQ's stockholders approve a merger or consolidation of NetIQ with any
other corporation, other than a merger or consolidation which would
result in NetIQ voting securities outstanding immediately prior to the
transaction continuing to represent more than 50% of the total voting
power of the surviving entity in the merger
. NetIQ's stockholders approve a plan of complete liquidation or an
agreement for the sale or disposition by NetIQ of all or substantially
all of NetIQ's assets
. any person or entity becomes the "beneficial owner," directly or
indirectly, of NetIQ's securities representing 50% or more of the total
voting power represented by NetIQ's 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 are either 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
Limitation on Directors' Liability and Indemnification
NetIQ's 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.
NetIQ's certificate of incorporation and bylaws provide that NetIQ will
indemnify its directors and executive officers and other corporate agents to
the fullest extent permitted by law. NetIQ believes that indemnification under
its bylaws covers at least negligence and gross negligence on the part of
indemnified parties. NetIQ's bylaws also permit it 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.
NetIQ has entered into agreements to indemnify its directors and executive
officers in addition to the indemnification provided for in its certificate of
incorporation and bylaws. These agreements, among other things, provide for
indemnification of its directors and executive officers for any 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 NetIQ, any subsidiary of NetIQ or any other company or
enterprise to which the person provided services at NetIQ's request. NetIQ
believes that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
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NETIQ PRINCIPAL STOCKHOLDERS
The following table sets forth as of February 29, 2000 certain information
with respect to the beneficial ownership of the common stock as to:
. each person known by NetIQ to own beneficially more than 5% of the
outstanding shares of its common stock
. NetIQ's Chief Executive Officer and each of NetIQ's other most highly
compensated executive officers during fiscal year 1999
. each of its directors, and
. all of its current directors and executive officers as a group.
Unless otherwise indicated below, each person or entity named below has an
address in care of NetIQ's principal executive offices. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission. Shares of common stock subject to options that are presently
exercisable or exercisable within 60 days of February 29, 2000 are deemed
outstanding for the purpose of computing the percentage ownership of the person
or entity holding the options, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person or entity.
The pre-merger percentage ownership is based on 17,613,370 shares of NetIQ
common stock outstanding as of February 29, 2000. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Shares Beneficially Owned
Name of Beneficial Owner Beneficially Owned Before Merger
------------------------ ------------------ --------------------
<S> <C> <C>
5% Stockholders:
Wongfratris Investment Companies(1).. 1,083,332 6.2%
51 Jordan Place
Palo Alto, CA 94303
Directors and Named Executive Officers:
Ching-Fa Hwang(2).................... 1,761,997 10.0%
Thomas R. Kemp(3).................... 208,076 1.2%
Glenn S. Winokur(4).................. 121,291 *
Herbert Chang(5)..................... 740,000 4.2%
Her-Daw Che(6)....................... 1,057,651 6.0%
Louis C. Cole(7)..................... 15,625 *
Alan W. Kaufman(8)................... 39,166 *
Ying-Hon Wong(9)..................... 1,083,332 6.2%
All directors and officers as a group 5,060,471 28.2%
(9 persons)(10).....................
Former Named Executive Officer
Stephen M. Kendall(11)............... 45,832 *
</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.
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<PAGE>
(2) Includes 30,332 shares held by Mr. Hwang's children and 399,999 shares held
by Mr. Hwang and his wife in joint tenancy. Share figure includes 55,000
shares of common stock issuable upon exercise of outstanding options which
are presently exercisable or will become exercisable within 60 days of
February 29, 2000.
(3) Includes 2,000 shares held by Mr. Kemp's spouse and 416 shares issuable
upon exercise of stock options exercisable within 60 days of February 29,
2000.
(4) Represents shares held by the Glenn S. Winokur Living Trust dated July 29,
1996, of which Mr. Winokur is the trustee. Share figure includes 7,083
shares of common stock issuable upon exercise of outstanding options which
are presently exercisable or will become exercisable within 60 days of
February 29, 2000.
(5) 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 110,000 shares
of common stock issuable upon exercise of outstanding options which are
presently exercisable or will become exercisable within 60 days of February
29, 2000. Mr. Chang disclaims beneficial ownership of the shares held by
InveStar Burgeon Venture Capital.
(6) Includes 13,333 shares held by Austin Che, Mr. Che's son, 13,333 shares
held by Joyce Che, Mr. Che's daughter and 151,820 shares held by the Che
Family Trust. Share figure includes 45,832 shares of common stock issuable
upon exercise of outstanding options which are presently exercisable or
will become exercisable within 60 days of February 29, 2000.
(7) Share figure includes 15,625 shares of common stock issuable upon exercise
of outstanding options which are presently exercisable or will become
exercisable within 60 days of February 29, 2000.
(8) Share figure includes 39,166 shares of common stock issuable upon exercise
of outstanding options which are presently exercisable or will become
exercisable within 60 days of February 29, 2000.
(9) 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.
(10) Share figure includes 306,455 shares of common stock issuable upon
exercise of outstanding options which are presently exercisable or will
become exercisable within 60 days of February 29, 1999.
(11) Mr. Kendall resigned as Vice President, Asia Pacific in October 1999.
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<PAGE>
CERTAIN NETIQ TRANSACTIONS
September 1995 Series A Preferred Stock Financing. In September 1995, NetIQ
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 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;
Ching-Fa Hwang, who is NetIQ's President and Chief Executive Officer and a
member of the board of directors; and Her-Daw Che, who is NetIQ's 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
Series A
Name of Stockholder Shares
------------------- ---------
<S> <C>
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, NetIQ 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., whose representative, Herbert Chang, is a member of the
board of directors; Ching-Fa Hwang; Wongfratris Investment Company; Her-Daw
Che; and Thomas R. Kemp, who is NetIQ's Vice President of Marketing. The
following table summarizes purchases of Series B Preferred Stock by these
individuals and entities:
<TABLE>
<CAPTION>
Number of
Series B
Name of Stockholder Shares
------------------- ---------
<S> <C>
InveStar Burgeon Venture Capital................................. 666,666
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 NetIQ's 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 NetIQ 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.
Change of Control Severance Agreements. NetIQ has entered into change of
control severance agreements with each of NetIQ's executive officers. For a
more detailed description of the change of control severance agreements, see
"Management--Change in Control Agreements."
Option Grants to Directors and Significant Stockholders. In November 1995,
in connection with his assistance in helping NetIQ obtain the Series A
Preferred Stock financing, NetIQ has 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
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determining that NetIQ probably would not need additional private financing, it
accelerated the vesting on this option so that Mr. Ho could purchase all of the
shares subject to this option in order to minimize accounting charges
associated with future vesting of this option.
NetIQ has also issued options to purchase common stock to Messrs. Chang,
Kaufman, Cole, Che, Hwang and Wong under its 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."
Incentive Stock Plans
1995 Stock Plan
NetIQ's 1995 Stock Plan was adopted by its board of directors in November
1995 and was approved by the stockholders in April 1996. The board of directors
approved the amendment and restatement of the plan in May 1999, and the
stockholders approved the amendment and restatement in July 1999. A total of
5,333,332 shares of common stock, plus annual increases beginning on July 1,
2000, equal to the lowest of 1,333,333 shares, 4% of its shares on that date or
an amount determined by the board of directors are currently reserved for
issuance under the 1995 Stock Plan. Unless terminated sooner, the 1995 Stock
Plan will terminate automatically in November 2005.
The 1995 Stock Plan provides for the discretionary grant of incentive stock
options to employees within the meaning of Section 422 of the United States tax
code, and for the grant of nonstatutory stock options and stock purchase rights
to employees, directors and consultants.
Stock Purchase Rights. The 1995 Stock Plan may be administered by the board
of directors or a committee of the board. 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 and stock purchase rights granted,
including:
. the exercise price of the option or stock purchase right;
. the number of shares subject to each option or stock purchase right;
. the exercisability thereof; and
. the form of consideration payable upon exercise.
The exercise price of all incentive stock options granted under the 1995
Stock Plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and
stock purchase rights granted under the 1995 Stock Plan is determined by the
administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code, the exercise price must be at least equal
to the fair market value of the common stock on the date of grant. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of its outstanding capital stock, the exercise price of any
incentive stock option granted must be at least equal 110% of the fair market
value on the grant date and the term of this incentive stock option must not
exceed five years. The term of all other incentive stock options granted under
the 1995 Stock Plan may not exceed ten years.
In the case of stock purchase rights, unless the administrator determines
otherwise, the restricted stock purchase agreement will grant NetIQ a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with NetIQ for any reason, including death or
disability. The purchase
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price for shares repurchased under the restricted stock purchase agreement will
be the original price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser to us. The repurchase option will lapse at a
rate determined by the administrator.
Options and stock purchase rights granted under the 1995 Stock Plan are
generally not transferable by the optionee, except by will or the laws of
descent or distribution, and are exercisable during the lifetime of the
optionee only by that optionee. Options granted under the 1995 Stock Plan must
generally be exercised within the period of time set forth in the optionee's
option agreement after the end of optionee's status as an employee, director or
consultant of its company, or within 12 months after the optionee's termination
by disability or death, but in no event later than the expiration of the
option's term.
The 1995 Stock 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 NetIQ's initial public offering, and who does not
beneficially hold 1% or more of the total voting power of NetIQ's voting
securities on the date of grant. 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 NetIQ's annual meeting.
However, if the first annual meeting following NetIQ'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 a non-employee director under the 1995 Stock Plan will have a term of five
years and the shares purchasable under such options are fully vested on the
date of grant. The exercise price of those options will be 100% of the fair
market value per share of common stock on the date of grant.
The 1995 Stock Plan provides that in the event of a merger of NetIQ with or
into another corporation, or a sale of substantially all of its assets, each
outstanding option and stock purchase right must be assumed or an equivalent
option substituted for by the successor corporation or a parent or subsidiary
of the successor corporation. If the outstanding options and stock purchase
rights are not assumed or substituted for, the optionee will fully vest in and
have the right to exercise the option or stock purchase right to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. The administrator shall notify the optionee that the option or
stock purchase right shall be fully exercisable for a period of 15 days from
the date of this notice, and the option or stock purchase right will terminate
upon the expiration of this 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.
1999 Employee Stock Purchase Plan
NetIQ's 1999 Stock Purchase Plan was adopted by its board of directors in
May 1999 and was approved by the stockholders in July 1999. A total of 500,000
shares of common stock, plus annual increases beginning on July 1, 2000, equal
to the lowest of 666,666 shares, 2% of its shares on that date or a lesser
amount determined by the board of directors are currently reserved for issuance
under the 1999 Stock Purchase Plan. Unless terminated sooner, the 1999 Stock
Purchase Plan will terminate automatically in May 2009.
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.
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 NetIQ"s capital stock;
or
. whose rights to purchase stock under all NetIQ"s employee stock purchase
plans accrues at a rate which exceeds $25,000 worth of stock for each
calendar year.
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The 1999 Stock Purchase Plan is intended to qualify under Section 423 of the
United States tax code. It 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 that the first such offering period commenced
on July 29, 1999 and will end on the last trading day on or before October 30,
2001.
The 1999 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.
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 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.
A participant may not transfer rights granted under the 1999 Stock Purchase
Plan other than by will, the laws of descent and distribution or as otherwise
provided under the 1999 Stock Purchase Plan.
The 1999 Stock Purchase Plan provides that, in the event of the merger of
NetIQ with or into another corporation or a sale of substantially all of its
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 option, the offering period then
in progress will be shortened, an a new exercise date will be set.
The 1999 Stock Purchase Plan will terminate in 2009. However, the board of
directors has the authority to amend or terminate the 1999 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 1999 Stock Purchase Plan.
The 1999 Stock Purchase Plan is intended to qualify under Section 423 of the
United States tax code. It 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 that the first such offering period commenced
on July 29, 1999 and will end on the last trading day on or before October 30,
2001.
The 1999 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.
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 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
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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.
A participant may not transfer rights granted under the 1999 Stock Purchase
Plan other than by will, the laws of descent and distribution or as otherwise
provided under the 1999 Stock Purchase Plan.
The 1999 Stock Purchase Plan provides that, in the event of the merger of
NetIQ with or into another corporation or a sale of substantially all of its
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 option, the offering period then
in progress will be shortened, an a new exercise date will be set.
The 1999 Stock Purchase Plan will terminate in 2009. However, the board of
directors has the authority to amend or terminate the 1999 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 1999 Stock Purchase Plan.
401(k) Plan
NetIQ has 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. NetIQ may make matching contributions on
behalf of all participants in the 401(k) plan in an amount determined by
NetIQ's board of directors. NetIQ 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
NetIQ has entered into change of control severance agreements with each of
NetIQ's 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
. NetIQ's stockholders approve a merger or consolidation of NetIQ with any
other corporation, other than a merger or consolidation which would
result in NetIQ's voting securities outstanding immediately prior thereto
continuing to represent more than 50% of the total voting power of the
surviving entity in the merger;
. NetIQ's stockholders approve a plan of complete liquidation or an
agreement for the sale or disposition by us of all or substantially all
of NetIQ's assets;
. any person becomes the "beneficial owner," directly or indirectly, of
NetIQ's securities representing 50% or more of the total voting power
represented by NetIQ's 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 are either 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
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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" for a description of the change
of control provisions of NetIQ's stock option plan.
Limitations on Directors' Liability and Indemnification
NetIQ's 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.
NetIQ's certificate of incorporation and bylaws provide that NetIQ will
indemnify its directors and executive officers and other corporate agents to
the fullest extent permitted by law. NetIQ believes that indemnification under
NetIQ's bylaws covers at least negligence and gross negligence on the part of
indemnified parties. NetIQ's bylaws also permit NetIQ 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.
NetIQ has entered into agreements to indemnify its directors and executive
officers, in addition to the indemnification provided for in NetIQ's
certificate of incorporation and bylaws. These agreements, among other things,
provide for indemnification of NetIQ's 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 NetIQ's request.
NetIQ believes that these provisions and agreements are necessary to attract
and retain qualified persons as directors and executive officers.
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CERTAIN INFORMATION REGARDING MCS
Overview
MCS provides systems administration and operations management software
products for corporate and Internet-based Windows NT/2000 networks. MCS's
OnePoint product suite is designed to improve the reliability, performance and
security of even the largest and most complex computing environments by
simplifying and automating key systems management functions. MCS products can
be deployed quickly, are based on an open and extensible architecture and are
easy to use.
As of December 31, 1999, MCS products had been installed by over 700
customers, including more than 50 of the 1999 Fortune 100 companies and some of
the largest Internet datacenters in the world. MCS markets and sells its
products worldwide through a network of sales offices and distribution
partners. MCS products have been adopted in a wide variety of industries,
including banking and finance, energy, healthcare, insurance and
pharmaceuticals. Representative customers include Dell Computer, Dow Chemical,
Ericsson, GTE, Johnson & Johnson, Lockheed Martin, Microsoft, Nortel, USAA and
Wells Fargo.
Ganymede, of which a majority interest was acquired by MCS in March 2000,
provides performance management solutions that help information technology
managers deliver reliable, high-performance networked applications. At February
29, 2000, Ganymede had sold or licensed its products to more than 1,000
customers and had 91 employees.
Industry Background
The evolution of enterprise computing from centralized, mainframe-based
computing to distributed, client/server and Internet-based computing has added
substantial complexity to the management of computer network infrastructures.
Today's information technology environments are characterized by distributed
information systems, applications and networks. Many of these environments have
been further complicated by the increasing use of the Internet as a medium for
connecting businesses with customers, suppliers and employees. In the
increasingly competitive business world, effective use of corporate and
Internet-based networks has become a necessity, particularly for companies
pursuing electronic commerce strategies. For companies such as online retailers
or Internet service providers that generate most of their revenue through
electronic commerce, systems issues such as network scalability, security,
availability and performance are critical business considerations.
In today's corporate networks, organizations are installing Windows NT/2000
servers in greater quantities and are using these servers to address a
broadening scope of business needs. Adoption of Windows NT/2000 has accelerated
as servers running on the Windows NT/2000 operating system are increasingly
being used to run Internet sites and Web server farms--Internet-based networks
composed of hundreds or thousands of linked Windows NT/2000 servers--and to
support Internet business and application hosting initiatives. In a survey of
Fortune 1000 information technology managers, Forrester Research found that, on
average, those managers expected 60% of their servers to run on Windows NT by
the end of 2000. International Data Corporation projects that the installed
base of Windows NT servers will increase from 1.7 million in 1998 to 3.4
million in 2002.
The growing complexity of corporate and Internet-based Windows NT/2000
networks has placed increasing pressure on systems managers to maintain
reliable network operations. These networks must be kept secure and available
24 hours per day, 7 days per week and must be able to support widely
distributed global organizations. Failure to ensure these service levels could
result in heavy penalties, including a loss of internal productivity and, with
the increasing prevalence of electronic commerce, corporate revenue. Although
Windows NT/2000 servers are flexible and powerful operating systems, they
require ongoing management support. To keep Windows NT/2000 networks running
smoothly, companies have employed large departments of skilled systems
administrators. This approach has proven costly and ineffective, as the
scarcity of skilled systems administrators has made employing these personnel
very expensive. To improve both the efficiency and effectiveness of corporate
and Internet-based Windows NT/2000 networks, businesses are increasingly
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using systems management software solutions. International Data Corporation
projects the size of the market for 32-bit Windows systems management
software--the market for software that manages Windows NT and other 32-bit
Windows operating systems--will grow from $1.8 billion in 1998 to $8.1 billion
by 2003. To date, these software solutions have addressed two primary
functions:
Systems Administration. The primary function of systems administration is to
create and maintain the data that directs and secures the network operating
system. Because of the volume, complexity and importance of the data produced
by the operating system, its proper management is critical. Another key role of
systems administration is to determine appropriate policies, including those
that are designed to secure access to the network, data and applications, and
to audit adherence to those policies. The automated application of policies
benefits corporate and Internet networks by ensuring consistency in outcomes
and reducing the systems administrator hours needed to maintain the network.
Operations Management. The primary function of systems operations management
is to identify and respond as early as possible to problems such as breaches in
security, hardware failures, software crashes and insufficient capacity. These
activities are critical to the ongoing operation of corporate and Internet-
based networks. For example, security operations management provides mechanisms
for notification and response to unauthorized access or policy violations.
Another role of systems operation management is to continually monitor the
performance, responsiveness and availability of network services so that
systems administrators can plan and budget for the frequently needed additions,
upgrades and configuration changes.
Several systems management software companies have attempted to provide this
functionality for Windows NT and other operating systems. Their products fall
into three general categories:
Utilities. Point applications and utilities focus on a specific systems
administration problem and attempt to amplify systems administrator efforts.
While these often are helpful in workgroup and small network situations, many
of them have not been designed and tested to scale to larger networks. The need
to evaluate and procure point applications and utilities one by one is costly.
Many of these applications and utilities also require substantial systems
administrator time for integration with other systems management tools used on
the networks.
Cross-platform point suites. Cross-platform point suites have broader
applications than the point product applications or utilities because of their
ability to support multiple operating systems such as Unix, Windows NT/2000 and
MCS. However, MCS believes that these cross-platform point suites typically
provide a limited depth of functionality due to the demands of functioning on
multiple operating systems. In addition, these suites are often more difficult
to implement and manage than point applications or utilities.
Frameworks. Frameworks attempt to solve most systems management problems on
most operating systems. Although they offer the promise of a "one-stop-shop"
for all enterprise systems management needs, they are complex, require a
significant amount of knowledge and training to manage, and require a lengthy
implementation. As with cross-platform point solutions, MCS believes that these
framework solutions typically provide limited depth of functionality for
Windows NT/2000 systems management given their broad scope.
MCS believes that products in these categories have exhibited a variety of
shortcomings in addressing Windows NT/2000 systems management requirements.
They have either proven to be too narrow in scope, limited in terms of Windows
NT functionality, overly difficult and costly to implement or some combination
of the above. MCS believes that companies increasingly want software solutions
that provide end-to-end integrated functionality for systems administration and
operations management, can be rapidly deployed and are easy to use. A
comprehensive systems management product offering should enable companies to
better utilize their skilled systems administrator resources and support the
security, availability and performance demands of large distributed corporate
and Internet-based networks. The solution should incorporate rules,
particularly those rules that relate to the increasing complexity of Internet
systems management, but should be customizable to meet specific customer needs.
Finally, the solution should fully support and extend the existing capabilities
of Windows NT/2000.
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The MCS Software Solution
MCS provides software products that enable scalable systems administration
and operations management for corporate and Internet-based Windows NT/2000
networks. MCS's OnePoint product suite is designed to improve the reliability,
performance and security of even the most complex computing environments by
simplifying and automating many key systems management functions. MCS products
are based on an open and extensible architecture, can be deployed quickly and
are flexible and easy to use. MCS software products provide the following
features and benefits:
Integrated, end-to-end Internet systems management. OnePoint is designed to
facilitate Internet systems management--the centralized management of critical
systems infrastructure and applications for the extended enterprise. Customers
can use OnePoint to monitor, manage, administer and secure a wide range of
resources in the Windows NT/2000 environment including Web server farms,
electronic commerce and corporate servers, workstations, applications and the
Windows 2000 Active Directory. OnePoint enables companies to automate labor-
intensive tasks, such as security monitoring and administration, and to
minimize the need for customization by incorporating widely accepted business
procedures into the software. OnePoint is also designed to ease the transition
from other operating systems, such as Novell Netware, to Windows NT/2000 by
providing systems administrators with the ability to test implementations and
convert systems incrementally.
Designed to manage and enable electronic commerce. MCS software solutions
enable systems administration and management of Windows NT/2000 servers that
power electronic commerce applications. OnePoint enables Internet businesses to
provide continuous, secure systems availability--24 hours per day, 7 days per
week--and high transaction throughput to their customers, thereby increasing
the level of overall customer satisfaction. OnePoint permits routine systems
administration functions to be conducted without interruption of services and
reduces the cost of Internet systems management by establishing policies and
rules which automate specific systems management tasks. For example, OnePoint
can respond to a hacker attack while the attack is in progress by reconfiguring
the impacted web server to deny further communications from the unauthorized
intruder.
Highly scalable, extensible architecture. Each of MCS's products is designed
to operate in complex, enterprise-scale Windows NT/2000 environments. OnePoint
centrally manages a large number of interlinked Windows NT/2000 servers and
facilitates the expansion of the number of servers under management without
time-consuming implementation. In addition, MCS products can be deployed
rapidly and be implemented incrementally either by product or by department.
The modular architecture of MCS products enables users to customize these
products to meet their network's specific needs.
Lower total cost of ownership. MCS reduces the total cost of ownership by
providing a single point of systems administration and operations management,
which simplifies systems management processes and limits the skilled systems
administrator resources required. MCS believes that MCS's policy-based approach
further reduces the number of required personnel by enabling businesses to
automate many systems management tasks. Unlike many other alternatives, MCS
software products enable systems administrators to implement network-wide
policies and rules without extensive programming or customization. MCS's
solutions also reduce total cost of ownership by permitting departmental self-
administration for routine tasks, such as entering changes in user profile
information, and by providing products that facilitate the transition from
other operating systems without costly consulting services or extensive
customization.
Rapid and cost-effective self-deployment. MCS products are designed to be
easy to install and use. Their automated implementation capabilities allow them
to be installed in minutes, configured in hours and deployed worldwide in days.
In addition, MCS products offer a familiar Windows look and feel that
accelerates user adoption and minimizes the need for formal training. As a
result, MCS products can be deployed without the need for extensive
professional services or internal implementation support staff, thus increasing
the potential return on investment for customers. For example, systems
administrators can use MCS's ActiveKnowledge modules to incorporate Windows
NT/2000-specific problem solving into their systems administration tools
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without extensive on-site custom programming. MCS believes that MCS's rules-
based approach is not only many times more scalable than simplistic script-
based approaches, but makes MCS products far easier and faster to deploy.
The MCS Software Strategy
MCS's objective is to maintain and strengthen MCS's position as a provider
of systems management software for corporate and Internet-based Windows server
networks. Key elements of MCS's strategy include:
Extending MCS's OnePoint product suite. MCS plans to increase the
functionality of MCS's OnePoint product suite through internal development and,
potentially, strategic acquisitions. MCS will continue to extend MCS's existing
technology in systems administration and operations management and broaden
MCS's platform migration modules. MCS has already released products that enable
customers to transition from Windows NT to Windows 2000 and from Netware to
Windows NT. MCS will continue to research and develop new products, examine the
use of agents for administering and monitoring other operating platforms from a
centralized Windows 2000 console and enhance integration of MCS products with
framework solutions.
Targeting companies and service providers conducting Internet commerce. MCS
believes that the growth of the Internet is accelerating demand for Windows
NT/2000 servers. MCS products are designed to support high volume, Internet-
based networks and are currently being used to manage web server farms and
electronic commerce sites. MCS intends to expand MCS's Internet systems
management business by specifically targeting online retailers, Internet
service providers, electronic commerce service providers and other companies
for which Windows NT/2000 systems management products are an operational
necessity.
Increasing sales to existing customer base. MCS's variable license fee
structure, which is based on the number of users and servers, allows customers
to try MCS products without committing to a full enterprise-wide
implementation. To date, a substantial portion of MCS's revenues have come from
additional sales of the same products within an existing customer's
organization. MCS believes that there is a large market for selling new
licenses for the same products as well as other products to MCS's existing
customers. MCS intends to continue MCS's current incremental selling strategy.
MCS will also pursue enterprise-wide initial sales whenever appropriate.
Expanding MCS's customer base. MCS products have been deployed by many of
the largest organizations in the world. While MCS intends to expand MCS's
direct sales efforts to these large organizations, MCS's variable license fee
structure makes MCS's solution viable for smaller enterprises as well. Through
partnership programs and targeted telesales campaigns, MCS intends to increase
MCS's selling efforts to mid-sized companies that often are aggressive adopters
of Windows NT because these smaller organizations often suffer most acutely
from the lack of highly skilled systems management personnel. MCS believes
these customers' business and computing needs are growing rapidly due to their
adoption of Internet-based applications and other software solutions.
Leveraging and expanding the Microsoft relationship. MCS is currently a
leading vendor of Windows NT/2000-based systems management software, both in
product sales and technology. MCS has developed an extensive relationship with
Microsoft that includes the sharing of technology, joint marketing and sales
efforts. Microsoft uses MCS's OnePoint Operations Manager product for its
global Internet and corporate datacenters. MCS intend to continue to work with
Microsoft to provide and jointly market solutions that exploit the full value,
flexibility and depth of the Windows NT and Windows 2000 operating
environments. MCS's Vice President of Strategic Alliances works closely with
Microsoft at its Redmond, Washington campus to help MCS manage and expand its
relationship with Microsoft. In addition, MCS has sales engineer and developer
personnel located on Microsoft's Redmond campus.
Expanding global distribution channels. MCS believes that the international
marketplace provides a significant growth opportunity as organizations
worldwide adopt Windows NT and Windows 2000. To date, MCS has sold its products
domestically through MCS's direct sales force and internationally through a
limited
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number of distributors. MCS believes that the ease of deployment and use of MCS
products and MCS's pricing model make its products well suited for resale
through indirect channels such as international distributors and strategic
partners. MCS intends to expand indirect selling of its products through
strategic partner arrangements and to engage international distributors with
substantial market penetration in the enterprise systems software segment. In
addition, MCS intends to expand MCS's direct sales presence in key
international markets.
Products and Technology
MCS's OnePoint product suite provides scalable systems administration and
operations management for even the largest and most complex computing
environments in a manner that is quick to deploy, flexible and easy to use.
OnePoint currently consists of the following products:
. Directory & Resource Administrator
. Domain Migration Administrator
. Exchange Administrator
. File Administrator
. Operations Manager
. Framework Integration
The OnePoint product suite's open and extensible architecture is designed to
provide stability, high performance and scalability. The OnePoint suite is
modular and allows organizations to add functionality as their corporate or
Internet-based Windows NT/2000 networks expand. Each generation of OnePoint
products has introduced additional functionality, such as the October 1999
release of MCS's File Administrator product and MCS's Operations Manager
product.
MCS's OnePoint product suite provides rich systems administration,
operations management and security functionality along with a reduction in the
total cost of network operations by:
. Providing an out-of-the-box solution that does not require extensive
customization
. Automating systems management functions by using policies and rules to
reduce the number of expensive systems manager hours needed to manage
Windows NT/2000 systems
. Applying centrally determined rules to Windows NT/2000 systems throughout
the enterprise to increase system reliability and security
. Delegating systems management tasks to business department personnel to
improve response time and limit systems administrator hours required
. Facilitating more rapid security audits through monitoring and logging
capabilities
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The major components of the OnePoint Suite are summarized below.
OnePoint Suite--Products
Component Feature
- --------------------------------------------------------------------------------
OnePoint Directory & Resource
Administrator
Provides unified, policy-based Central definition of security
administration of directory content policies and rules:
and nondirectory resources for
increased security, data integrity . Secure distribution of
and reduced administrative effort. administrative tasks to line of
business departments to increase
service levels and reduce systems
administrator workload
. Monitoring and logging facilities
for comprehensive security audit
OnePoint Domain Migration
Administrator
Simplifies networks by reducing the . Domain consolidation and
number of domains and variety of reconfiguration to simplify
operating systems required. systems administration, reduce
systems administrator workload
and reduce the amount of hardware
required to run a Windows NT-
based network
. Design, modeling, testing and
implementation of Windows 2000
Active Directory structures to
enable flexible, efficient
responses to organizational
change
. Simplified and rapid migration
from Windows NT 4.0 to Windows
2000
. Simplified and rapid migration
from Novell Netware to Windows NT
4.0 and Windows 2000
OnePoint Exchange Administrator
Enables secure, distributed and . Unified administration of the
synchronized administration of Exchange and Windows NT
Microsoft Exchange mailboxes and directories to ensure data
distribution lists. consistency and integrity
. Central definition of security
policies and rules for mailbox
administration
. Distribution of mailbox
administration tasks to line of
business departments to increase
service levels and reduce systems
administrator workload
. Comprehensive security audit
through monitoring and logging
OnePoint File Administrator
Enables efficient administration of . Policy-based administration of
the NT file system and file the Windows NT/2000 file system
security.
. Security permission management
and auditing across the entire
enterprise
. Analysis, reporting and
management of Windows NT and
Windows 2000 service
configuration enables
administrators to identify
service accounts and change
service account settings across a
large number of users
simultaneously
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Component Feature
- --------------------------------------------------------------------------------
OnePoint Operations Manager
Enables operations management and Real-time system availability and
monitoring of a wide range of performance monitoring
network components and applications
by providing real time event and . Comprehensive security monitoring
problem detection, automated problem and of network components and
resolution and service level intrusion detection
management.
. Comprehensive monitoring of
operation, performance and
security for web farms and
business applications
. Automated problem resolution via
execution of ActiveKnowledge
modules and integration with
OnePoint administration products
. Real-time console, pager and
email alerts
. High performance, low overhead
data collection and filtering
. Continuous monitoring of tens of
thousands of servers and
applications
. Monitoring and management of
service level agreements for
availability, performance and
problem resolution
One point Framework Integration
Enables OnePoint to integrate with . Continuous monitoring of a one
existing frameworks and systems point-managed network through the
management environments. Tivoli management console
OnePoint Architecture
OnePoint is based on a multi-layer client server architecture. It exploits
Microsoft's Distributed interNet Application architecture technologies to
provide increased security, simplicity and performance in the systems
management arena. These technologies enable simplified component level
programming, multi-part transactions, support for multi-level distributed
components, extended security and integration with the Internet and the web.
MCS believes that Distributed interNet Application architecture technologies
are important in the area of securing and managing complex systems
infrastructure components and the related data and that they provide a point of
differentiation between MCS products and those of other vendors. OnePoint is
comprised of three primary layers:
Data Layer--dynamically manages the collection and update of data from a
wide range of Windows NT and Windows 2000 data sources including the Windows NT
4.0 Security Access Manager, Windows 2000 Active Directory, Exchange,
application event logs NT system services and the Windows Registry.
Presentation Layer--provides the interfaces that systems administrators and
managers use to perform systems management functions. Multiple interfaces are
provided to meet the unique needs of specific types of users.
.Microsoft Management Console--OnePoint products are provided as
supplemental products that integrate into the Microsoft Management Console
and are designed for use by professional systems managers to provide rich
functionality.
.Web client--A task-oriented thin web client, requiring no workstation
installation, provides a simple and effective tool for non-systems
professionals, such as a line of business department assistant, to perform
administrative activities efficiently, securely and safely.
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.Wireless clients--A task-oriented client operating on wireless devices
such as Web-enabled cellular phones and Personal Digital Assistants (PDAs)
to enable remote administration of Windows NT/2000 networks.
.Application programming and customization interfaces--These interfaces
enable professional administrators to customize or extend the functionality
of OnePoint products to meet the unique needs of a specific organization.
Business Logic Layer--provides a layer of common services that manages the
communication between the data and presentation layers. The business logic
layer ensures that administrative and operational policies are enforced, that
transactions across multiple data stores are managed and that the integrity of
data store content is maintained.
Ganymede
The acquisition of Ganymede is expected to enable Newco to enhance
significantly its suite of management application testing products. Ganymede is
a leader in end-to-end monitoring and testing from the application layer. Its
technologies solve day-to-day challenges of "enterprise performance
management," which describes the process of managing the performance of
clients, servers, applications, and the network as an integrated system in
order to deliver and maintain reliable, predictable application performance.
Ganymede's product suite includes Chariot and Pegasus. Chariot began as a
product to allow information technology managers and networking vendors to
address their project needs, and is used today by businesses and by major
laboratories testing networking hardware and software. Chariot helps determine
true end-to-end performance of complex, multi-protocol networks by testing from
the application layer.
Pegasus allows information technology managers to see application
performance from the user's perspective. The Pegasus Application Monitor
passively monitors the performance of application transactions at the desktop,
as they occur, breaking out response time by client, network, and server. It
actively emulates known application transaction flows to measure repeatedly how
well the network is handling application traffic, giving the user consistent
and helpful comparisons of network performance over time. With Pegasus, one can
quickly and easily monitor end-user performance, detect, prioritize, and
isolate performance problems before users experience them, benchmark and
monitor service level agreements, analyze history, track performance trends and
feed this information back into the planning process, and minimize
troubleshooting time.
Customers
MCS products have been sold to over 700 customers worldwide including more
than 50 of the 1999 Fortune 100 companies. Included in this group are
governmental agencies and companies in the financial services, high technology,
utilities, manufacturing, pharmaceuticals, health care, retail and
telecommunications industries.
These customers often buy for a single location, department or division, and
then, based upon the initial success of the products in that location,
department or division, expand their use of MCS products into other parts of
the organization. In fiscal 1998, fiscal 1999 and the six months ended December
31, 1999, no single customer comprised more than 10% of MCS's revenue.
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Microsoft Relationship
Currently Microsoft is MCS's supplier, partner and customer.
Supplier. MCS products are focused on the Windows NT marketplace. MCS has a
relationship with Microsoft's Developer Relations Group, through which
Microsoft works with companies that are developing products that enhance
Microsoft's products and operating systems. MCS also has a relationship with
Microsoft's Windows 2000 Product Management Group, through which Microsoft
coordinates marketing of Windows 2000 with vendors whose products enhance
Microsoft's products and operating systems. MCS believes that these
relationships enable MCS to anticipate Microsoft's evolving product strategy in
advance of the market and to create products designed to increase the value of
Microsoft's operating systems. In addition, MCS believes that the relationship
enables it to have early access to technologies and/or influence the
development of special requirements.
Partner. MCS is a member of numerous Microsoft program partnerships. MCS
participates as a partner in the Microsoft Certified Solution Provider, ADSI
Partner and Security Partner programs. MCS also participates in Microsoft's
BackOffice program, through which Microsoft tests and certifies MCS products
for BackOffice compatibility. MCS has been chosen as one of the vendors whom
Microsoft promotes through both its internal and external marketing programs.
The objectives of these programs are to increase Windows NT/2000 server sales
by informing both Microsoft field personnel as well as potential customers
about the added value of MCS's solutions. MCS also participates in numerous
Microsoft-sponsored events such as COMDEX, Windows 2000 Rapid Deployment
Conferences and TechEd. At some of the tradeshows MCS attends, MCS demonstrates
and/or presents as a member of the Microsoft Partner Pavilion. In addition to
the above, MCS participates in extensive joint field work with Microsoft
account representatives, systems engineers and consultants through a concerted
program of awareness, joint presentations, briefings and sales calls.
Customer. Microsoft's Information Technology Group became MCS's customer in
June 1998 when Microsoft licensed MCS's OnePoint Operations Manager product.
Microsoft selected OnePoint Operations Manager to perform strategic event
management of its global Internet and corporate data centers. Microsoft has
five primary datacenters, including three Internet datacenters--in Redmond,
Washington, the United Kingdom and Japan--and two main corporate data centers--
in Redmond and Ireland. The Microsoft Information Technology Group uses the
OnePoint Operations Manager product to centrally monitor and provide alert
notification for proactively managing the health status of more than 5,000
critical business systems.
Sales and Marketing
MCS sells its products primarily through MCS's direct sales force and
distributors. Historically MCS's sales efforts have focused on companies with
more than 3,000 employees. MCS intends to continue these efforts and to expand
MCS's sales efforts to middle-market companies. MCS has relied on systems
integrators and consulting service providers for only a limited number of
sales, but MCS intends to explore opportunities to work with systems
integrators and consulting service providers in the future.
Direct Sales. MCS sells its products through MCS's direct sales force using
a team approach. MCS believes this approach allows MCS to achieve control of
the sales process and respond rapidly to customer needs. Each sales team
consists of three persons: a sales manager, an inside sales person and a sales
engineer. The sales manager is responsible for coordinating the efforts of the
sales team and for finalizing customer requirements and closing the sale. The
inside sales person is responsible for maintaining contact with existing
customers as well as prospecting for and qualifying potential new customers.
The sales engineer is a highly skilled technical employee responsible for
supporting products sales, including all technical aspects related to sales of
MCS products. MCS's typical sales cycle has averaged three months.
MCS's direct sales force for North America is distributed throughout the
United States and Toronto, Canada and accounts for substantially all of MCS's
North American revenues. During 1999, MCS established
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direct sales activities in Germany and France. MCS also has sales
representatives based in London, England. MCS has increased the size of its
direct sales organization from 29 to 81 individuals over the past 18 months and
expects to continue hiring sales personnel over the next 12 months, primarily
in North America.
Distributors and Resellers. In addition to MCS's direct sales strategy, MCS
has established indirect sales channels through distributors and other
resellers. Outside North America, MCS has historically relied heavily on MCS's
indirect sales channel. MCS has established a network of resellers and
distributors in Europe, Australia and Brazil, with the concentration of MCS's
distributors being located in Europe.
MCS's international distributors and other resellers typically perform
marketing, sales and technical support functions in their country or region.
Each one may distribute direct to the customer, via other resellers or through
a mixture of both channels. MCS actively trains MCS's international
distributors in both product and sales methodology.
Systems Integrators and Consulting Service Providers. To date, MCS has yet
to significantly utilize systems integrators or consulting service providers in
MCS's selling efforts. MCS is currently evaluating opportunities for and plans
to expand joint sales with systems integrators and consulting service
providers, particularly with respect to the implementation of Windows 2000.
Marketing Programs. To support MCS's growing sales organization and channel,
MCS has devoted significant resources in the past year to building and
launching a series of marketing campaigns. MCS's marketing efforts have
included a number of programs, such as seminars, industry trade shows,
mailings, analyst and press tours, advertising and public relations. MCS
believes these marketing programs have resulted in a number of sales leads.
Customer Service and Support
MCS believes that a high level of customer service and support is critical
to the successful marketing and sale of MCS products. MCS is developing a
comprehensive service and support organization to manage customer accounts and
expects to provide an increasing level of support as MCS products are deployed
across a range of customers. MCS provides support for MCS products and services
primarily from MCS's Houston, Texas location. MCS plans to establish additional
service and support sites internationally commensurate with customer needs.
MCS products are designed to be implemented quickly and effectively by MCS's
customers and to require minimal support from MCS. MCS provides technical
support to MCS's customers through maintenance and support agreements. This
support includes assistance with product installation, configuration and
initial set-up, run-time support and support during extended hours. MCS
generally provides MCS's support via electronic mail, the Internet, facsimile
and telephone. MCS makes software upgrades available to customers with
maintenance agreements as the upgrades are released.
Research and Development
MCS believes that strong product development capabilities are essential to
MCS's strategy of enhancing MCS's core technology, developing additional
applications and increasing the competitiveness of MCS's product offerings. MCS
has invested significant time and resources in creating a structured process
for undertaking all product development projects. This process involves all
functional groups within MCS and is designed to provide a framework for
defining and addressing the steps, tasks and activities required to bring
product concepts and development projects to market successfully. In addition,
MCS has actively recruited key computer engineers and software developers with
expertise and degrees in computer science. MCS's product development strategy
emphasizes rapid innovation and product releases. As of February 29, 1999,
MCS's research and development staff consisted of 69 employees. To date, none
of MCS's development staff has left MCS since inception.
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MCS's research and development expenses totaled $1.3 million for fiscal
1997, $3.6 million for fiscal 1998, $6.0 million for fiscal 1999 and $4.6
million for the six months ended December 31, 1999.
Competition
MCS competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing. MCS faces competition primarily from systems
management software vendors that provide solutions for distributed computing
systems. MCS has experienced and expects to continue to experience increased
competition from current and potential competitors, many of which have
significantly greater financial, technical, marketing and other resources.
Companies offering competitive products vary in scope and breadth of the
products and services offered and include:
. internal systems management departments
. providers of point solutions for Windows NT directory administration,
domain consolidation migration and event management, such as Master,
Design & Development, Inc., Fastlane Technologies, Inc., System Options
Ltd. and Aelita Software Group
. providers of security and audit products for Windows NT/2000, such as
BindView Development Corporation and Netwise Systems Limited and
. providers of systems management suites and/or frameworks such as Computer
Associates, Inc., Hewlett-Packard Company, Tivoli Systems, Inc. and BMC
Software, Inc
MCS expects competition in the systems management software market to
increase significantly as new companies enter the market and current
competitors expand their product lines and services. Many of these potential
competitors are likely to enjoy substantial competitive advantages, including:
. greater resources that can be devoted to the development, promotion and
sale of their products
. more established sales channels
. greater software development experience and
. greater name recognition
Proprietary Rights
MCS software products rely on MCS's internally developed intellectual
property and other proprietary rights. MCS relies primarily on a combination of
copyright, trademark and trade secret laws, confidentiality procedures and
contractual provisions to protect MCS's intellectual property and other
proprietary rights. However, MCS believes that these measures afford only
limited protection. MCS licenses MCS software products primarily under shrink
wrap licenses that are included as part of the product packaging. Shrink wrap
licenses are not negotiated with or signed by individual customers, and purport
to take effect upon the opening of the product package. MCS believes that these
measures afford only limited protection. Despite MCS's efforts to protect MCS's
proprietary rights, unauthorized parties may attempt to copy aspects of MCS
products or to obtain and use information that MCS regards as proprietary.
Policing unauthorized use of MCS products is difficult, and MCS is unable to
determine the extent to which piracy of MCS software products exists. In
addition, the laws of some foreign countries do not protect MCS's proprietary
rights as fully as do the laws of the United States.
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MCS is not aware that its products employ technologies that infringe any
proprietary rights of third parties. MCS expects that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in MCS's industry segment grows and the functionality
of products in different industry segments overlaps. Any infringement claims,
with or without merit, could:
. be time consuming to defend
. result in costly litigation
. divert management's attention and resources
. cause product shipment delays
. require MCS's to enter into royalty or licensing agreements
These royalty or licensing agreements may not be available on terms acceptable
to MCS, if at all.
MCS uses the following trademarks:
. OnePoint . OnePoint Operations Manager
. the OnePoint logo . OnePoint File Administrator
. OnePoint EA . OnePoint Resource
Administrator
. OnePoint Directory
Administrator . Enterprise Administrator
. OnePoint Exchange . Knowledge Pack
Administrator
. ActiveKnowledge
. OnePoint Domain Administrator
. the Mission Critical Software
. OnePoint Event Manager logo
Each trademark, trade name or service mark of any other company appearing in
this prospectus belongs to its holder.
Employees
As of February 29, 2000, MCS had 228 employees, 69 of whom were engaged in
research and development, 119 in sales and marketing, 16 in customer support,
and 24 in finance, administration and operations. None of MCS's employees is
represented by a labor union. MCS has not experienced any work stoppages and
considers its relations with its employees to be good.
Facilities
MCS leases approximately 70,000 square feet in a single office building
located in Houston, Texas pursuant to a lease that expires in August 2004. MCS
also leases space in Lakewood, California; Atlanta, Georgia; Austin, Texas;
McLean, Virginia; Seattle, Washington; Boston, Massachusetts; Chicago,
Illinois; and London, England. The term of each of these leases is 12 months or
less.
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MCS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
MCS provides systems administration and operations management software
products for corporate and Internet-based Windows NT and Windows 2000 networks.
MCS's OnePoint product suite is designed to improve the reliability,
performance and security of even the most complex computing environments by
simplifying and automating key systems management functions. MCS products can
be deployed quickly, are based on an open and extensible architecture and are
easy to use.
MCS derives its revenue from the sale of software product licenses and
maintenance. Currently, all of MCS product license revenue is derived from
MCS's OnePoint suite and principally MCS's OnePoint Administrator products. In
the three months ended December 31, 1999, sales of OnePoint Administrator
products accounted for approximately 80% of MCS's license revenue. MCS expects
that these products will continue to account for a large portion of MCS's
license revenue for the foreseeable future.
Any factors adversely affecting the pricing of, demand for or market
acceptance of MCS's OnePoint product suite, such as competition or
technological change, could materially adversely affect MCS's business,
operating results and financial condition. Of particular importance is the
continued acceptance of Windows NT as a server operating system in corporate
and Internet-based networks. MCS believes that Windows NT/2000 Server will
continue to be an integral part of the corporate and Internet-based
client/server environments.
Since MCS's inception in 1996, MCS has incurred substantial costs to develop
its technology and products, to recruit and train personnel for MCS's
engineering, sales and marketing and technical support departments, and to
establish an administrative organization. MCS anticipates that MCS's operating
expenses will increase substantially in the future as MCS increases its sales
and marketing operations, develops new distribution channels, funds greater
levels of research and development, broadens MCS's technical support and
improves its operational and financial systems. Accordingly, MCS will need to
generate significant quarterly revenues to maintain profitability. In addition,
its limited operating history makes it difficult for MCS to predict future
operating results and, accordingly, there can be no assurance in future
quarters that MCS will achieve or sustain revenue growth or profitability.
Total revenue was $10.4 million in the three months ended December 31, 1999,
attributable primarily to sales in North America. In the three months ended
December 31, 1999, license revenue attributable to sales outside of North
America accounted for approximately 23% of MCS's total license revenue. MCS
plans to expand MCS's international operations significantly as it believes
international markets represent a substantial growth opportunity. Consequently,
MCS anticipates that international revenue will increase as a percentage of
total revenue in the future. If international revenue continues to increase as
a percentage of total revenue, MCS may experience a corresponding increase in
cost of sales, because of higher personnel costs for overseas locations and
commission expenses related to distributions that may impact MCS's operating
results. MCS's sales are generally denominated in United States dollars and, as
a result, MCS's current exposure to foreign exchange fluctuations is minimal.
As MCS's international sales and operations expand, MCS anticipates that its
exposure to foreign currency fluctuations will increase.
In the three months ended December 31, 1999, maintenance revenue comprised
18% of MCS's total revenue. MCS expects maintenance revenue to continue to
increase as a percentage of total revenue if the number of MCS customers
increases and if the number of customers entering into annual maintenance
agreements increases. If maintenance revenue increases as a percentage of total
revenue, MCS's gross margin as a percentage of total revenue will decrease
because of lower margins on maintenance revenue due to incremental maintenance
support costs.
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In view of the rapidly changing nature of MCS's business and MCS's limited
operating history, MCS believes that period-to-period comparisons of its
revenue and operating results are not necessarily meaningful and should not be
relied upon as indications of its future performance. Additionally, despite its
revenue growth for all but one quarter since inception, MCS does not believe
that historical growth rates are necessarily sustainable or indicative of
future growth.
During fiscal 1999, MCS recorded deferred stock compensation of $2.8 million
in connection with certain stock option grants. MCS amortizes deferred stock
compensation over the vesting period of the related award. MCS records this
amortization as a noncash expense in accordance with Accounting Principles
Board Opinion No. 25. This charge included $475,000 related to stock option
grants to three former directors. These directors resigned from MCS's board of
directors in the quarter ended June 30, 1999 and became consultants. In the
three months ended September 30, 1999, the Board of Directors vested these
options in full. MCS consequently recognized the remaining $436,000 of deferred
stock compensation during the quarter ended September 30, 1999. Such
compensation expense was allocated to sales and marketing, research and
development, and general and administrative expenses.
MCS had 206 employees at December 31, 1999, a substantial increase from 100
at December 31, 1998. This rapid growth has placed significant demands on MCS's
management and operational resources. In order to manage MCS's growth
effectively, MCS must implement and improve its operational systems, procedures
and controls on a timely basis. In addition, MCS expects that future expansion
will continue to challenge its ability to hire, train, motivate and manage MCS
employees. Competition is intense for highly qualified technical, sales and
marketing and management personnel. If MCS's total revenue does not increase
relative to its operating expenses, MCS's management systems do not expand to
meet increasing demands, MCS fails to attract, assimilate and retain qualified
personnel or MCS's management otherwise fails to manage its expansion
effectively, MCS would experience a decline in its revenue and operating
results.
In August 1999, MCS issued 3,312,500 shares of its common stock in
connection with its initial public offering at a per share price of $16.00 per
share. Immediately prior to the closing of the offering, all outstanding shares
of redeemable convertible preferred stock were converted to 6,968,650 shares of
common stock.
On November 10, 1999, MCS sold 2,100,000 shares in a public offering
pursuant to an effective Registration Statement with the Securities and
Exchange Commission. MCS's existing stockholders sold 2,500,000 shares in the
offering. MCS raised $113.8 million, net of related costs including the
underwriters discounts and commissions. MCS did not receive any of the proceeds
of the sale of shares by the selling stockholders.
Recent Developments
On February 26, 2000, MCS entered into an agreement to acquire Ganymede. MCS
has already acquired 90% of Ganymede pursuant to the merger agreement, and it
expects to complete the merger in April of 2000. Under the terms of the
agreement, MCS will issue 2,466,882 shares of its common stock for all the
outstanding common stock of Ganymede, and it will issue 283,118 options to
purchase MCS common shares to assume all options to purchase Ganymede stock
under the terms of Ganymede's current stock option plan. Stockholders of
Ganymede will own roughly 7% of Newco upon completion of the mergers.
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Results of Operations
The following table sets forth the results of MCS's operations expressed as
a percentage of total revenues. MCS's historical operating results are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
Period from Year Six Months
July 19, 1996 Ended Ended
(inception) June 30, December 31,
to June 30, ----------- ----------------
1997 1998 1999 1998 1999
------------- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Software license revenue...... 96% 89% 85% 85% 82%
Service revenue............... 4 11 15 14 18
--- --- --- ------ ------
Total revenue............... 100 100 100 100 100
--- --- --- ------ ------
Cost of Revenue:
Cost of software license
revenue...................... 5 3 2 2 1
Cost of service revenue....... 3 7 4 4 3
--- --- --- ------ ------
Total cost of revenue....... 8 10 6 6 4
--- --- --- ------ ------
Gross Margin................... 92 90 94 94 96
--- --- --- ------ ------
Operating expenses:
Sales and marketing........... 84 65 54 53 53
Research and development...... 30 25 24 26 24
General and administration.... 23 15 10 12 10
Amortization of deferred stock
compensation................. -- -- 2 1 3
Abandoned lease costs
(recovery)................... -- -- 4 -- (1)
Acquired in-process research
and development.............. 37 -- -- -- --
--- --- --- ------ ------
Total operating expenses.... 174 106 94 92 89
--- --- --- ------ ------
Income (loss) from operations... (82) (16) -- 2 7
--- --- --- ------ ------
Interest and other income, net.. -- -- 1 1 8
Income tax expense (benefit).... (4) -- -- -- 2
Excess of consideration paid to
redeem preferred stock and
increase in dividends on
convertible preferred stock.... (4) (26) (4) (5) --
--- --- --- ------ ------
Net income (loss)............... (82)% (42)% (3)% (2)% 13%
=== === === ====== ======
</TABLE>
Comparison of Six Months Ended December 31, 1998 and 1999
Revenue
MCS's revenue was $10.2 million and $19.5 million for the six months ended
December 31, 1998 and 1999, respectively, representing an increase of $9.3
million, or 91%. This increase was attributable to additional sales to MCS's
existing customers, as well as an increase in MCS's customer base.
License. License revenue was $8.8 million and $16.0 million for the six
months ended December 31, 1998 and 1999, respectively. License revenue
represented 86.5% and 82.0% of total revenue for the six months ended December
31, 1998 and 1999, respectively. License revenue increased 81% from the six
months ended December 31, 1998 to the six months ended December 31, 1999. The
increase in license revenue in absolute dollars was primarily attributable to
increased unit sales of MCS products. The decrease of license revenue as a
percentage of total revenue was primarily due to an increase in first year
maintenance sold with the product licenses and, to a lesser extent, the number
of renewal maintenance agreements purchased.
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Maintenance. Maintenance revenue was $1.4 and $3.5 million for the six
months ended December 31, 1998 and 1999, respectively. Maintenance revenue
represented 13.5% and 18.0% of total revenue for the six months ended December
31, 1998 and 1999, respectively. Maintenance revenue increased 155% from the
six months ended December 31, 1998 to the six months ended December 31, 1999.
This increase resulted primarily from the growth in software license revenue,
as new software licenses are generally sold with one year of maintenance, and,
to a lesser extent, renewals of maintenance agreements by existing customers.
Cost of Revenue
License. License costs were $192,000 and $151,000 in the six months ended
December 31, 1998 and 1999, respectively. License costs represented 2.2% and
1.0% of license revenue in the six months ended December 31, 1998 and 1999,
respectively. The 21.4% decrease in absolute dollars was attributable to a
reduction in amortization cost as acquired technology became fully amortized.
The decrease as a percentage of revenue was primarily a result of increased
growth of revenue in relation to amortization expense for acquired technology.
MCS expects license costs to decrease in the future due to the reduction in
amortization expense as acquired technology becomes fully amortized.
Maintenance. Maintenance costs were $441,000 and $602,000 in the six months
ended December 31, 1998 and 1999, respectively. Maintenance costs represented
32.1% and 17.2% of maintenance revenue in the six months ended December 31,
1998 and 1999, respectively. The 36.5% increase in absolute dollars was
attributable to the increase of MCS's average headcount. The decrease in
maintenance costs as a percentage of maintenance revenue was primarily
attributable to increased growth of revenue in relation to maintenance costs
and increased utilization of MCS's technical support staff. MCS expects
maintenance costs to increase in the future as MCS continues to expand its
customer base.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses were $5.4 million
and $10.4 million in the six months ended December 31, 1998 and 1999,
respectively. Sales and marketing expenses represented 53.0%, and 53.3% of
total revenue in the six months ended December 31, 1998 and 1999, respectively.
The increases in the absolute dollar level of sales and marketing expenses were
primarily due to increases in sales and marketing personnel and commission
expense as a result of MCS's revenue growth. To a lesser extent, increases in
marketing expenditures for tradeshows and marketing brochures and related
materials also contributed to the absolute dollar increases. Discretionary
marketing expense for the six months ended December 31, 1999 increased 39% from
the six months ended December 31, 1998 as compared to MCS's revenue increases
of 91% for the same respective periods. MCS expects sales and marketing
expenses to increase as MCS continues to hire additional sales and marketing
personnel.
Research and Development Expenses. Research and development expenses were
$2.6 million and $4.6 million in the six months ended December 31, 1998 and
1999, respectively. Research and development expenses represented 26.0% and
23.5% of total revenue in the six months ended December 31, 1998 and 1999,
respectively. The increases in the absolute dollar level of research and
development expense were attributable to recruiting costs, salaries and
benefits associated with hiring of additional research and development staff.
To a lesser extent, the absolute dollar level of research and development
expense increased as a result of additional infrastructure, such as office
space, computer equipment and development software used to support these
employees. The infrastructure cost increased by 86% from the six months ended
December 31, 1998 to the six months ended December 31, 1999, compared to an
overall increase in research and development expense of 74% for the same
respective periods. The declines in research and development expense as a
percentage of total revenue reflected the increase of revenue at a faster rate
than the increase in research and development expenses. MCS expects research
and development expenses to increase as MCS continues to hire additional
research and development personnel to develop new OnePoint products.
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General and Administrative Expenses. General and administrative expenses
were $1.2 and $2.0 million in the six months ended December 31, 1998 and 1999,
respectively. General and administrative expenses represented 11.7% and 10.1%
of total revenue in the six months ended December 31, 1998 and 1999,
respectively. The absolute dollar increase was primarily related to
approximately $200,000 in consulting costs associated with vesting of deferred
stock compensation, $250,000 in legal fees associated with the settlement of a
lawsuit involving Commerce Funding Corporation and costs associated with
expansion and relocation of MCS's facilities and related infrastructure and the
recruiting costs, salaries and benefits associated with the hiring of
additional administrative personnel to support MCS's increased sales, marketing
and development activities. The decreases in general and administrative
expenses as a percentage of total revenue reflected increased absorption of
fixed costs over a larger revenue base. MCS expects general and administrative
expenses to increase as MCS expands its infrastructure and incurs additional
costs as a result of being a public company.
Amortization of Deferred Stock Compensation. MCS amortized approximately
$78,000 and $521,000 of deferred employee stock compensation in the six months
ended December 31, 1998 and 1999, respectively. MCS expects to amortize the
remaining $1.4 million of deferred stock compensation through fiscal 2003.
Abandoned Lease Costs (Recovery). During fiscal 1999, MCS took a charge of
$1,034,000 for the abandonment of an office facility leased through January
2003 and write-off of its related infrastructure. This charge was primarily for
the future lease costs and required exit fees. At the time of the charge, it
was determined that potential recovery or avoidance of these costs would be
remote. On September 15, 1999, MCS was released from a portion of the lease and
consequently reduced the amount accrued by $295,000 for amounts no longer due.
Interest and Other Income, Net
Interest and other income, net, was $123,000 and $1.5 million in the six
months ended December 31, 1998 and 1999, respectively. The growth in other
income, net was primarily the result of increased cash and cash equivalent
balances from the proceeds of MCS's initial and secondary public offerings.
Income Taxes
MCS did not record a provision for income taxes in the six months ended
December 31, 1998, because MCS had generated net operating loss carryforwards
of approximately $3.5 million since MCS's inception. A full valuation allowance
was recorded due to the uncertainty of MCS's ability to recognize the future
benefits of such losses. MCS's net operating loss carryforwards begin to expire
2012. In the future, MCS's utilization of the net operating loss carryforwards
may be subject to substantial annual limitations due to the ownership change
regulations contained in the Internal Revenue Code of 1986 and similar state
provisions. These annual limitations may result in the expiration of the net
operating loss carryforwards and other tax credits before MCS is able to use
them.
The provision for income tax expense for the six months ended December 31,
1999 was $455,000, or 15% of pre-tax income. The difference in the effective
rate versus the statutory U.S. tax rate is primarily due to the impact of tax
benefits associated with the anticipated utilization of net operating loss
carryforwards during fiscal 2000.
During the three months ended December 31, 1999, employees exercised stock
options and sold the related shares generating approximately $6.0 million in
tax benefits for MCS. At December 31, 1999, approximately $430,000 of the tax
benefits resulting from stock option exercises and sales were realized by MCS
and accordingly, MCS recorded a decrease in income taxes payable and an
increase in additional paid-in capital for such amount. A full valuation
allowance has been recorded for the remaining unutilized tax benefits,
including net operating loss carryforwards, due to the uncertainty of MCS's
ability to recognize the future benefits of such amounts.
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Comparison of Fiscal Years Ended June 30, 1997, 1998 and 1999
Revenue
MCS's revenue was $4.3 million, $14.4 million, and $24.8 million in fiscal
1997, 1998 and 1999, respectively, representing increases of $10.1 million or
237% from fiscal 1997 to 1998 and $10.5 million or 73% from fiscal 1998 to
1999. These increases were attributable to an increase in MCS's customer base
resulting in substantial growth in product license and maintenance revenue, as
well as additional sales to our existing customers. In fiscal 1997, one
customer accounted for approximately 11% of total revenue. No one customer
accounted for greater than 10% of total revenue during fiscal 1998 or fiscal
1999.
License. License revenue was $4.1 million, $12.8 million and $21.1 million
in fiscal 1997, 1998 and 1999, respectively. License revenue represented 96%,
89% and 86% of total revenue in fiscal 1997, 1998 and 1999, respectively.
License revenue increased 212% from fiscal 1997 to 1998 and 65% from fiscal
1998 to 1999. The increases in license revenue in absolute dollars were
primarily attributable to increased unit sales of MCS's product. The decreases
of license revenue as a percentage of total revenue were primarily due to an
increase in first year maintenance sold with the product licenses and, to a
lesser extent, the number of renewal maintenance agreements purchased.
Maintenance. Maintenance revenue was $180,000, $1.6 million and $3.8 million
in fiscal 1997, 1998 and 1999, respectively. Maintenance revenue represented
4%, 11% and 15% of total revenue for fiscal 1997, 1998 and 1999, respectively.
Maintenance revenue increased 794% from fiscal 1997 to 1998 and 134% from
fiscal 1998 to 1999. These increases resulted primarily from the growth in
software license revenue, as new software licenses are generally sold with one
year of maintenance, and, to a lesser extent, renewals of maintenance
agreements by existing customers.
Cost of Revenue
License. License costs were $206,000, $392,000 and $380,000 in fiscal 1997,
1998 and 1999, respectively. License costs represented 5%, 3% and 2% of license
revenue in fiscal 1997, 1998 and 1999, respectively. A majority of license
costs relates to the amortization of acquired technology that is being expensed
over periods ranging from three to five years. The 90% increase in absolute
dollars from fiscal 1997 to fiscal 1998 was attributable to amortization of
technology acquired in June 1997. The decreases as a percentage of revenue were
primarily a result of increased growth of revenues relative to the growth in
amortization expense for acquired technology.
Maintenance. Maintenance costs were $142,000, $933,000 and $914,000 in
fiscal 1997, 1998 and 1999, respectively. Maintenance costs represented 79%,
58% and 24% of maintenance revenue in fiscal 1997, 1998 and 1999, respectively.
The 557% increase in the absolute dollars from fiscal 1997 to 1998 was
attributable to the increase of MCS's average headcount from two to 10 in our
technical support department. The declines in maintenance costs as a percentage
of maintenance revenue were primarily attributable to increased maintenance
revenue and, to a lesser extent, increased utilization of our technical support
staff.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses were $3.6
million, $9.6 million and $13.5 million in fiscal 1997, 1998 and 1999,
respectively. Sales and marketing expenses represented 83%, 66% and 54% of
total revenue in fiscal 1997, 1998 and 1999, respectively. The increases in the
absolute dollar level of sales and marketing expenses were primarily due to
increases in sales and marketing personnel, which increased from 24 as of June
30, 1997 to 42 at June 30, 1998 and to 72 at June 30, 1999, and commission
expense as a result of MCS's revenue growth. To a lesser extent, increases in
marketing expenditures for tradeshows and marketing brochures and related
materials also contributed to the absolute dollar increases. The increase in
discretionary marketing expense was 238% from fiscal 1997 to 1998 and 145% from
fiscal 1998 to
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1999 as compared to MCS's revenue increases of 237% and 73% for the same
respective periods. The decreases in sales and marketing expenses as a
percentage of total revenue reflected the increased productivity of MCS's sales
force.
Research and Development Expenses. Research and development expenses were
$1.3 million, $3.6 million and $6.0 million in fiscal 1997, 1998 and 1999,
respectively. Research and development expenses represented 31%, 25% and 24% of
total revenue in fiscal 1997, 1998 and 1999, respectively. The increases in the
absolute dollar level of research and development expenses were attributable to
recruiting costs, salaries and benefits associated with hiring of additional
research and development staff, which increased from 11 as of June 30, 1997, to
21 at June 30, 1998 and to 61 as of June 30, 1999. To a lesser extent, the
absolute dollar level of research and development expense increased as a result
of additional infrastructure, such as additional office space required by the
personnel growth, and additional computer equipment and development software,
to support these employees. The infrastructure cost increased by 129% from
fiscal 1997 to 1998 and 70% from fiscal 1998 to 1999 compared to an overall
increase in research and development expense of 174% and 66% for the same
respective periods. The declines in research and development expense as a
percentage of total revenue reflected the increase of revenue at a faster rate
than the increase in research and development expenses.
General and Administrative Expenses. General and administrative expenses
were $973,000, $2.2 million and $2.5 million in fiscal 1997, 1998 and 1999,
respectively. General and administrative expenses represented 23%, 15% and 10%
of total revenue in fiscal 1997, 1998 and 1999, respectively. The absolute
dollar increases were primarily related to costs associated with the expansion
of MCS's facilities and related infrastructure and the recruiting costs,
salaries and benefits associated with the hiring of additional administrative
personnel to support MCS's increased sales, marketing and development
activities. General and administrative personnel increased from eight as of
June 30, 1997, to 18 at June 30, 1998, and to 19 at June 30, 1999. MCS's
facility rent cost increased 317% from fiscal 1997 to 1998 and 31% from fiscal
1998 to 1999. The decreases in general and administrative expenses as a
percentage of total revenue reflected increased absorption of fixed costs over
a larger revenue base.
Amortization of Deferred Stock Compensation. MCS amortized approximately
$532,000 of deferred stock compensation in fiscal 1999. MCS did not have any
deferred stock compensation amortization in fiscal 1997 or 1998.
Other Income, Net
Other income, net, was $2,000, $63,000 and $299,000 in fiscal 1997, 1998 and
1999, respectively. The growth in other income, net, was primarily the result
of increased cash and cash equivalent balances.
Income Taxes
In fiscal 1997, MCS recorded an income tax benefit of $175,000 related to
the purchase of MCS's OnePoint Administrator product line. MCS did not record a
provision for federal or state income taxes in either fiscal 1998 or 1999,
because MCS generated net operating loss carryforwards of approximately $2.4
million from inception through June 30, 1999. As of June 30, 1998 and 1999, MCS
recorded a full valuation allowance for the deferred tax assets related to the
future benefits, if any, of these net operating loss carryforwards.
Write-off of Acquired In-Process Research and Development
In June 1997, MCS acquired in-process research and development from
Serverware, Ltd. for $2.7 million consisting of cash of $100,000, a $2.5
million note payable, a warrant to purchase 333,333 shares of MCS common stock
at an exercise price of $1.50 per share that is exercisable until 2007, and
$75,000 of direct costs incurred. No value was allocated to the warrant, as the
amount was not significant.
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MCS intended to utilize the acquired in-process research and development to
develop an event management product for Windows NT that MCS did not possess at
the time. MCS's intention was to develop a product that monitored and managed
Windows NT and that provided real-time event and problem detection. In order to
capitalize on the event management market, MCS's intention was to complete the
in-process research and development as quickly as possible and sell and market
that product under the name SeNTry. From the date of acquisition to June 30,
1998, MCS expended approximately 80 person months, or approximately $800,000,
to complete and enhance the in-process research and development. In June 1998,
MCS completed SeNTry, which represented the first completed and enhanced
version of the acquired technology. MCS then began internal development of an
entirely new event management product, OnePoint Event Manager, the design of
which was intended to be more consistent with MCS's long-term product strategy.
A significant amount of uncertainty existed surrounding the successful
development and completion of the research and development acquired, which was
estimated to be 70% complete at the date of the acquisition. This was MCS's
first attempt to develop event management technology. MCS was uncertain of its
ability to complete the development of a new product within a timeframe
acceptable to the market and ahead of competitors. At the time of purchase, the
in-process research and development effort had not reached technological
feasibility as it lacked many key elements, including standardized
implementation capabilities, a scalable and extensible architecture, enhanced
user interfaces, broad functionality and extensive reporting capabilities.
MCS assigned values of $1.5 million to the in-process research and
development and $1.1 million to the core technology based on a discounted cash
flow model. MCS based the cash flow projections for revenue on the projected
incremental increase in revenue that we expected to receive from the completed
acquired in-process research and development. MCS expected revenue derived from
the completed in-process research and development to commence after it
completed development of the SeNTry product. MCS expected revenue from the in-
process research and development to continue until the release of OnePoint
Operations Manager, which we expect to release in fiscal 2000. MCS deducted
estimated operating expenses and income taxes from estimated revenue to arrive
at estimated after-tax cash flows. Projected operating expenses included cost
of revenue and general and administrative, customer support and sales and
marketing expenses. MCS estimated operating expenses as a percentage of revenue
and based its estimates primarily on projections it prepared.
The cash flow projections attributable to the core technology included 50%
of the net income before tax expense MCS expected to generate from the
completed in-process technology and 15% from the net income before tax expense
MCS expected to generate from OnePoint Operations Manager, an entirely new and
internally developed product. MCS estimated that it would derive revenue from
OnePoint Operations Manager through 2004. MCS deducted estimated operating
expenses and income taxes from estimated revenue to arrive at estimated after-
tax cash flows. Projected operating expenses included cost of revenue, general
and administrative, customer support and sales and marketing expenses. MCS
estimated operating expenses as a percentage of revenue and based such
estimates primarily on projections we prepared.
MCS used a rate to discount the net cash flows to present value based on the
weighted average cost of capital. MCS used a discount rate of 35% for valuing
the in-process research and development and 25% for the core technology. These
discount rates are higher than the implied weighted average cost of capital due
to the inherent uncertainties surrounding the successful development of the
acquired in-process research and development, the useful life of such in-
process research and development, the profitability levels of such in-process
research and development, and the uncertainty of technological advances that
were unknown at the time.
Liquidity and Capital Resources
MCS has funded its operations primarily from license and maintenance revenue
received from inception to December 31, 1999 and the proceeds of approximately
$162.8 million from the sale of common stock and the exercise of stock options
and warrants. At December 31, 1999, MCS had cash and cash equivalents of $178.7
million. As of December 31, 1999, MCS had an accumulated deficit of $5.6
million and working capital of $175.1 million, net of a short-term component of
deferred revenue of $6.8 million.
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MCS's operating activities used net cash of $1.7 million in fiscal 1997 and
$439,000 in fiscal 1998 and provided net cash of $7.9 million in fiscal 1999
and $7.2 million in the six months ended December 31, 1999. Net cash used by
operating activities in fiscal 1997 and fiscal 1998 was due primarily to net
operating losses and increases in accounts receivable. MCS's operations
generated net cash in fiscal 1999 and the six months ended December 31, 1999
primarily due to increased revenue, improved accounts receivable collection
efforts, interest earned on cash deposits and increased liabilities. The
increase in liabilities during fiscal 1999 was the result of an accrual for
abandoned lease costs and expansion of MCS's operations, including increased
commissions, marketing programs, recruiting fees, benefit costs and other
infrastructure costs. The increase in liabilities for the six months ended
December 31, 1999 was primarily due to increases in deferred maintenance and
accounts payable. Deferred maintenance increases are due to higher revenues
which typically include initial maintenance and increased amounts of renewal
maintenance due to larger amount of cumulative licenses revenue. Accrued
liabilities increases related to payroll withholding associated with our
Employee Stock Purchase Plan.
MCS's investing activities used net cash of $1.2 million, $492,000, $1.4
million and $2.3 million in fiscal 1997, 1998, 1999 and the six months ended
December 31, 1999, respectively. MCS's investing activities consisted primarily
of net purchases of property and equipment.
MCS's financing activities provided cash of $3.1 million, $5.2 million,
$47.9 million and $162.7 million in fiscal 1997, 1998, 1999 and the six months
ended December 31, 1999, respectively. In fiscal 1997 and fiscal 1998,
financing activities consisted primarily of sales of redeemable convertible
preferred stock partially offset in fiscal 1998 by the repurchase of 950,000
shares of Series A preferred stock for $2,850,000 and net repayments on debt
facilities. In fiscal 1999, MCS used $124,000 for financing activities as the
repayments on MCS's debt facilities exceeded the generation of cash from the
sales of MCS common stock to employees in connection with the exercise of stock
options. In the six months ended December 31, 1999, cash provided from finance
activities consisted of net proceeds from MCS's initial and secondary public
offerings.
MCS anticipates spending at least $1.1 million for office lease payments and
approximately $3.0 million for capital expenditures over the next 12 months.
MCS expects capital expenditures to increase over the next several years as MCS
expands facilities and acquires equipment to support its planned expansion in
sales and marketing and research and development.
In November 1999, MCS completed the sale of 4,600,000 shares of Common
Stock, including 2,500,000 shares on behalf of selling stockholders, at a per
share price of $57.00 in a firm commitment underwritten public offering
pursuant to a Registration Statement on Form S-1, which the Securities and
Exchange Commission declared effective on November 10, 1999.
MCS realized net proceeds from the offering of approximately $113.8 million
after deducting the underwriting discounts and expenses of the offering,
including legal, accounting, printing, filing and other fees. MCS is currently
investing the net offering proceeds in interest-bearing, investment-grade
securities for future use as additional working capital.
In January 1998, MCS obtained a revolving credit facility of $3.0 million
from a commercial bank. MCS renewed this credit facility in March 2000, and it
expires on February 5, 2001. Borrowings under the credit facility bear interest
at the bank's prime rate. Under the terms of the loan agreement, all borrowings
are collateralized by substantially all of MCS's assets, and MCS must maintain
certain financial ratios and comply with other covenants. There was $197,000
outstanding at December 31, 1999. MCS was in compliance with all covenants as
of December 31, 1999, but it can give no assurance that it will be able to
continue to comply with its loan covenants in the future.
MCS intends to continue to invest heavily in the development of new products
and enhancements to MCS's existing products. MCS's future liquidity and capital
requirements will depend upon numerous factors, including the costs and timing
of expansion of product development efforts and the success of these
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development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which MCS's existing and new products gain market
acceptance, market developments, the costs involved in maintaining and
enforcing intellectual property rights, the level and timing of license
revenue, available borrowings under line of credit arrangements and other
factors. MCS believes that its current cash and investment balances and any
cash generated from operations and from available or future debt financing,
will be sufficient to meet MCS's operating and capital requirements for at
least the next 12 months. However, it is possible that MCS may require
additional financing within this period. MCS has no current plans, and MCS is
not currently negotiating, to obtain additional financing. The factors
described in this paragraph will affect MCS's future capital requirements and
the adequacy of MCS's available funds. MCS may be required to raise additional
funds through public or private financing, strategic relationships or other
arrangements. MCS cannot ensure that such funding, if needed, will be available
to MCS on terms attractive to MCS, or at all. Furthermore, any additional
equity financing may be dilutive to stockholders, and debt financing, if
available, may involve restrictive covenants. Strategic arrangements, if
necessary to raise additional funds, may require MCS to relinquish its rights
to certain of its technologies or products. If MCS fails to raise capital when
needed, the failure could have a negative impact on its operating results and
financial condition.
Quantitative and Qualitative Disclosure about Market Risks
MCS does not use derivative financial instruments in its investment
portfolio and has no foreign exchange contracts. MCS's financial instruments
consist of cash and cash equivalents, trade accounts receivable and accounts
payable. MCS's exposure to market risk for changes in interest rates relates
primarily to its cash equivalents and obligations; thus, fluctuations in
interest rates would not have a material effect on the fair value of these
securities.
Sales to customers in foreign countries accounted for approximately 23% of
total revenue during the quarter ended December 31, 1999. MCS invoices sales in
United States dollars and does not currently engage in currency hedging
activities. Although exposure to currency fluctuations to date has been
insignificant, future fluctuations in currency exchange rates may adversely
affect MCS's future revenue from international sales.
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MCS MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
OF MCS JOINING NETIQ
Executive Officers And Directors
The following table sets forth information regarding MCS's executive
officers and directors who will serve as executive officers and directors of
the combined company subsequent to the merger.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael S. Bennett............... 48 Chairman of the Board, President and Chief
Executive Officer
Thomas P. Bernhardt.............. 46 Chief Technology Officer and Director
Stephen E. Odom.................. 48 Chief Operating Officer, Chief Financial
Officer, Treasurer and Secretary
Brian J. McGrath................. 61 Vice President of Sales
Richard J. Pleczko............... 42 Vice President of Marketing and Product
Management
Stephen Kangas................... 46 Vice President of Strategic Alliances
Olivier J. Thierry............... 44 Vice President of Marketing Communications
D. Von Jones..................... 36 Vice President of Development
Janell Heathcock................. 48 Vice President North American Sales
Leslie Willard................... 36 Vice President, Finance
Simon Church..................... 34 Director, International Sales
Michael Rovner................... 30 Director of Business Development
Michael J. Maples................ 57 Director
Scott D. Sandell................. 35 Director
</TABLE>
Michael S. Bennett has served as the President, Chief Executive Officer and
a member of the board of directors of MCS since May 1998. He was appointed
Chairman of the Board in February 1999. From August 1996 until April 1998, he
served as President and Chief Executive Officer of Learmonth & Burchett
Management Systems plc, a provider of process management tools for software
development. Prior to joining Learmonth & Burchett in August 1996, Mr. Bennett
served as President and Chief Executive Officer of Summagraphics from June 1993
to July 1996, until its acquisition by Lockheed Martin's CalComp subsidiary.
Prior to that time, Mr. Bennett served as a senior executive with Dell Computer
Corporation and as chief executive officer of several high technology
organizations.
Thomas P. Bernhardt is a founder of MCS and has served as a director since
July 1996. Mr. Bernhardt was a consultant to MCS from September 1996 to January
1997, when he joined MCS on a full time basis as MCS's Chief Technology
Officer, which is his current role. From February 1998 to May 1998, he also
served as MCS's interim President and Chief Executive Officer. From January
1989 to December 1996, Mr. Bernhardt was a consultant with RCG International,
an information technology consulting services company. Mr. Bernhardt holds a
B.S. degree in Experimental Psychology from the University of Notre Dame.
Stephen E. Odom has served as MCS's Chief Financial Officer, Treasurer and
Secretary since May 1998. In January 1999, Mr. Odom was also appointed MCS's
Chief Operating Officer. From April 1995 until April 1998, he served as Chief
Financial Officer, Senior Vice President of Finance and Secretary of Learmonth
& Burchett. From July 1988 to April 1995, Mr. Odom was a Partner with
PricewaterhouseCoopers LLP. Mr. Odom holds a B.B.A. degree in Accounting from
Georgia State University.
Brian J. McGrath joined MCS as a consultant in January 1997 and has served
as MCS's Vice President of Sales since January 1998. From June 1980 until
present, Mr. McGrath also served as a principal of McGrath & Associates, a
contract software selling firm.
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Richard Pleczko has served as MCS's Vice President of Marketing and Product
Management since December 1998. From May 1998 to December 1998, Mr. Pleczko
served as Senior Vice President of World Wide Marketing at PLATINUM Technology,
Inc., a software company. From April 1985 until May 1998, Mr. Pleczko served in
various managerial positions with Learmonth & Burchett, the most recent of
which was Senior Vice President--Marketing and Product Development.
Stephen Kangas has served as MCS's Vice President of Strategic Alliances
since February 1999. From May 1998 to February 1999, Mr. Kangas was the
President, Chief Executive Officer and a founder at SendDocs.com, an Internet-
based services company. From August 1996 to May 1998, Mr. Kangas served as the
President, Chief Operating Officer and a founder of Exodus Technologies, Inc.,
a software company. From December 1995 to August 1996, Mr. Kangas served as the
Vice President of Marketing for Intertech Imaging, Inc., a software company.
From January 1994 to December 1995, Mr. Kangas served as the General Manager of
Wall Data, Inc., a software company.
D. Von Jones has served as MCS's Vice President of Development since April
1997. From October 1995 to April 1997, Mr. Jones served as Manager--Systems
Management at Compaq Computer Corporation, a personal computer manufacturer.
From May 1994 to September 1995, Mr. Jones served as Senior Development Manager
at Legent Corp., a software company. Prior to that time, Mr. Jones served in
various capacities at Microsoft Corporation and Pocket Soft, Inc. Mr. Jones
holds a B.S. degree in Computer Science from Rice University.
Olivier J. Thierry has served as MCS's Vice President of Marketing
Communications since February 1998. Mr. Thierry also served as MCS's Vice
President of Product Management from February 1998 to December 1998. From
December 1993 until joining MCS, Mr. Thierry was Vice President of Antares
Alliance Group, a provider of enterprise development tools jointly owned by
Amdahl Corporation and EDS. Mr. Thierry holds a Bachelor of Commerce degree in
Marketing and Computer Systems from McGill University.
Janell H. Heathcock has served as MCS's Vice President, North America Sales
since July 1999. From January 1997 to July 1999, Ms. Heathcock served in
various capacities at Peregrine Systems, Inc., an infrastructure management
software company, the most recent of which was Regional Director of Sales.
Ms. Heathcock served as Director of Sales for Co-Counsel, Inc., a legal
staffing company, from January 1996 to December 1996. From December 1992 until
September 1995, Ms. Heathcock served as a Regional Manager of Sales at Lexis-
Nexis, a legal and information technology company.
Leslie Willard has served as MCS's Vice President of Finance since June
1998. From October 1995 until May 1998, he served as Vice President of Finance
for Learmonth & Burchett. From January 1986 until September 1995, Mr. Willard
served in various positions, including Senior Manager, with
PricewaterhouseCoopers LLP. Mr. Willard holds a B.B.A. in Accounting and
Finance from Texas Tech University.
Simon Church has served as MCS's Director of International Sales since
August 1998. From August 1996 to July 1998, Mr. Church owned and operated ADM
Solutions, Ltd., a software company. From June 1994 to July 1996, Mr. Church
served in various capacities at Learmonth & Burchett, the most recent of which
was as Director of Channel Sales.
Michael Rovner has served as MCS's Director of Business Development since
March 1999. From June 1998 to February 1999, Mr. Rovner served as the Director
of Product Management at ClearCommerce Corporation, an electronic commerce
software company. From July 1997 to June 1998, Mr. Rovner served as a
consultant to Federal Express Corporation specializing in global logistics and
electronic commerce strategies. From November 1995 to June 1997, Mr. Rovner
served as Product Manager for Data Warehousing and Online Analytical Processing
at Informix Software, Inc., a database software company. From June 1993 to
November 1995, Mr. Rovner served as a product manager for Empart, Inc., a
software company. Mr. Rovner holds B.A. degrees in English and Political
Science from the University of California at Los Angeles.
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Michael J. Maples has served as a director of MCS since April 1999. Mr.
Maples manages private investments. From April 1988 to July 1995, Mr. Maples
held various management positions at Microsoft Corporation, the most recent of
which was Executive Vice President of the Worldwide Products Group and a member
of the office of the president. Prior to that, he served as a Director of
Software Strategy for IBM. He also serves as a director of J.D. Edwards &
Company, an enterprise software company, Lexmark International, Inc., a laser
and inkjet printer company, and PSW Technologies, a software company. Mr.
Maples is also a member of the Board of Visitors for the Engineering School at
the University of Oklahoma and the College of Engineering Foundation Advisory
Council at the University of Texas at Austin. Mr. Maples holds a B.S. degree in
electrical engineering from the University of Oklahoma and an M.B.A. degree
from Oklahoma City University.
Scott D. Sandell has served as a director of MCS since September 1996. Mr.
Sandell is a partner of New Enterprise Associates, a venture capital firm, and
has served in other capacities at such firm since January 1996. Prior to
joining New Enterprise Associates, Mr. Sandell was the President of Yankee
Pacific Company, a marketing and business strategy consulting firm from March
1994 to December 1995. He is also a member of the boards of directors of
several privately held companies. Mr. Sandell holds a B.S. degree in
Engineering Sciences from Dartmouth College and a M.B.A. degree from the
Stanford Graduate School of Business.
MCS's board of directors is divided into three classes, with each director
serving a three-year term and one class being elected at each year's annual
meeting of stockholders. Messrs. Bennett and Sandell are in the class of
directors whose term expires at the 2002 annual meeting of stockholders.
Messrs. Bernhardt and Maples are in the class of directors whose term expires
at the 2001 annual meeting of stockholders. MCS's bylaws provide that the
authorized number of directors may be changed by a resolution of the board of
directors.
Executive officers are elected by the board of directors on an annual basis
and serve until their successors have been duly elected and qualified.
Board Committees
MCS has established an audit committee and a compensation committee. The
audit committee reviews MCS's internal accounting procedures and consults with
and reviews the services provided by MCS's independent accountants. The
compensation committee reviews and recommends to the board of directors the
compensation and benefits of all of MCS's officers and establishes and reviews
general policies relating to compensation and benefits of MCS's other
employees.
Compensation Committee Interlocks and Insider Participation
MCS's board of directors established its compensation committee in December
1997. Prior to establishing the compensation committee, MCS's board of
directors as a whole performed the functions delegated to the compensation
committee. No interlocking relationship exists between any member of MCS's
compensation committee and any member of any other company's board of directors
or compensation committee.
Director Compensation
Directors do not currently receive any cash compensation from MCS for their
service as members of the board of directors, although they are reimbursed for
travel expenses in connection with attendance at board and committee meetings.
Under MCS's 1997 Stock Plan, nonemployee directors are eligible to receive
stock option grants at the discretion of the board of directors, and all
nonemployee directors are eligible to receive stock options pursuant to the
automatic option grant program in effect under the 1999 Director Option Plan.
See "--Incentive Stock Plans" on page [ ] of this proxy statement/prospectus
for more about the automatic grant program.
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Executive Compensation
Summary Compensation Table. The following table sets forth the compensation
earned for services rendered to MCS's in all capacities by MCS's Chief
Executive Officer and MCS's four next most highly compensated executive
officers who earned more than $100,000--collectively, the "Named Executive
Officers"--for the fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Securities
All Other Underlying
Name and Principal Positions Salary($) Bonus($) Options(#) Compensation
- ---------------------------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Michael S. Bennett................. $200,016 $134,167 250,000 $1,696
President and Chief Executive
Officer
Thomas P. Bernhardt................ 172,916 30,000 160,000 1,696
Chief Technology Officer
Stephen E. Odom.................... 200,016 28,000 100,000 1,696
Chief Operating Officer, Chief
Financial Officer, Treasurer and
Secretary
Brian McGrath...................... 200,016 718,801 -- 7,371
Vice President of Sales
Olivier J. Thierry................. 175,008 46,667 -- 80,999
Vice President of Marketing
Communications
</TABLE>
Mr. McGrath received sales commissions of $718,801. Commissions are variable
cash-based incentive compensation that are payable as a percentage of revenue
cash collected.
All other compensation represents excess compensation associated with
premiums for life insurance of $1,696 for each of Messrs. Bennett, Bernhardt,
Odom and Thierry and $7,371 for Mr. McGrath. Mr. Thierry also received $79,303
for moving expenses paid in connection with his relocation agreement.
Option Grants in Fiscal Year Ended June 30, 1999. The following table sets
forth certain information with respect to stock options granted to each of the
Named Executive Officers during the fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants Option Term
-------------------------------------------- ------------------------------
Number of % of Total
Securities Options/
Underlying Rights
Options/ Granted to Exercise
Rights Employees in Price Per Expiration
Name and Principal Position Granted Fiscal Year Share Date 5% 10%
- --------------------------- ---------- ------------ --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Bennett...... 250,000 11.7 15.00 06/21/09 2,358,355 5,976,634
President and Chief
Executive Officer
Thomas P. Bernhardt..... 160,000 7.5 2.75 08/27/03 3,469,347 5,784,982
Chief Technology
Officer
Stephen E. Odom......... 100,000 4.7 15.00 06/21/09 943,342 2,390,614
Chief Operating
Officer, Chief
Financial Officer,
Treasurer and Secretary
Brian McGrath........... -- -- -- -- -- --
Vice President of Sales
Olivier J. Thierry...... -- -- -- -- -- --
Vice President of
Marketing
Communications
</TABLE>
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<PAGE>
The potential realizable value assumes a fair market value of $15.00 per
share over the 10 year term of the options based on assumed rates of stock
appreciation of 5% and 10%, compounding annually less the total option exercise
price.
In fiscal 1999, MCS granted options to purchase an aggregate of 2,131,510
shares to employees and consultants.
The exercise price of the option grant to Thomas P. Bernhardt was equal to
110% of the fair market value of the common stock on the date of grant, as
determined by the board of directors.
Options under the stock option plan generally vest over four years with 25%
of the shares subject to the option vesting on the first anniversary of the
grant date, and the remaining option shares vesting ratably monthly thereafter.
Mr. Bennett's option vests as to 1/36th of the initial 125,000 shares per month
over the first three years and as to 1/12th of the remaining shares per month
in months 37 through 48. Mr. Odom's option vests as to 1/48th of the shares per
month for 48 months.
Option Exercises in Last Fiscal Year. The following table sets forth
information with respect to the Named Executive Officers concerning option
exercises for the fiscal year ended June 30, 1999 and exercisable and
unexercisable options held as of June 30, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised in-
Underlying Unexercised the- Money Options at
Options at Fiscal Year End Fiscal Year End
------------------------------ -------------------------
Number of
Shares
Acquired on Value
Name and Principal Position Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ----------- ---------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Bennett...... 200,000 $2,400,000 136,378 850,270 $1,977,481 $8,703,915
President and Chief
Executive Officer
Thomas P. Bernhardt..... -- -- 16,875 173,125 244,688 2,150,313
Chief Technology
Officer
Stephen E. Odom......... 50,184 602,208 8,364 242,188 121,278 2,061,726
Chief Operating
Officer, Chief
Financial Officer,
Treasurer and Secretary
Brian McGrath........... 70,623 415,314 15,002 94,375 217,529 1,368,438
Vice President of Sales
Olivier J. Thierry...... 69,999 839,988 10,000 160,001 145,000 2,320,015
Vice President of
Marketing
Communications
</TABLE>
The value realized is calculated on the basis of the fair market value of
the common stock on the date of exercise minus the exercise price. It does not
necessarily indicate that the optionee sold the stock for the amount listed.
The value of in-the-money options represents the positive spread between the
exercise price of the stock options and the fair market value of the common
stock on the date of exercise as determined by MCS's board of directors. The
fair market value of the common stock was $15.00 per share as of June 30, 1999.
Incentive Stock Plans
1997 Stock Option Plan. MCS's 1997 stock option plan was adopted by MCS's
board of directors in March 1997 and approved by MCS's stockholders in July
1997. The stock option plan was amended in May 1999. A total of 8,795,000
shares of common stock has been reserved for issuance under MCS's stock option
plan, together with an annual increase in the number of shares reserved
thereunder beginning on the first day of MCS's fiscal year--commencing July 1,
2000--in an amount equal to the lesser of:
. 750,000 shares;
. five percent of MCS's outstanding shares of common stock on the last day
of the prior fiscal year; or
. an amount determined by MCS's board of directors.
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The 1997 stock option plan provides for grants of incentive stock options to
MCS' employees including officers and employee directors, and nonstatutory
stock options to MCS's consultants, including nonemployee directors. The
purposes of MCS's stock option plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to MCS employees and consultants and to promote the
success of MCS's business. At the request of the board of directors, the
compensation committee administers MCS's stock option plan and determines the
optionees and the terms of options granted, including the exercise price,
number of shares subject to the option and the exercisability thereof.
The term of an option granted under the 1997 stock option plan is stated in
the option agreement. However, the term of an incentive stock option may not
exceed ten years and, in the case of an option granted to an optionee who owns
more than 10 percent of MCS's outstanding stock at the time of grant, the term
of an option may not exceed five years. Options granted under the 1997 stock
option plan vest and become exercisable as set forth in each option agreement.
With respect to any optionee who owns more than 10 percent of MCS's
outstanding stock, the exercise price of any stock option granted must be at
least 110% of the fair market value on the grant date.
No incentive stock options may be granted to an optionee, which, when
combined with all other incentive stock options becoming exercisable in any
calendar year that are held by that person, would have an aggregate fair market
value in excess of $100,000. In any fiscal year, MCS may not grant any employee
options to purchase more than 500,000 shares, or 1,000,000 shares in the case
of an employee's initial employment.
The 1997 stock option plan will terminate in March 2007, unless MCS's board
of directors terminates it sooner.
1999 Employee Stock Purchase Plan. MCS's 1999 employee stock purchase plan
was adopted by MCS's board of directors in May 1999 and the initial offering
period began on August 4, 1999. MCS has reserved a total of 600,000 shares of
common stock for issuance under the 1999 employee stock purchase plan, together
with an annual increase in the number of shares reserved thereunder beginning
on the first day of MCS's fiscal year commencing July 1, 2000 in an amount
equal to the lesser of:
. 500,000 shares;
. four percent of MCS's outstanding common stock on the last day of the
prior fiscal year; or
. an amount determined by MCS's board of directors.
MCS's employee stock purchase plan is administered by the board of directors
and is intended to qualify under Section 423 of the Internal Revenue Code.
MCS's employees, including MCS's officers and employee directors but excluding
MCS's five percent or greater stockholders, are eligible to participate if they
are customarily employed for at least 20 hours per week and for more than five
months in any calendar year. MCS's employee stock purchase plan permits
eligible employees to purchase common stock through payroll deductions, which
may not exceed the lesser of 15% of an employee's compensation, as compensation
is defined on Form W-2, or $25,000.
MCS's employee stock purchase plan will be implemented in a series of
overlapping 24 month offering periods, and each offering period consists of
four six month purchase periods. The initial offering period under MCS's
employee stock purchase plan began on August 4, 1999, and the subsequent
offering periods will begin on the first trading day on or after February 1 and
August 1 of each year. Each participant will be granted an option on the first
day of the offering period and the option will be automatically exercised on
the date six months later, the end of a purchase period, throughout the
offering period. If the fair market value of MCS's common stock on any purchase
date is lower than such fair market value on the start date of that offering
period, then all participants in that offering period will be automatically
withdrawn from such offering period and re-enrolled in the immediately
following offering period. The purchase price of MCS's common stock under MCS's
employee stock purchase plan will be 85 percent of the lesser of the fair
market value per share
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on the start date of the offering period or at the end of the purchase period.
Employees may end their participation in an offering period at any time, and
their participation ends automatically on termination of employment with MCS.
MCS's employee stock purchase plan will terminate in May 2009, unless MCS's
board of directors terminates it sooner.
1999 Director Option Plan. MCS's 1999 director option plan became effective
upon the closing of MCS's initial public offering. MCS has reserved a total of
250,000 shares of common stock for issuance under the 1999 director option
plan, together with an annual increase in the number of shares reserved
thereunder beginning on the first day of MCS's fiscal year commencing July 1,
2000 equal to the lesser of:
. 250,000 shares;
. two percent of the outstanding shares of MCS's common stock on the last
day of the prior fiscal year; or
. an amount determined by the board of directors.
The option grants under the 1999 director option plan are automatic and non-
discretionary, and the exercise price of the options is 100% of the fair market
value of MCS common stock on the grant date.
The 1999 director option plan provides for an initial grant to a nonemployee
director of an option to purchase 37,500 shares on the date on which he or she
becomes a member of the board of directors. Each nonemployee director will
thereafter automatically be granted an additional option to purchase 12,500
shares of common stock at the next meeting of the board of directors following
the annual meeting of stockholders, if on the date of the annual meeting the
director has served on the board of directors for at least six months.
The term of the options granted under the 1999 director plan is ten years,
but the options expire three months following the termination of the optionee's
status as a director or twelve months if the termination is due to death or
disability. The initial 37,500 share grants will become exercisable at a rate
of one-third of the shares on the first anniversary of the grant date and at a
rate of 1/36th of the remaining shares per month thereafter. The subsequent
12,500 share grants will become exercisable at the rate of one-half of the
shares on the first anniversary of the grant date and at a rate of 1/24th of
the remaining shares per month thereafter.
As of February 29, 2000, MCS had issued 1,820,258 shares of common stock
upon the exercise of options granted under the two MCS's stock option plans,
MCS had outstanding options to purchase 4,083,805 shares of common stock at a
weighted average exercise price of $11.25 per share, and 3,140,937 shares
remain available for future option grants under MCS's stock option plans.
401(k) Plan. In September 1996, MCS adopted a Retirement Savings and
Investment Plan, the 401(k) Plan, covering MCS full-time employees located in
the United States. The 401(k) Plan is intended to qualify under Section 401(k)
of the Internal Revenue Code, so that contributions to the 401(k) Plan by
employees or by MCS and the investment earnings thereon are not taxable to the
employees until withdrawn. If MCS's 401(k) Plan qualifies under Section 401(k)
of the Internal Revenue Code, MCS's contributions will be deductible by it when
made. MCS employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit of $10,000 in 1999 and to have those funds
contributed to the 401(k) Plan. The 401(k) Plan permits MCS, but does not
require MCS, to make additional matching contributions on behalf of all
participants. To date, MCS has not made any contributions to the 401(k) Plan.
Employment Agreements and Change in Control Arrangements
MCS has entered into the following employment, non-compete and change in
control arrangements and agreements with its current officers. For a
description of arrangements with its former officers, directors and substantial
stockholders, see "Certain MCS Transactions."
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<PAGE>
Michael S. Bennett, MCS's Chairman of the Board, Chief Executive Officer and
President, entered into an offer letter with MCS dated April 13, 1998 under
which he is entitled to acceleration of 100% of his then unvested option grants
if after the first anniversary of his employment and prior to the fourth such
anniversary, MCS is acquired by another company and he is:
. terminated;
. assigned a position of lesser responsibility or compensation in the
resulting organization; or
. required to relocate.
Mr. Bennett will have twelve months following his separation from MCS or its
successor, regardless of whether his termination is voluntary or involuntary,
to exercise his vested options. Mr. Bennett is also entitled to severance
payments of $200,000 in the event that he is terminated other than for cause.
Stephen E. Odom, MCS's Chief Operating Officer, Chief Financial Officer,
Treasurer and Secretary, entered into an offer letter with MCS dated April 13,
1998 under which he is entitled to acceleration of 100% of his then unvested
options if after the first anniversary of his employment and prior to the
fourth such anniversary, MCS is acquired by another company and he is (1)
terminated or (2) assigned a position of lesser responsibility or compensation
in the resulting organization. Mr. Odom will have twelve months following his
separation from MCS or MCS's successor to exercise his vested options,
regardless of whether his termination is voluntary or involuntary. Mr. Odom is
also entitled to severance payments of six months of his then-current salary in
the event that he is terminated other than for cause.
Thomas P. Bernhardt, MCS's Chief Technology Officer, entered into an
employment agreement with MCS dated January 1, 1997. This agreement provides
that Mr. Bernhardt is entitled to severance equal to six months salary in the
event he is terminated without cause by MCS. Mr. Bernhardt has agreed that for
a period of one year after his separation from MCS, regardless of the reason,
he will not:
. engage in direct competition with MCS;
. conduct a business of the type or character engaged in by MCS's at the
time of his separation; or
. develop, market, sell and/or distribute products or services directly
competitive with MCS.
Mr. Bernhardt has also agreed to not employ any of MCS employees or induce
or attempt to influence any of MCS employees to voluntarily terminate his or
her employment with MCS other than those employees not directly involved in the
development, marketing, sales and/or distribution of MCS products or services
during Mr. Bernhardt's employment.
Brian J. McGrath, MCS's Vice President of Sales, entered into an employment
agreement with MCS dated August 6, 1997 and a letter agreement dated January
13, 1999 intended to clarify the terms of his employment agreement. These
agreements provide that Mr. McGrath is entitled to severance equal to six
months salary upon his termination by MCS, other than for cause. In addition,
the January 1999 amendment provides that effective July 1, 1999, Mr. McGrath's
compensation consists of a base salary of $200,000 and an additional $200,000
in commissions contingent upon meeting specified operating targets. Prior to
July 1, 1999, Mr. McGrath's commission plan depended on meeting specific
operating targets and sales to specified customers. MCS has agreed with Mr.
McGrath that for a six month period after his separation from MCS, he will not
compete with MCS and will not solicit a list of customers set forth in the
January 1999 agreement as amended by MCS from time to time. Mr. McGrath agreed
for a period of one year not to employ any of MCS employees or induce or
attempt to influence any of MCS's employees to voluntarily terminate his or her
employment with MCS. In the event Mr. McGrath is terminated without cause, his
warrant to purchase shares of MCS common stock will continue to vest during the
notice period and severance periods set forth in his August 6, 1997 employment
agreement.
Olivier J. Thierry, MCS's Vice President--Marketing Communications, has
entered into an employment agreement with MCS dated February 23, 1998. This
agreement provides that Mr. Thierry is entitled to
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severance equal to six months salary upon his termination by MCS, other than
for cause. Mr. Thierry has agreed that for a period of one year after his
separation from MCS, regardless of the reason, he will not (1) engage in direct
competition with MCS or (2) develop, market, sell and/or distribute products or
services directly competitive with MCS. Mr. Thierry has also agreed for a
period of two years not to employ any of MCS's employees or induce or attempt
to influence any of MCS's employees to voluntarily terminate his or her
employment with MCS.
Under the February 23, 1998 agreement, MCS also agreed to grant Mr. Thierry
a relocation loan of $80,000. The noninterest bearing relocation loan is due
and payable in February 2002. MCS agreed to forgive the principal and interest
due on the relocation loan in the amount of 1/48th per month for each month Mr.
Thierry remains MCS's employee. In addition, MCS also agreed to provide
additional payments to make Mr. Thierry whole for any taxes payable upon the
income realized from the loan forgiveness, net of any deductions Mr. Thierry is
entitled to claim for moving expenses. MCS also agreed to forgive the balance
of the relocation loan in the event that:
. Mr. Thierry is terminated other than for cause or he voluntarily leaves
MCS;
. MCS is acquired by another company and Mr. Thierry's position is
eliminated, downgraded, modified or geographically transferred; or
. new senior management replaces Mr. Thierry with another individual in the
same position other than for cause.
In the fiscal year ended June 30, 1999, MCS paid $79,303 to Mr. Thierry in
loan forgiveness and tax reimbursement.
Richard Pleczko, MCS's Vice President of Marketing and Product Management,
has entered into an employment agreement with MCS dated December 21, 1998. This
agreement provides that Mr. Pleczko is entitled to an advance equal to $31,250,
which will be forgiven over his first twelve months of employment with MCS, if
his quarterly bonus from PLATINUM technologies inc. is not paid to him. Mr.
Pleczko is also entitled to (1) severance payments of six months of his then
current salary in the event he is terminated without cause and (2) acceleration
of 25% of his then unvested options in the event he is terminated without cause
during his first twelve months employment with MCS. Mr. Pleczko has agreed that
for a period of two years, in the event of any voluntary or involuntary
termination or resignation, he will not directly or indirectly compete with
MCS. Mr. Pleczko also agreed for a period of two years not to employ any of
MCS's employees or induce or influence any of MCS's employees to voluntarily
terminate his or her employment with MCS.
Stephen Kangas, MCS's Vice President of Strategic Alliances, entered into an
employment agreement with MCS dated February 8, 1999. This agreement provides
that Mr. Kangas is entitled to acceleration of 25% of his then unvested options
to purchase shares of MCS's common stock in the event that Mr. Kangas is
terminated without cause as a result of a merger or acquisition of MCS prior to
the first anniversary of his employment with MCS. Mr. Kangas is also entitled
to severance payments of six months of his then current salary in the event
that he is terminated other than for cause. Mr. Kangas has agreed that for a
period of two years, in the event of any voluntary or involuntary termination
or resignation, he will not directly or indirectly compete with MCS. Mr. Kangas
has also agreed for a period of two years not to employ any of MCS employees or
induce or influence any of MCS's employees to voluntarily terminate his or her
employment with MCS.
Leslie D. Willard, MCS's Vice President--Finance, entered into an employment
agreement with MCS dated May 26, 1998. Under the agreement, Mr. Willard is
entitled to acceleration of 100% of his then unvested options if, after the
first anniversary of his employment, MCS is acquired by another company and he
is (1) terminated or (2) assigned to a position of lesser responsibility or
compensation in the resulting corporation.
Michael Rovner, MCS's Director of Business Development, entered into an
employment agreement with MCS dated March 24, 1999. This agreement provides
that Mr. Rovner is entitled to (1) acceleration of 25% of
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his then unvested options and (2) severance payments of six months of his then
current salary in the event he is terminated without cause as a result of a
merger or acquisition of MCS during the first twelve months of his employment.
Mr. Rovner has agreed that for a period of two years, in the event of any
voluntary or involuntary termination or resignation, he will not directly or
indirectly compete with MCS. Mr. Rovner has also agreed for a period of two
years not to employ any of MCS's employees or induce or influence any of MCS's
employees to voluntarily terminate his or her employment with MCS.
Limitations on Directors' Liability and Indemnification
MCS's certificate of incorporation limits the liability of MCS's directors
and executive officers 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 breach of their duty of loyalty to MCS or MCS's 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; or
. any transaction from which the director derived an improper personal
benefit.
The limits on a director or officer's liability in MCS's certificate of
incorporation do not apply to liabilities arising under the federal securities
laws and do not affect the availability of equitable remedies such as
injunctive relief or rescission.
MCS's certificate of incorporation together with MCS's bylaws provide that
MCS must indemnify MCS's directors and executive officers and may indemnify
MCS's other officers and employees and other agents to the fullest extent
permitted by law. MCS believes that indemnification under MCS's bylaws covers
at least negligence and gross negligence on the part of indemnified parties.
MCS's bylaws also permit MCS to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in that capacity, regardless of whether MCS's bylaws would permit
indemnification.
MCS has entered into agreements to indemnify MCS directors and executive
officers. These agreements provide for indemnification of MCS directors and
executive officers for certain expenses including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding. MCS believes that these provisions and agreements are necessary to
attract and retain qualified persons as MCS directors and executive officers.
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MCS PRINCIPAL STOCKHOLDERS
The following table sets forth information known to MCS with respect to the
beneficial ownership of MCS common stock as of February 29, 2000, by:
. each stockholder known by MCS to own beneficially more than five percent
of MCS common stock,
. each of the executive officers listed in MCS's Summary Compensation
Table,
. each director of MCS, and
. all directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned
---------------------------
Name of Beneficial Owner Number Percentage
- ------------------------ ------------- -------------
<S> <C> <C>
New Enterprise Associates Entities................ 1,237,302 7.2%
2490 Sand Hill Rd.
Menlo Park, California 94025
Zesiger Capital Group LLC. ....................... 853,650 5.0%
320 Park Avenue
New York, New York 10022
Michael S. Bennett................................ 314,448 1.8%
Thomas P. Bernhardt............................... 867,322 5.1%
Stephen E. Odom................................... 68,985 *
Oliver J. Thierry................................. 91,000 *
Brian J. McGrath.................................. 196,123 1.1%
Scott D. Sandell.................................. 1,237,302 7.1%
John D. Thornton.................................. 24,765 *
Douglas L. Ayer................................... 113,803 *
Michael J. Maples................................. 25,000 *
John J. Moores.................................... 18,906 *
All executive officers and directors as a group
(13 persons)..................................... 3,010,223 17.6%
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
Except as otherwise noted above, the address of each person listed on the
table is 13939 Northwest Freeway, Houston, Texas 77040.
As of February 29, 2000, 17,109,434 shares of MCS common stock were
outstanding.
MCS has determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person, MCS
has included the shares of common stock subject to options or warrants held by
that person that are currently exercisable or will become exercisable within 60
days after February 29, 2000, but MCS has not included those shares for
purposes of computing percentage ownership of any other person. MCS has assumed
unless otherwise indicated below that the persons and entities named in the
table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
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<PAGE>
The beneficial ownership of the persons set forth in the table above
includes the following options to purchase MCS's common stock that may be
exercised by such person within 60 days of February 29, 2000:
<TABLE>
<CAPTION>
Options
-------
<S> <C>
Michael S. Bennett................................................... 63,318
Thomas P. Bernhardt.................................................. 86,457
Stephen E. Odom...................................................... 18,801
Olivier J. Thierry................................................... 15,000
Brian J. McGrath..................................................... 42,500
Scott D. Sandell..................................................... 28,906
John D. Thornton..................................................... 5,469
Douglas L. Ayer...................................................... 28,906
Michael J. Maples.................................................... 25,000
John J. Moores....................................................... 18,906
All directors and officers........................................... 333,263
</TABLE>
The beneficial ownership reported for New Enterprise Associates entities and
Mr. Sandell includes 957,455 shares held by New Enterprise Associates VII Ltd.
Partnership, 242,132 shares held by New Enterprise Associates Partners VII
Ltd., 2,691 shares held by NEA President's Fund, L.P., NEA General Partners
812, and 5,306 shares held by NEA Ventures 1996, L.P. Mr. Sandell disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest. New Enterprise Associates VII Ltd. Partnership has one general
partner, NEA Partners VII, L.P. The general partners of NEA Partners VII, L.P.
are Peter J. Barris, Nancy L. Dorman, Ronald H. Kase, C. Richard Kramlich,
Arthur C. Marks, Thomas C. McConnell, Peter T. Morris, Charles W. Newhall, John
M. Niera and Mark W. Perry. The general partner of NEA Presidents Fund, L.P. is
NEA General Partners, L.P. The general partners of NEA General Partners, L.P.
are Peter J. Barris, Frank A. Bonsol, Jr., Nancy L. Dorman, Ronald H. Kase, C.
Richard Kramlich, Arthur C. Marks, Thomas C. McConnell, Charles W. Newhall,
John M. Niera and Mark W. Perry. These numbers and percentages also include
28,906 shares subject to options exercisable within 60 days from February 29,
2000 held by Mr. Sandell.
The beneficial ownership reported for Mr. Thornton includes 2,037 shares
held by Austin Venture V, L.P. and 7,998 shares held by Austin Ventures V
Affiliates Fund, L.P. Mr. Thornton disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest. Austin Ventures V, L.P.
and Austin Ventures V Affiliates Fund, L.P. have one general partner, Austin
Ventures Partners V, L.P. The general partners of Austin Ventures Partners V,
L.P. are Joseph Aragona, Kenneth P. DeAngelis, John D. Thornton, Blaine F.
Werner and Jeff Gravy. These numbers and percentages also include 5,469 shares
subject to options exercisable within 60 days from February 29, 2000 held by
Mr. Thornton.
Mr. Moores' sole interest is in 18,906 shares subject to options exercisable
within 60 days of February 29, 2000 held by Mr. Moores.
The beneficial ownership reported for Mr. Ayers includes 94,897 shares held
by International Capital Partners, Inc. The managing partners of International
Capital Partners, Inc. are Douglas L. Ayer, president and managing partner,
Ajit G. Hutheesing, chairman and managing partner and Nicholas E. Sinacori,
managing partner. Mr. Ayers disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest. These numbers and percentages
also include 28,906 shares subject to options exercisable within 60 days from
February 29, 2000 held by Mr. Ayers.
The beneficial ownership reported for Zesiger Capital includes 548,800
shares over which Zesiger has voting power and 853,650 shares over which
Zesiger has dispositive power, but the shares are held in the names of the
individuals for whom Zesiger acts as an investment advisor.
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<PAGE>
CERTAIN MCS TRANSACTIONS
In September 1996, MCS issued 2,431,350 shares of common stock to six
individuals for aggregate proceeds of $3,000. Of such shares, MCS issued
1,045,480 shares to Thomas P. Bernhardt and 1,045,480 shares to Louis R.
Woodhill. MCS acquired MCS's OnePoint Administrator software product from MCS
Software I, Inc., an entity held by James R. Woodhill, in September 1996 in
exchange for 1,697,082 shares of its Series A preferred stock. MCS also issued
121,568 shares of Series A Preferred Stock to E. Alexander Goldstein for
aggregate proceeds of $25,000. In September 1996, MCS also issued 2,650,000
shares of Series B preferred stock for aggregate proceeds of $2,650,000. MCS
repurchased 950,000 shares of the Series A preferred stock issued to MCS
Software I, Inc. in July 1997 for an aggregate of $2,850,000 in connection with
MCS's Series C preferred stock financing. The purpose was to reallocate some
shares between MCS's classes of capital stock as agreed by MCS's existing
stockholders and new investors. In July 1997, MCS issued 3,450,000 shares of
Series C preferred stock for aggregate proceeds of $10,350,000. All shares of
outstanding preferred stock converted automatically into shares of common stock
on a one for one basis upon the closing of its initial public offering in
August 1999. Listed below are those persons who participated in the financings
described above who are MCS's executive officers, directors or stockholders who
beneficially own five percent or more of MCS's securities.
<TABLE>
<CAPTION>
Aggregate
-----------------------------------------------------
Common Series A Series B Series C Consideration
Stockholder Stock Preferred Preferred Preferred Paid
- ----------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Austin Ventures Enti-
ties................... -- -- -- 1,250,000 $3,750,000
Thomas P. Bernhardt..... 1,045,480 -- -- -- 1,045
E. Alexander Goldstein.. -- 121,568 -- 30,000 90,000
International Capital
Partners, Inc.......... -- -- 62,500 27,333 144,499
JMI Equity Fund III,
L.P.................... -- -- -- 666,667 2,000,001
Brian J. McGrath........ 70,625 -- 50,000 20,000 145,313
Mission Critical Soft-
ware I, Inc. (James R.
Woodhill).............. 97,254 1,697,082 -- -- 349,187
New Enterprise Associ-
ates Entities.......... -- -- 1,250,000 683,333 3,299,999
Louis R. Woodhill....... 1,045,480 -- -- -- 1,045
Zesiger Capital......... -- -- 1,140,000 656,000 3,764,000
</TABLE>
The entities listed above as Austin Ventures entities include Austin Venture
V, L.P. and Austin Ventures V Affiliates Fund, L.P. Mr. Thornton, a director of
MCS, is a general partner of each of the entities. Mr. Thornton disclaims
beneficial ownership of the shares held by each entity, except to the extent of
his pecuniary interest therein.
Mr. Ayer, a director of MCS, is a managing partner of International Capital
Partners, Inc. Mr. Ayer disclaims beneficial ownership of the shares held by
International Capital Partners, except to the extent of his pecuniary interest
therein.
The entities listed above as New Enterprise Associates entities include New
Enterprise Associates VII Ltd. Partnership, NEA President's Fund and NEA
Ventures 1996. Mr. Sandell, a director of MCS, is a partner of each of the
entities. Mr. Sandell disclaims beneficial ownership of the shares held by each
entity, except to the extent of his pecuniary interest therein.
Of the 1,796,000 shares originally issued to persons for whom Zesiger
Capital serves as an investment advisor, Zesiger Capital currently has voting
power over 548,800 shares and dispositive power over 853,650 shares. The shares
listed under Zesiger are held in the names of the individuals for whom Zesiger
acts as an investment advisor.
Employment, Severance Agreements with MCS's Former Founders, Directors and
Officers
MCS was founded by Thomas P. Bernhardt, Louis R. Woodhill, Paul M. Koffend,
Jr. and James R. Woodhill. Of these founders, Mr. Bernhardt is still an
employee and director of MCS. By mutual agreement,
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<PAGE>
Louis Woodhill, Paul Koffend and James Woodhill each left MCS during fiscal
1998 and fiscal 1999 because each of the former founders wanted to participate
in a start-up stage company and MCS had matured to a larger enterprise
requiring management with different skill sets and experience. The following
analysis sets forth the terms of MCS's employment and severance agreements with
each of Messrs. L. Woodhill, Koffend and J. Woodhill and describes amounts paid
to each of them in the fiscal year ended June 30, 1999.
Employment Agreement with Louis R. Woodhill. On September 4, 1996, MCS
entered into an employment agreement with Louis R. Woodhill, then MCS's Chief
Executive Officer and President. Under the terms of the September 4, 1996
agreement, Mr. Woodhill was entitled to severance payments equal to six months
of his salary in the event he was terminated without cause.
Mr. Woodhill agreed that for a period of one year after his separation from
MCS, regardless of the reason, he would not:
. engage in direct competition with MCS;
. conduct a business of the type or character engaged in by MCS at the time
Mr. Woodhill's employment ceased; or
. develop, market, sell and/or distribute products or services directly
competitive with MCS.
This non-competition period will expire in November 1999.
Mr. Woodhill also agreed that for a period of two years not to employ any of
MCS's employees or induce or attempt to influence any of MCS's employees to
voluntarily terminate his or her employment with MCS other than those employees
not directly involved in the development, marketing, sales and/or distribution
of MCS products or services during Mr. Woodhill's employment with the company.
Mr. Woodhill agreed that for a two year period after his separation from MCS he
would not solicit, divert or take away or attempt to divert or take away the
business or patronage of any clients, customers or accounts, or prospective
clients, customers or accounts that were contacted, solicited or served by Mr.
Woodhill during his employment by MCS in connection with the products or
services that were developed or under active development, consideration for
development, marketed, sold and/or distributed by MCS.
On May 21, 1998, MCS entered into an amended and restated employment
agreement with Mr. Woodhill. The May 1998 employment agreement provided for a
term of employment of six months and required Mr. Woodhill to serve in the
position of Chairman of the Board of Directors of MCS during that six month
period. Mr. Woodhill was entitled to salary payments of $13,750 per month
during the six month period plus customary benefits and an office rental
allowance of $1,000 per month.
In connection with the May 1998 agreement, Mr. Woodhill was also entitled to
receive a lump-sum severance payment of six months salary plus accrued and
unused vacation time and unreimbursed travel expenses upon termination of his
employment. Mr. Woodhill left MCS's employ in November 1998 and in connection
with the May 1998 employment agreement, Mr. Woodhill received gross salary
payments of $82,500, health and dental benefits of $534 and a lump-sum
severance payment of $82,500.
MCS also agreed to and granted Mr. Woodhill an option to purchase 15,000
shares of MCS common stock at an exercise price of $0.50 per share. One-fourth
of the shares subject to such option will vest on November 28, 1999 and at a
rate of 1/48th of the original share amount per month thereafter.
Mr. Woodhill is also bound by non-competition, nonsolicitation and non-
hiring provisions similar to those set forth in the September 1996 agreement.
These non-competition provisions terminate in November 1999 and the
nonsolicitation and non-hiring provisions terminate in November 2000.
Employment Agreement with James R. Woodhill. On September 4, 1996, MCS
entered into an employment agreement with James R. Woodhill, then MCS's Vice
President--Marketing. Pursuant to the September 4, 1996 agreement, Mr. Woodhill
was entitled to severance payments equal to six months of his salary in the
event he was terminated without cause.
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<PAGE>
Mr. Woodhill agreed that for a period of one year after his separation from
MCS, regardless of the reason, he would not:
. engage in direct competition with MCS;
. conduct a business of the type or character engaged in by MCS at the time
Mr. Woodhill's employment ceased; or
. develop, market, sell and/or distribute products or services directly
competitive with MCS.
Mr. Woodhill also agreed for a period of two years not to employ any of
MCS's employees or induce or attempt to influence any of MCS's employees to
voluntarily terminate his or her employment with MCS other than those employees
not directly involved in the development, marketing, sales and/or distribution
of MCS products or services during Mr. Woodhill's employment. Mr. Woodhill
agreed that for a two-year period after his separation from MCS, he would not
solicit, divert or take away or attempt to divert or take away the business or
patronage of any clients, customers or accounts, or prospective clients,
customers or accounts that were contacted, solicited or served by Mr. Woodhill
during his employment with MCS in connection with the products or services that
were developed or under active development, consideration for development,
marketed, sold and/or distributed by MCS.
Mr. Woodhill left MCS's employ on May 15, 1998, and the Company paid him
severance and related payments of $60,000. Mr. Woodhill's non-competition,
nonsolicitation and non-hiring provisions will terminate in May 2000.
Employment Agreement with Paul F. Koffend, Jr. On September 4, 1996, MCS
entered into an employment agreement with Paul F. Koffend, Jr., then MCS's
Chief Financial Officer. Mr. Koffend agreed that for a period of one year after
his separation from MCS, regardless of the reason, he would not:
. engage in direct competition with MCS;
. conduct a business of the type or character engaged in by MCS at the time
Mr. Koffend's employment ceased; or
. develop, market, sell and/or distribute products or services directly
competitive with MCS.
Mr. Koffend also agreed for a period of two years not to employ any of MCS's
employees or induce or attempt to influence any of MCS's employees to
voluntarily terminate his or her employment with MCS, other than those
employees not directly involved in the development, marketing, sales and/or
distribution of MCS products or services during Mr. Koffend's employment. Mr.
Koffend agreed that for a two-year period after his separation from MCS, he
would not solicit, divert or take away or attempt to divert or take away the
business or patronage of any clients, customers or accounts, or prospective
clients, customers or accounts that were contacted, solicited or served by Mr.
Koffend during his employment by MCS in connection with the products or
services that were developed or under active development, consideration for
development, marketed, sold and/or distributed by MCS.
Mr. Koffend left MCS's employ effective June 30, 1998, and MCS paid him
severance and related payments of $60,000.
Consulting Agreements with Former Directors. Effective April 16, 1999, May
21, 1999 and May 21, 1999, Paul F. Koffend, Jr., Louis R. Woodhill and E.
Alexander Goldstein resigned as directors of MCS. Each of Messrs. Koffend,
Woodhill and Goldstein entered into a consulting agreement with MCS that
provides for the former director to provide continued services to MCS as
requested from time to time by MCS's board of directors or Chief Executive
Officer for a period of two years for Mr. Koffend, one year for Mr. Woodhill
and one year for Mr. Goldstein. There is no minimum number of hours of service
required. During the term of the consulting agreement, the directors will
receive no other compensation for these services but each former director's
stock options was vested in full in August 1999.
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<PAGE>
ADDITIONAL MATTERS BEING SUBMITTED TO A
VOTE OF ONLY NETIQ STOCKHOLDERS
Proposal No. 1
Changing the Name of NetIQ Corporation to Newco Corporation
NetIQ stockholders are being asked to approve an amendment to the
certificate of incorporation to change the corporation's name from NetIQ
Corporation to Newco Corporation. The new name has been selected by the
managements of MCS and NetIQ to reflect the strategic positioning of the
combined company following the merger. The change of name will not be effected
if the merger is not completed, but the name change is not required for
completion or effectiveness of the merger.
Regardless of whether this proposal is approved, you will not need to
exchange your NetIQ stock certificate, because if the name change is approved,
your shares of NetIQ will become shares of Newco by operation of law.
The affirmative vote of a majority of the outstanding shares of NetIQ is
required to approve the name change.
The board of directors recommends that stockholders vote "FOR" the amendment
to the certificate of incorporation.
Proposal No. 2
Approval of amendment to 1995 Stock Plan
NetIQ stockholders are being asked to approve an amendment to the 1995 Stock
Plan to provide for an increase in the number of shares of common stock
reserved for issuance from 5,333,332 shares to 8,000,000 shares. In addition,
NetIQ stockholders are being asked to approve an amendment to the provision of
the stock plan that provides for an annual increase in the number of shares
reserved for issuance in the amount that is the lowest of (i) 2,600,000 shares,
(ii) 5% of the number of shares of NetIQ outstanding on the first day of the
fiscal year (July 1), and (iii) an amount determined by the board. Currently,
the plan provides that the annual increase shall be the lowest of (i) 1,333,333
shares, 4% of the number of shares of NetIQ outstanding on the first day of the
fiscal year, and (iii) an amount determined by the board.
The board believes that if the merger is completed, adding shares to the
plan is in the best interests of NetIQ because it will permit NetIQ to
accommodate the increase in employees as a result of the merger and to attract
and retain employees by providing them with appropriate equity incentives. The
plan plays an important role in NetIQ's efforts to attract and retain employees
of outstanding ability.
Set forth below is a summary of the principal features of the 1995 Stock
Plan. NetIQ will provide, without charge, to each person to whom a proxy
statement is delivered, upon request of such person and by first class mail
within three business days of receipt of such request, a copy of the incentive
plan. Any such request should be directed as follows: Secretary, NetIQ
Corporation, 5410 Betsy Ross Drive, Santa Clara, CA 95054; telephone number
(408) 330-7000.
NetIQ's 1995 Stock Plan
NetIQ's 1995 Stock Plan was adopted by its board of directors in November
1995 and was approved by the stockholders in April 1996. The board of directors
approved the amendment and restatement of the plan in May 1999, and the
stockholders approved the amendment and restatement in July 1999. A total of
5,333,332 shares of common stock, plus annual increases beginning on July 1,
2000, currently equal to the lowest of 1,333,333 shares, 4% of its shares on
that date or an amount determined by the board of directors are currently
reserved for issuance under the 1995 Stock Plan. Unless terminated sooner, the
1995 Stock Plan will terminate automatically in November 2005.
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<PAGE>
The 1995 Stock Plan provides for the discretionary grant of incentive stock
options to employees within the meaning of Section 422 of the United States tax
code, and for the grant of nonstatutory stock options and stock purchase rights
to employees, directors and consultants.
Stock Purchase Rights
The 1995 Stock Plan may be administered by the board of directors or a
committee of the board. 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 stock purchase right granted, including:
. the exercise price of the option or stock purchase right;
. the number of shares subject to each option or stock purchase right;
. the exercisability thereof; and
. the form of consideration payable upon exercise.
The exercise price of all incentive stock options granted under the 1995
Stock Plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and
stock purchase rights granted under the 1995 Stock Plan is determined by the
administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code, the exercise price must be at least equal
to the fair market value of the common stock on the date of grant. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of its outstanding capital stock, the exercise price of any
incentive stock option granted must be at least equal 110% of the fair market
value on the grant date and the term of this incentive stock option must not
exceed five years. The term of all other incentive stock options granted under
the 1995 Stock Plan may not exceed ten years.
In the case of stock purchase rights, unless the administrator determines
otherwise, the restricted stock purchase agreement will grant NetIQ a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with NetIQ for any reason, including death or
disability. The purchase price for shares repurchased under the restricted
stock purchase agreement will be the original price paid by the purchaser and
may be paid by cancellation of any indebtedness of the purchaser to us. The
repurchase option will lapse at a rate determined by the administrator.
Options and stock purchase rights granted under the 1995 Stock Plan are
generally not transferable by the optionee, except by will or the laws of
descent or distribution, and are exercisable during the lifetime of the
optionee only by that optionee. Options granted under the 1995 Stock Plan must
generally be exercised within the period of time set forth in the optionee's
option agreement after the end of optionee's status as an employee, director or
consultant of its company, or within 12 months after the optionee's termination
by disability or death, but in no event later than the expiration of the
option's term.
The 1995 Stock 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 NetIQ's initial public offering, and who does not
beneficially hold 1% or more of the total voting power of NetIQ's voting
securities on the date of grant. 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 NetIQ's annual meeting.
However, if the first annual meeting following NetIQ'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 a non-employee director under the 1995 Stock Plan will have a term of five
years and the shares purchasable under such options are fully vested on the
date of grant. The exercise price of those options will be 100% of the fair
market value per share of common stock on the date of grant.
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The 1995 Stock Plan provides that in the event of a merger of NetIQ with or
into another corporation, or a sale of substantially all of its assets, each
outstanding option and stock purchase right must be assumed or an equivalent
option substituted for by the successor corporation or a parent or subsidiary
of the successor corporation. If the outstanding options and stock purchase
rights are not assumed or substituted for, the optionee will fully vest in and
have the right to exercise the option or stock purchase right to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. The administrator shall notify the optionee that the option or
stock purchase right shall be fully exercisable for a period of 15 days from
the date of this notice, and the option or stock purchase right will terminate
upon the expiration of this 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.
The board of directors recommends that stockholders vote "FOR" the amendment
to the 1995 Stock Plan.
Proposal No. 3
Approval of amendment to 1999 Employee Stock Purchase Plan
NetIQ stockholders are being asked to approve an amendment to the 1999
Employee Stock Purchase Plan to provide for an increase in the number of shares
of common stock reserved for issuance from 500,000 shares to 1,000,000 shares.
In addition, NetIQ stockholders are being asked to approve an amendment to the
provision of the stock purchase plan that provides for an annual increase in
the number of shares reserved for issuance in the amount that is the lowest of
800,000 shares, 2% of the outstanding shares on the first day of NetIQ's fiscal
year, and an amount determined by the board of directors. The board believes
that if the merger is completed, adding shares to the plan is in the best
interests of NetIQ because it will permit NetIQ to attract and retain employees
by providing them with appropriate equity incentives. The plan plays an
important role in NetIQ's efforts to attract and retain employees of
outstanding ability.
Set forth below is a summary of the principal features of the 1999 Employee
Stock Purchase Plan. NetIQ will provide, without charge, to each person to whom
a proxy statement is delivered, upon request of such person and by first class
mail within three business days of receipt of such request, a copy of the
incentive plan. Any such request should be directed as follows: Secretary,
NetIQ Corporation, 5410 Betsy Ross Drive, Santa Clara, CA 95054; telephone
number (408) 330-7000.
NetIQ's 1999 Employee Stock Purchase Plan
NetIQ's 1999 Stock Purchase Plan was adopted by its board of directors in
May 1999 and was approved by the stockholders in July 1999. A total of 500,000
shares of common stock, plus annual increases beginning on July 1, 2000,
currently equal to the lowest of 666,666 shares, 2% of its shares on that date
or a lesser amount determined by the board of directors are currently reserved
for issuance under the 1999 Stock Purchase Plan. Unless terminated sooner, the
1999 Stock Purchase Plan will terminate automatically in May 2009.
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.
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 NetIQ"s capital stock;
or
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. whose rights to purchase stock under all NetIQ"s employee stock purchase
plans accrues at a rate which exceeds $25,000 worth of stock for each
calendar year.
The 1999 Stock Purchase Plan is intended to qualify under Section 423 of the
United States tax code. It 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 that the first such offering period commenced
on July 29, 1999 and will end on the last trading day on or before October 30,
2001.
The 1999 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.
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 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.
A participant may not transfer rights granted under the 1999 Stock Purchase
Plan other than by will, the laws of descent and distribution or as otherwise
provided under the 1999 Stock Purchase Plan.
The 1999 Stock Purchase Plan provides that, in the event of the merger of
NetIQ with or into another corporation or a sale of substantially all of its
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 option, the offering period then
in progress will be shortened, an a new exercise date will be set.
The 1999 Stock Purchase Plan will terminate in 2009. However, the board of
directors has the authority to amend or terminate the 1999 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 1999 Stock Purchase Plan.
The board of directors recommends that stockholders vote "FOR" the amendment
to the 1999 Stock Purchase Plan.
139
<PAGE>
LEGAL MATTERS
The validity of the shares of NetIQ common stock offered by this proxy
statement/prospectus will be passed upon for NetIQ by Wilson Sonsini Goodrich &
Rosati, Professional Corporation. Davis Polk & Wardwell is representing MCS. It
is a condition to the completion of the merger that MCS and NetIQ each receive
opinions from its counsel, to the effect that, among other things, the merger
will be a reorganization for federal income tax purposes. See "The Merger--
Material United States federal income tax considerations of the merger."
EXPERTS
The consolidated financial statements of NetIQ as of June 30, 1999 and 1998
and for each of the three years in the period ended June 30, 1999 included in
this proxy statement/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 have been so included in reliance on the reports of such firm, given upon
their authority as experts in auditing and accounting.
Ernst & Young LLP, independent auditors, have audited the financial
statements of Mission Critical Software, Inc. at June 30, 1998 and 1999 and for
the period from July 19, 1996 (date of inception) to June 30, 1997, and the
years ended June 30, 1998 and 1999, as set forth in their report, which is
included in this prospectus. The financial statements of Mission Critical
Software, Inc. are included in this prospectus in reliance on their report,
given on their authority as experts in accounting and auditing.
The financial statements of Ganymede Software, Inc. as of March 31, 1999 and
1998 and for each of the years then ended in this proxy statement/prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
STOCKHOLDER PROPOSALS
Under Rule 14a-8 of the Exchange Act, NetIQ stockholders may present proper
proposals for inclusion in NetIQ's proxy statement and for consideration at the
next annual meeting of its stockholders by submitting such proposals to NetIQ
in a timely manner. In order to be so included for the 2000 annual meeting,
stockholder proposals must have been received by NetIQ no later than , and
must have otherwise complied with the requirements of Rule 14a-8.
Under Rule 14a-8 of the Exchange Act, MCS stockholders may present proper
proposals for inclusion in MCS's proxy statement and for consideration at the
next annual meeting of its stockholders by submitting such proposals to MCS in
a timely manner. In order to be so included for the 2000 annual meeting,
stockholder proposals must have been received by MCS a reasonable time in
advance of the meeting, and must have otherwise complied with the requirements
of Rule 14a-8.
140
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Reports, proxy Reports, proxy
statements and other statements and other
information concerning information regarding
NetIQ may be inspected MCS may be inspected at:
at:
The National Association of
The National Association of Securities Dealers
Securities Dealers 1735 K Street, N.W.
1735 K Street, N.W. Washington, D.C. 20006
Washington, D.C. 20006
Requests for documents
Requests for documents relating to MCS should
relating to NetIQ should be directed to:
be directed to:
Mission Critical Software, Inc.
NetIQ Corporation 13939 Northwest Freeway
5410 Betsy Ross Drive Houston, Texas 77040
Santa Clara, California 95054 (713) 548-1700
(408) 330-7000
NetIQ files reports, proxy statements and other information with the SEC.
Copies of its reports, proxy statements and other information may be inspected
and copied at the public reference facilities maintained by the SEC:
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The SEC
maintains a website that contains reports, proxy statements and other
information regarding each of MCS and NetIQ. The address of the SEC website is
http://www.sec.gov.
NetIQ has filed a registration statement under the Securities Act with the
SEC with respect to NetIQ's common stock to be issued to MCS stockholders in
the merger. This proxy statement/prospectus constitutes the prospectus of NetIQ
filed as part of the registration statement. This proxy statement/prospectus
does not contain all of the information set forth in the registration statement
because certain parts of the registration statement are omitted as provided by
the rules and regulations of the SEC. You may inspect and copy the registration
statement at any of the addresses listed above.
This document does not constitute an offer to sell, or a solicitation of an
offer to purchase, the NetIQ common stock or the solicitation of a proxy, in
any jurisdiction to or from any person to whom or from whom it is unlawful to
make the offer, solicitation of an offer or proxy solicitation in that
jurisdiction. Neither the delivery of this proxy statement/prospectus nor any
distribution of securities means, under any circumstances, that there has been
no change in the information set forth or incorporated in this document by
reference or in its affairs since the date of this proxy statement/prospectus.
The information contained in this document with respect to MCS and its
subsidiaries was provided by MCS. The information contained in this document
with respect to NetIQ was provided by NetIQ.
141
<PAGE>
NetIQ CORPORATION
MISSION CRITICAL SOFTWARE, INC.
GANYMEDE SOFTWARE INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
NetIQ's 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
NetIQ's Unaudited Condensed Financial Statements for Three and Six Months
Ended December 31, 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
MCS's Audited Financial Statements for Fiscal Years Ended June 30, 1997,
1998 and 1999
Report of Independent Auditors........................................... F-23
Balance Sheets........................................................... F-24
Statements of Operations................................................. F-25
Statements of Stockholders' Deficit...................................... F-26
Statements of Cash Flows................................................. F-27
Notes to Financial Statements............................................ F-28
MCS's Unaudited Condensed Financial Statements for Three and Six Months
Ended December 31, 1998 and 1999
Condensed Balance Sheets................................................. F-42
Statements of Operations................................................. F-43
Statement of Stockholders' Equity (Deficit).............................. F-44
Statements of Cash Flows................................................. F-45
Notes to Condensed Financial Statements.................................. F-46
Ganymede's Audited Financial Statements for Fiscal Years Ended March 31,
1999 and 1998 and Unaudited Financial Statements as of and for the Nine
Months Ended December 31, 1999 and 1998
Report of Independent Accountants ....................................... F-49
Balance Sheets........................................................... F-50
Statements of Operations................................................. F-52
Statements of Stockholders' Equity....................................... F-53
Statements of Cash Flows................................................. F-54
Notes to Financial Statements............................................ F-55
</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 Preferred
Stock Common Stock
------------------------ ------------------
Shares Amount Shares Amount
----------- ------------ ----------- ------
<S> <C> <C> <C> <C>
Balances, July 1, 1996............ 4,666,656 $ 2,786 2,882,665 $ 9
Issuance of Series B preferred
stock, at $3.00 per share, net
of issuance costs of $31........ 2,733,321 8,169 -- --
Exercise of stock options........ -- -- 144,918 9
Deferred stock-based
compensation.................... -- -- -- 30
Amortization of deferred stock-
based compensation.............. -- -- -- --
Net loss......................... -- -- -- --
--------- ------- --------- ------
Balances, June 30, 1997........... 7,399,977 10,955 3,027,583 48
Exercise of stock options........ -- -- 190,250 13
Deferred stock-based
compensation.................... -- -- -- 1,241
Amortization of deferred stock-
based compensation.............. -- -- -- --
Net loss......................... -- -- -- --
--------- ------- --------- ------
Balances, June 30, 1998........... 7,399,977 10,955 3,217,833 1,302
Exercise of stock options........ -- -- 929,325 254
Repurchase of common stock....... -- -- (58,331) (3)
Issuance of stock................ -- -- 26,667 320
Deferred stock-based
compensation.................... -- -- -- 3,036
Amortization of deferred stock-
based compensation.............. -- -- -- --
Net loss......................... -- -- -- --
--------- ------- --------- ------
Balances, June 30, 1999........... 7,399,977 $10,955 4,115,494 $4,909
========= ======= ========= ======
<CAPTION>
Note
Receivable Deferred
From Stock-based Accumulated
Stockholder Compensation Deficit Total
----------- ------------ ----------- ------
<S> <C> <C> <C> <C>
Balances, July 1, 1996............ $ (6) $ -- $ (909) $1,880
Issuance of Series B preferred
stock, at $3.00 per share, net
of issuance costs of $31........ -- -- -- 8,169
Exercise of stock options........ -- -- -- 9
Deferred stock-based
compensation.................... -- (30) -- --
Amortization of deferred stock-
based compensation.............. -- 10 -- 10
Net loss......................... -- -- (2,281) (2,281)
--------- ------- --------- ------
Balances, June 30, 1997........... (6) (20) (3,190) 7,787
Exercise of stock options........ -- -- -- 13
Deferred stock-based
compensation.................... -- (1,241) -- --
Amortization of deferred stock-
based compensation.............. -- 250 -- 250
Net loss......................... -- -- (3,111) (3,111)
--------- ------- --------- ------
Balances, June 30, 1998........... (6) (1,011) (6,301) 4,939
Exercise of stock options........ -- -- -- 254
Repurchase of common stock....... 6 -- -- 3
Issuance of stock................ -- -- -- 320
Deferred stock-based
compensation.................... -- (3,036) -- --
Amortization of deferred stock-
based compensation.............. -- 1,925 -- 1,925
Net loss......................... -- -- (1,642) (1,642)
--------- ------- --------- ------
Balances, June 30, 1999........... $ -- $(2,122) $ (7,943) $5,799
========= ======= ========= ======
</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
Accurals 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 $17,999
Foreign............................................... -- 728 3,570
---- ------ -------
Total revenue*...................................... $388 $7,070 $21,569
==== ====== =======
Long-lived assets:
United States......................................... $294 $ 528 $ 1,445
Foreign............................................... -- 97 116
---- ------ -------
Total long-lived assets............................. $294 $ 625 $ 1,561
==== ====== =======
</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
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31 June 30,
1999 1999(1)
----------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 4,631 $ 9,634
Short-term investments.................................. 125,616 --
Accounts receivable, net of allowance for uncollectible
accounts............................................... 6,200 6,395
Prepaid expenses........................................ 825 764
-------- -------
Total current assets.................................. 137,272 16,793
Property and equipment, net............................... 1,895 1,465
Other assets.............................................. 361 96
-------- -------
Total assets.......................................... $139,528 $18,354
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt......................................... $ -- $ 5,144
Accounts payable........................................ 964 326
Accrued compensation and related benefits............... 2,082 1,100
Other liabilities....................................... 1,790 1,839
Deferred revenue........................................ 5,892 3,941
-------- -------
Total current liabilities............................. 10,728 12,350
Long-term debt............................................ -- 205
-------- -------
Total liabilities..................................... 10,728 12,555
-------- -------
Stockholders' equity:
Convertible preferred stock--$0.001; 5,000,000 shares
authorized,
zero outstanding at December 31, 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,
17,106,396 shares outstanding at December 31, 1999;
30,000,000 shares authorized, 4,115,494 outstanding at
June 30, 1999......................................... 136,451 4,909
Deferred stock-based compensation....................... (1,643) (2,122)
Accumulated deficit..................................... (6,038) (7,943)
Accumulated other comprehensive income.................. 30 --
-------- -------
Total stockholders' equity............................ 128,800 5,799
-------- -------
Total liabilities and stockholders' equity............ $139,528 $18,354
======== =======
</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
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
December 31, December 31,
------------- ---------------
1999 1998 1999 1998
------ ------ ------- ------
<S> <C> <C> <C> <C>
Software license revenue...................... $7,379 $4,519 $13,600 $8,159
Service revenue............................... 1,743 628 3,108 1,078
------ ------ ------- ------
Total revenue............................... 9,122 5,147 16,708 9,237
------ ------ ------- ------
Cost of software license revenue.............. 173 158 329 245
Cost of service revenue....................... 397 384 816 560
------ ------ ------- ------
Total cost of revenue....................... 570 542 1,145 805
------ ------ ------- ------
Gross profit.................................. 8,552 4,605 15,563 8,432
Operating expenses:
Sales and marketing......................... 4,851 2,864 8,975 4,989
Research and development.................... 1,879 806 3,588 1,690
General and administrative.................. 754 742 1,507 1,265
Stock-based compensation.................... 174 661 352 1,025
------ ------ ------- ------
Total operating expenses.................... 7,658 5,073 14,422 8,969
------ ------ ------- ------
Income (loss) from operations................. 894 (468) 1,141 (537)
Interest income (expense):
Interest income............................. 901 66 1,283 85
Interest expense and other.................. 17 (28) (18) (28)
------ ------ ------- ------
Interest income, net........................ 918 38 1,265 57
------ ------ ------- ------
Income (loss) before income taxes............. 1,812 (430) 2,406 (480)
Income taxes.................................. 379 -- 501 --
------ ------ ------- ------
Net income (loss)............................. 1,433 (430) 1,905 (480)
------ ------ ------- ------
Other comprehensive income:
Foreign currency translation adjustments.... 26 -- 1 --
Unrealized gain on short-term investments... 29 -- 29 --
------ ------ ------- ------
Comprehensive income (loss)................... $1,488 $ (430) $ 1,935 $ (480)
====== ====== ======= ======
Basic net income (loss) per share............. $ 0.09 $(0.13) $ 0.14 $(0.15)
Shares used to compute basic net income (loss)
per share.................................... 15,709 3,397 13,832 3,235
Diluted net income (loss) per share........... $ 0.08 $(0.13) $ 0.11 $(0.15)
Shares used to compute diluted net income
(loss) per share............................. 17,556 3,397 16,868 3,235
</TABLE>
See notes to condensed consolidated financial statements.
F-19
<PAGE>
NetIQ CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------
1999 1998
--------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 1,905 $ (480)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................... 347 155
Stock-based compensation............................... 352 1,025
Stock issued in lieu of compensation................... 80 --
Gain on sale of property and equipment................. -- 8
Changes in:
Accounts receivable.................................. 176 (1,597)
Prepaid expenses..................................... (59) 18
Accounts payable..................................... 636 126
Accrued compensation and related benefits............ 981 (98)
Other liabilities.................................... 690 244
Deferred revenue..................................... 1,958 1,727
--------- -------
Net cash provided by operating activities............ 7,066 1,128
--------- -------
Cash flows from investing activities:
Purchases of property and equipment...................... (769) (570)
Proceeds from sales of property and equipment............ -- 11
Purchases of short-term investments...................... (206,288) --
Proceeds from maturities of short-term investments....... 80,708 --
Other.................................................... (257) (24)
--------- -------
Net cash used in investing activities................ (126,606) (583)
--------- -------
Cash flows from financing activities:
Repayments on short-term debt............................ (1,724) --
Proceeds from borrowings................................. -- 433
Repayments on long-term debt............................. (349) (12)
Proceeds from sale of common stock, net of expenses...... 116,601 47
--------- -------
Net cash provided by financing activities............ 114,528 468
--------- -------
Effect of exchange rate changes............................ 9 --
--------- -------
Net increase (decrease) in cash and cash equivalents....... (5,003) 1,013
Cash and cash equivalents, beginning of period............. 9,634 3,358
--------- -------
Cash and cash equivalents, end of period................... $ 4,631 $ 4,371
========= =======
Noncash investing and financing activities:
Conversion of preferred stock to common stock............ $ 10,955 $ --
Benefit from disqualifying dispositions of stock......... $ 310 $ --
Supplemental disclosure of cash flow information--cash paid
for:
Interest................................................. $ 125 $ 4
Income taxes............................................. $ 185 $ 2
</TABLE>
See notes to condensed consolidated financial statements.
F-20
<PAGE>
NetIQ CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended December 31, 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 proxy statement/prospectus.
2. Short-term Investments
Short-term investments consist primarily of highly liquid debt instruments
purchased with remaining maturity dates of greater than 90 days. Short-term
investments are classified as available-for-sale securities and are stated at
market value with unrealized gains and losses included in stockholders' equity,
net of income taxes.
3. 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 December
31, 1999 reflects the expected tax expense based on the projected effective tax
rate for fiscal year 2000.
4. 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 income 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.
F-21
<PAGE>
NetIQ CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Six Months Ended December 31, 1999 and 1998
(Unaudited)
5. Net Income (Loss) Per Share
Basic net 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, warrants and
outstanding stock options using the treasury stock method.
The following is a reconciliation of weighted average shares used in
computing net income (loss) per share for the three- and six-months ended
December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three months Six months
ended ended
December 31, December 31,
------------- -------------
1999 1998 1999 1998
------ ----- ------ -----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding... 15,731 3,580 13,867 3,473
Weighted average common shares outstanding
subject to repurchase....................... (22) (183) (35) (238)
------ ----- ------ -----
Shares used in computing basic net income
(loss) per share............................ 15,709 3,397 13,832 3,235
====== ===== ====== =====
Weighted average common shares outstanding... 15,731 13,867
Dilutive effect of options outstanding....... 1,825 1,807
Dilutive effect of preferred shares
outstanding................................. -- 1,166
Dilutive effect of warrants outstanding...... -- 28
------ ------
Shares used in computing diluted net income
per share................................... 17,556 16,868
====== ======
</TABLE>
The Company had a net loss for the three- and six-months ended December 31,
1998; therefore shares used in computing diluted net loss per share are equal
to shares used for computing basic net loss per share.
6. Public Offerings
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.
In December 1999, the Company sold 1,500,000 shares of common stock in an
underwritten offering for net proceeds of approximately $75.5 million.
In January 2000, the underwriters exercised their over-allotment option and
the Company issued 387,000 additional shares for net proceeds of approximately
$19.6 million.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Mission Critical Software, Inc.
We have audited the accompanying balance sheets of Mission Critical
Software, Inc. (the "Company") as of June 30, 1999 and 1998, and the related
statements of operations, stockholders' deficit, and cash flows for the years
ended June 30, 1999 and 1998, and the period from July 19, 1996 (date of
inception) to June 30, 1997. 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 auditing standards generally
accepted in the United States. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Mission Critical Software,
Inc. at June 30, 1999 and 1998, and the results of its operations and its cash
flows for the years ended June 30, 1999 and 1998, and the period from July 19,
1996 (date of inception) to June 30, 1997, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Austin, Texas
July 7, 1999 except for Note 14, as to
which the date is August 4, 1999
F-23
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30,
----------------
1998 1999
------- -------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 4,575 $11,031
Accounts receivable, net of allowance of $150 and $395,
respectively................................................ 3,912 3,299
Prepaid and other current assets............................. 202 758
------- -------
Total current assets....................................... 8,689 15,088
Property and equipment, net.................................. 1,199 2,048
Acquired technology, net of accumulated amortization of $598
and $959, respectively...................................... 968 607
Other assets................................................. 102 43
------- -------
Total assets............................................... $10,958 $17,786
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Revolving line of credit and current maturities of long-term
debt........................................................ $ 536 $ 265
Accounts payable............................................. 288 918
Accrued liabilities.......................................... 2,154 5,429
Deferred revenue............................................. 2,470 4,300
------- -------
Total current liabilities.................................. 5,448 10,912
Long-term debt, less current maturities...................... 352 81
Deferred revenue, less current portion....................... 495 838
------- -------
Total liabilities.......................................... 6,295 11,831
Redeemable convertible preferred stock, Series A, $0.001 par
value, authorized and outstanding--868,650 shares; ($.205647
per share liquidation preference)........................... 179 179
Redeemable convertible preferred stock, Series B, $0.001 par
value, authorized and outstanding--2,650,000 shares; ($1 per
share liquidation preference)............................... 2,650 2,650
Redeemable convertible preferred stock, Series C, $0.001 par
value, authorized 3,450,000 shares, outstanding--3,450,000
shares; ($3 per share liquidation preference)............... 10,350 10,350
Stockholders' deficit:
Common stock, $0.001 par value, authorized--50,000,000
shares, outstanding 2,484,971 and 3,307,511 shares,
respectively................................................ 2 3
Additional paid-in capital................................... 26 3,290
Deferred stock compensation.................................. -- (2,315)
Accumulated deficit.......................................... (8,544) (8,202)
------- -------
Total stockholders' deficit................................ (8,516) (7,224)
------- -------
Total liabilities and stockholders' deficit................ $10,958 $17,786
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period From
July 19, 1996 Year Ended June 30,
(date of inception) --------------------
to June 30, 1997 1998 1999
------------------- --------- ---------
<S> <C> <C> <C>
Revenue:
License........................... $ 4,087 $ 12,767 $ 21,067
Maintenance....................... 180 1,609 3,760
------- --------- ---------
Total revenue..................... 4,267 14,376 24,827
Cost of revenue:
Cost of license................... 206 392 380
Cost of maintenance............... 142 933 914
------- --------- ---------
Total cost of revenue............. 348 1,325 1,294
------- --------- ---------
Gross margin.................... 3,919 13,051 23,533
------- --------- ---------
Operating expenses:
Sales and marketing............... 3,554 9,590 13,480
Research and development.......... 1,317 3,612 5,986
General and administrative........ 973 2,228 2,458
Amortization of deferred stock
compensation..................... -- -- 532
Abandoned lease costs............. -- -- 1,034
Acquired in-process research and
development...................... 1,575 -- --
------- --------- ---------
Total operating expenses.......... 7,419 15,430 23,490
------- --------- ---------
Operating income (loss)......... (3,500) (2,379) 43
------- --------- ---------
Interest income..................... 35 149 365
Interest expense.................... (6) (59) (50)
Other expense, net.................. (27) (27) (16)
------- --------- ---------
Income (loss) before income
taxes............................ (3,498) (2,316) 342
Income tax benefit.................. 175 -- --
------- --------- ---------
Net income (loss)............... (3,323) (2,316) 342
Excess of consideration paid to re-
deem preferred stock and dividends
in arrears......................... (181) (3,714) (1,059)
------- --------- ---------
Net loss applicable to common
stockholders (Note 8).............. $(3,504) $ (6,030) $ (717)
======= ========= =========
Basic and diluted net loss per share
applicable to common stockholders.. $ (1.44) $ (2.47) $ (0.25)
======= ========= =========
Pro forma basic net income per share
(unaudited)........................ $ 0.04
=========
Pro forma diluted net income per
share (unaudited).................. $ 0.03
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Deferred
---------------- Paid-in Stock Accumulated
Number Amount Capital Compensation Deficit Total
--------- ------ ---------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued for
cash................... 2,431,350 $ 2 $ 1 $ -- $ -- $ 3
Effect of deferred tax
liability recorded for
acquired technology.... -- -- -- -- (175) (175)
Cost of issuance of
Series B Preferred
Stock.................. -- -- -- -- (25) (25)
Net loss................ -- -- -- -- (3,323) (3,323)
--------- --- ------ ------- ------- -------
Balance at June 30,
1997................. 2,431,350 2 1 -- (3,523) (3,520)
--------- --- ------ ------- ------- -------
Common stock issued upon
exercise of stock
options................ 53,621 -- 25 -- -- 25
Redemption of Series A
Preferred Stock in
excess of issue price.. -- -- -- -- (2,655) (2,655)
Cost of issuance of
Series C Preferred
Stock.................. -- -- -- -- (50) (50)
Net loss................ -- -- -- -- (2,316) (2,316)
--------- --- ------ ------- ------- -------
Balance at June 30,
1998................. 2,484,971 2 26 -- (8,544) (8,516)
--------- --- ------ ------- ------- -------
Common stock issued upon
exercise of stock
options................ 822,540 1 417 -- -- 418
Deferred stock
compensation relating
to stock options....... -- -- 2,847 (2,847) -- --
Amortization of deferred
stock compensation..... -- -- -- 532 -- 532
Net income.............. -- -- -- -- 342 342
--------- --- ------ ------- ------- -------
Balance at June 30,
1999................. 3,307,511 $ 3 $3,290 $(2,315) $(8,202) $(7,224)
========= === ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period From
July 19, 1996 Year Ended June 30,
(date of inception) --------------------
to June 30, 1997 1998 1999
------------------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................... $(3,323) $ (2,316) $ 342
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization...... 332 860 878
Deferred tax benefit............... (175) -- --
Noncash compensation expense....... -- -- 532
Acquired in-process research and
development....................... 1,400 -- --
(Gain) loss on disposal of assets.. 3 18 (6)
Changes in operating assets and li-
abilities:
Accounts receivable............... (1,613) (2,298) 613
Prepaid and other current assets.. (37) (128) (556)
Other assets...................... (55) (46) 59
Accounts payable and accrued lia-
bilities......................... 786 1,514 3,905
Deferred revenue.................. 1,008 1,957 2,173
------- --------- ---------
Net cash provided by (used in) oper-
ating activities.................... (1,674) (439) 7,940
Cash flows from investing activities:
Proceeds from sale of property and
equipment.......................... 5 18 52
Purchase of property and equipment.. (821) (860) (1,412)
Payment from (loan to) stockholder
under promissory note.............. (350) 350 --
------- --------- ---------
Net cash used in investing activi-
ties................................ (1,166) (492) (1,360)
Cash flows from financing activities:
Net payments (borrowings) on revolv-
ing line of credit................. 500 275 (275)
Borrowings on long-term debt........ -- 642 --
Payments on long-term debt.......... (4) (3,020) (267)
Redemption of Series A preferred
stock.............................. -- (2,850) --
Issuance of common stock, net of
cost............................... 3 25 418
Issuance of Series B preferred
stock, net of cost................. 2,475 -- --
Issuance of Series C preferred
stock, net of cost................. -- 10,135 --
Subscription of Series C preferred
stock.............................. 165 -- --
------- --------- ---------
Net cash provided by (used in) fi-
nancing activities:................. 3,139 5,207 (124)
------- --------- ---------
Net increase in cash and cash equiva-
lents............................... 299 4,276 6,456
------- --------- ---------
Beginning cash and cash equivalents.. -- 299 4,575
------- --------- ---------
Ending cash and cash equivalents..... $ 299 $ 4,575 $ 11,031
======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
1. Description of Business and Summary of Significant Accounting Policies
Mission Critical Software, Inc. (the "Company") is a leading provider of
systems administration and operations management software products for
corporate and Internet-based Windows NT networks. The Company was incorporated
on July 19, 1996, as a Delaware corporation, and commenced operations on
September 4, 1996.
Revenue Recognition
The Company derives revenue from the sale of product licenses and
maintenance.
The Company recognizes product license revenue when persuasive evidence of
an agreement exists, the product and the permanent license key have been
delivered, the Company has no remaining significant obligations, customer
acceptance periods, if any, have been completed, the license fee is fixed or
determinable and collection of the fee is probable.
The Company recognizes revenue from maintenance agreements ratably over the
term of the agreement, typically one year. Customers purchasing maintenance
agreements receive unspecified product upgrades and electronic, Internet-based
technical support and telephone support. Maintenance agreements are purchased
separately by customers at their discretion.
The Company adopted Statement of Position ("SOP") 97-2, Software Revenue
Recognition, and SOP 98-4, Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition, as of July 1, 1997. Prior to July 1, 1997,
the Company recognized revenue in accordance with SOP 91-1, Software Revenue
Recognition. The adoption of SOP 97-2 and SOP 98-4 did not have a material
impact on the Company's financial results.
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. SOP 98-9 amends SOP 98-4 to
extend the deferral of the application of certain passages of SOP 97-2 provided
by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All
other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. The Company believes that the
adoption of SOP 98-9 will not have a material effect on the Company's results
of operations or financial condition.
Cash and Cash Equivalents
The Company considers instruments with an original maturity date of three
months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized on a straight-line method over the shorter of the
estimated useful life or the lease term. The cost of ordinary maintenance and
repairs is charged to expense as incurred.
Research and Development
Research and development expenditures are expensed as incurred. Statement of
Financial Accounting Standards ("SFAS") 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of
F-28
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
technological feasibility. Based on the Company's product development process,
technological feasibility is established upon completion of a working model.
Costs incurred by the Company between completion of the working model and the
point at which the product is ready for general release have been
insignificant. Through June 30, 1999, all software development costs have been
expensed as incurred.
Acquired Technology
Acquired technology is recorded at cost and amortized on the straight-line
method over the products' estimated useful lives, generally three to five
years.
Stock-Based Compensation
SFAS 123, Accounting for Stock-Based Compensation, prescribes accounting and
reporting standards for all stock-based compensation plans, including employee
stock options. As allowed by SFAS 123, the Company has elected to continue to
account for its employee stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Income Taxes
Income taxes have been provided in accordance with the liability method of
accounting for income taxes. Accordingly, deferred income taxes are recorded to
reflect the tax consequences on future years of temporary differences between
the tax basis of assets and liabilities and their financial amounts. A
valuation allowance is provided, if necessary, to reduce deferred tax assets to
their estimated net realizable value.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, Reporting Comprehensive Income. SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components. For the
periods ended June 30, 1997, 1998 and 1999, comprehensive income or loss was
the same as net income or loss.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
$181,000, $613,000, and $1,502,000 for the periods ended June 30, 1997, 1998
and 1999, respectively.
F-29
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk consist of
cash and cash equivalents and accounts receivable. The Company's investment
policy limits its exposure to credit risk for cash and cash equivalents. The
Company licenses its software products primarily to major corporations in a
number of industries. Collateral or deposits generally are not required from
customers who demonstrate creditworthiness. Credit risk is considered limited
for accounts receivable. The following table summarizes the changes in the
allowance for doubtful accounts receivable (in thousands):
<TABLE>
<S> <C>
Balance at July 19, 1996 (date of inception)........................ $ --
Additions charged to costs and expenses............................. --
Write-off of uncollectible accounts................................. --
----
Balance at June 30, 1997............................................ --
Additions charged to costs and expenses............................. 150
Write-off of uncollectible accounts................................. --
----
Balance at June 30, 1998............................................ 150
Additions charged to costs and expenses............................. 290
Write-off of uncollectible accounts................................. (45)
----
Balance at June 30, 1999............................................ $395
====
</TABLE>
The Company's products are sold through a network of sales offices and
distribution partners. Approximately 16%, 17%, and 22% of the Company's license
revenue in the periods ended June 30, 1997, 1998 and 1999, respectively, were
represented by customers outside of North America. During the period ended June
30, 1997, one customer accounted for approximately 11% of total revenue. No one
customer accounted for greater than 10% of total revenue during the periods
ended June 30, 1998 and 1999.
The Company maintains cash demand deposits with major financial
institutions. Balances exceed the $100,000 level covered by federal depository
insurance; however, the Company has experienced no losses.
Earnings Per Share
The Company follows the provisions of SFAS No. 128, Earnings Per Share.
Basic net loss per share is computed by dividing net loss applicable to common
stockholders by the weighted average number of common shares outstanding during
the period. Securities that could potentially dilute basic earnings per share
in the future and were not included in the diluted computation as they were
antidilutive to the Company's net loss applicable to common stockholders total
1,764,600, 3,906,000 and 4,968,000 for the period ended June 30, 1997, 1998 and
1999, respectively. Accordingly, basic and diluted net loss per share are the
same for all periods presented. Such shares, had they been dilutive, would have
been included in the computation of diluted net loss per share using the
treasury stock method.
F-30
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table presents the calculation of basic and diluted net loss
per share and pro forma basic and diluted net income per share (in thousands,
except per share data):
<TABLE>
<CAPTION>
Period From July
19, 1996 Year Ended June 30,
(date of inception) --------------------
to June 30, 1997 1998 1999
------------------- --------- ---------
<S> <C> <C> <C>
Net income (loss).................... $(3,323) $ (2,316) $ 342
Excess of consideration paid to
redeem preferred stock over carrying
amount.............................. -- (2,655) --
Increase in cumulative dividends in
arrears on redeemable convertible
preferred stock..................... (181) (1,059) (1,059)
------- --------- ---------
Net loss applicable to common
stockholders........................ $(3,504) $ (6,030) $ (717)
======= ========= =========
Pro forma net income applicable to
common stockholders................. $ 342
=========
Shares used in computing:
Basic and diluted net loss per
share............................. 2,431 2,440 2,814
======= ========= =========
Pro forma basic net income per
share (unaudited)................. 9,783
=========
Pro forma diluted net income per
share (unaudited)................. 12,827
=========
Computation of:
Basic and diluted net loss per
share applicable to common
stockholders...................... $ (1.44) $ (2.47) $ (0.25)
======= ========= =========
Pro forma basic net income per
share (unaudited)................. $ 0.04
=========
Pro forma diluted net income per
share (unaudited)................. $ 0.03
=========
</TABLE>
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
redeemable convertible preferred stock into common stock concurrent with the
closing of the Company's anticipated initial public offering. Accordingly, a
pro forma calculation for the period ended June 30, 1999 assuming the
conversion of all outstanding shares of redeemable convertible preferred stock
into common stock upon the Company's initial public offering using the if-
converted method from their respective dates of issuance is presented. As the
pro forma calculation results in net income applicable to common stockholders,
the shares used in computing pro forma diluted net income per share include
3,044,000 common stock equivalents using the treasury stock method.
Financial Instruments
The Company records all financial instruments at cost. The fair values of
accounts receivable, accounts payable, accrued liabilities and indebtedness
approximate cost due to their short-term nature or adjustable interest rates.
Segments
Effective July 1, 1998, the Company adopted SFAS 131, Disclosures about
Segments of an Enterprise and Related Information. The adoption of SFAS 131 did
not have a significant effect on the disclosure of segment information as the
Company continues to consider its business activities to be in a single
segment.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-31
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Recent Pronouncements
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
entities to capitalize certain costs related to internal-use software once
certain criteria have been met. The Company expects that the adoption of SOP
98-1 will not have a material impact on its financial position or results of
operations. The Company will adopt SOP 98-1 for its fiscal year beginning July
1, 2000.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-up
Activities. SOP 98-5 requires that all start-up costs related to new operations
be expensed as incurred. In addition, all start-up costs that were capitalized
in the past must be written off when SOP 98-5 is adopted. The Company expects
that the adoption of SOP 98-5 will not have a material impact on its financial
position or results of operations. The Company will be required to implement
SOP 98-5 for its fiscal year beginning July 1, 2000.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes methods for derivative
financial instruments and hedging activities related to those instruments, as
well as other hedging activities. Because the Company does not currently hold
any derivative instruments and does not engage in hedging activities, it
expects that the adoption of SFAS 133 will not have a material impact on its
financial position or results of operations. The Company will adopt SFAS 133
for its fiscal year beginning July 1, 2000.
2. Note Receivable From Shareholder
At June 30, 1997, the Company held a note receivable of $350,000 from a
shareholder which earned interest at 6% per year. The promissory note and all
remaining accrued interest were collected on July 28, 1997. The Company
recognized interest income of approximately $15,000 and $3,000 for the periods
ended June 30, 1997 and June 30, 1998, respectively.
3. Technology Acquisitions
On September 4, 1996, the Company acquired various assets and liabilities
from a related party through the issuance of 1,697,082 shares of Series A
Preferred Stock. The related party was a company wholly-owned by a brother of
the individual then serving as the Company's president. The related party had
approximately a 4% ownership interest in the Company prior to the transaction.
The most significant asset acquired was a developed software product which had
reached technological feasibility. Accordingly, the assets acquired and
liabilities assumed were recorded at their fair values as follows (in
thousands):
<TABLE>
<S> <C>
Property and equipment.............................................. $113
Acquired technology................................................. 515
Other assets........................................................ 37
----
Total assets acquired............................................... 665
Notes payable....................................................... 175
Other liabilities................................................... 141
----
Total liabilities assumed........................................... 316
----
Net assets acquired................................................. $349
====
</TABLE>
F-32
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
On June 27, 1997, the Company purchased in-process research and development
for $2,625,000, consisting of cash of $100,000, issuance of a note payable in
the principal amount of $2,450,000, other direct costs of $75,000 and a warrant
to purchase 333,333 shares of the Company's common stock at $1.50 per share.
The warrant may be exercised at any time up until June 26, 2007. No value was
assigned to the warrant in determining the total purchase price since the
estimated fair value of the warrant at the purchase date was insignificant, as
determined using the Black-Scholes Model with a volatility factor of .6, a
risk-free interest rate of 6%, a dividend yield of 0%, an expected life of 3
years and a fair value of the Company's common stock at the time of the
transaction of $.50 per share. The Company allocated $1,050,000 to acquired
technology which was capitalized and the remaining $1,575,000 was allocated to
acquired in-process research and development. See Note 10 for further
discussion of Acquired In-Process Research and Development.
4. Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful June 30,
Life in --------------
Years 1998 1999
--------- ------ ------
<S> <C> <C> <C>
Computer software and equipment....................... 3 $1,427 $2,620
Furniture and fixtures................................ 7 84 185
Leasehold improvements................................ 5 152 191
Office and telephone equipment........................ 5 118 125
------ ------
1,781 3,121
Accumulated depreciation and amortization............. (582) (1,073)
------ ------
Property and equipment, net........................... $1,199 $2,048
====== ======
</TABLE>
5. Accrued Liabilities
Accrued liabilities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
-------------
1998 1999
------ ------
<S> <C> <C>
Accrued sales and use and other taxes............................ $ 424 $ 756
Accrued compensation and related cost............................ 1,080 1,411
Accrued abandoned lease cost..................................... -- 1,034
Other accrued expenses........................................... 650 2,228
------ ------
$2,154 $5,429
====== ======
</TABLE>
F-33
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Indebtedness
Indebtedness consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
------------
1998 1999
----- -----
<S> <C> <C>
Revolving line of credit facility with a bank ($3,000 and $3,000,
respectively) which matures in January 2000, interest payable
monthly at prime (7.75% at June 30, 1999) collateralized by all
assets of the Company........................................... $ 275 $ --
Note payable to a bank, monthly principal installment of $21,
interest payable monthly at prime (7.75% at June 30, 1999),
maturing in September 2000, collateralized by all assets of the
Company......................................................... 579 322
Note payable to a finance company, monthly principal and interest
of $1, interest rate of 13%, maturing in November 2001, collat-
eralized by certain
equipment....................................................... 34 24
----- -----
888 346
Less current maturities.......................................... (536) (265)
----- -----
$ 352 $ 81
===== =====
</TABLE>
The revolving line of credit facility subjects the Company to certain
restrictive and financial covenants including limitations of dividends and
maintenance of certain financial ratios. The Company was in compliance with all
the restrictive and financial covenants at June 30, 1999.
Future principal payments of indebtedness for the fiscal years ending June
30 are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................................. $265
2001................................................................. 76
2002................................................................. 5
----
$346
====
</TABLE>
Total interest paid for the periods ended June 30, 1997, June 30, 1998, and
June 30, 1999 was $6,000, $59,000 and $50,000, respectively.
As described in Note 3, the Company issued a note payable in the principal
amount of $2,450,000 to finance the purchase of in-process research and
development. The note bore interest at 10.5% per year and matured on December
31, 1997. The Company retired the note on July 11, 1997.
7. Income Taxes
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $2.4 million available to offset future taxable income and which
begin expiring in 2012, if not utilized. Special limitations exist under the
tax law related to cumulative changes in ownership that may restrict the
utilization of the regular tax net operating loss carryforwards.
F-34
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of deferred taxes were as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------
1998 1999
------- -------
<S> <C> <C>
Acquired in-process technology.......................... $ 389 $ 195
Net operating loss carryforward......................... 1,263 890
Accrued liabilities..................................... 324 457
Allowance for doubtful accounts......................... 55 146
------- -------
Gross deferred tax assets............................... 2,031 1,688
Purchased software costs................................ (99) (84)
Property and equipment.................................. (11) (34)
------- -------
Gross deferred tax liabilities.......................... (110) (118)
Valuation allowance..................................... (1,921) (1,570)
------- -------
Net deferred tax asset.................................. $ -- $ --
======= =======
</TABLE>
A valuation allowance has been recorded to completely offset the carrying
value of the deferred tax asset due to the uncertainty surrounding its
realization, including a lack of earnings history and the variability of
operating results. The valuation allowance was increased by $828,000 during
the period ended June 30, 1998 and decreased by $351,000 for the period ended
June 30, 1999.
The difference between the Company's effective tax rate and the statutory
rate of 34% was as follows:
<TABLE>
<CAPTION>
Year Ended
June 30,
------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate................................... (34)% (34)% 34 %
State taxes, net of federal benefit.................. (3) (3) 4
Nondeductible expenses............................... 1 1 10
Amortization of deferred stock compensation ......... -- -- 44
Valuation allowance.................................. 31 36 (92)
--- --- ---
(5)% -- % -- %
=== === ===
</TABLE>
In connection with the acquisition of various assets and liabilities from a
related party on September 4, 1996 (see Note 3), the Company recorded a
deferred tax liability of approximately $175,000 for the tax effect of the
difference in the recorded basis for book and tax purposes. Consequently,
during the period ended June 30, 1997, the Company was able to recognize a
$175,000 tax benefit for deferred tax assets generated subsequent to the
acquisition to the extent of such deferred tax liability.
8. Redeemable Convertible Preferred Stock
On September 4, 1996, the Company's board of directors authorized the
issuance of 1,818,650 shares of Series A Redeemable Convertible Preferred
Stock (Series A Preferred Stock), $.001 par value, of which 121,568 shares
were issued to a member of the board of directors as satisfaction of a note
payable to the board member in the principal amount of $25,000, and 1,697,082
shares were issued to a related party in exchange for assets and liabilities
as described in Note 3.
F-35
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
On July 2, 1997, the Company entered into an agreement to redeem 950,000
shares of Series A Preferred Stock at $3 per share in cash for a total
redemption price of $2,850,000. The excess of the redemption price over the
carrying amount of the redeemed shares of preferred stock, in the amount of
$2,655,000, has been subtracted from net loss to arrive at net loss applicable
to common stockholders. The redeemed shares were subsequently canceled.
On September 4, 1996, the Company's board of directors authorized the
issuance of 2,650,000 shares of Series B Redeemable Convertible Preferred Stock
(Series B Preferred Stock), $.001 par value, of which 150,000 shares were
issued as satisfaction of a note payable in the principal amount of $150,000,
and 2,500,000 shares were issued for cash of $2,475,000, net of issuance costs
of $25,000.
On July 2, 1997, the Company sold 3,450,000 shares of Series C Redeemable
Convertible Preferred Stock (Series C Preferred Stock) at $3 per share,
resulting in cash proceeds of $10,300,000, after issuance costs of
approximately $50,000. The Company received $165,000 prior to June 30, 1997, as
a cash subscription to 55,000 shares of the stock issued.
Series A, B and C Preferred Stock (the "Preferred Stock") are convertible
into shares of common stock at the option of the holder or in the event the
Company completes an initial public offering of common stock. The conversion
rate is initially one to one and is subject to adjustment if the Company issues
additional shares of common stock.
The holders of the Preferred Stock are entitled to vote upon any matter
submitted to the common stockholders for a vote as though the common stock and
the Preferred Stock constituted a single class of stock. The holders of
Preferred Stock have the number of votes per share which equals the number of
shares of common stock into which each such share of preferred stock held by
such holder is then convertible.
The holders of the Preferred Stock are entitled to receive, when and as
declared by the board of directors, cumulative dividends at the annual rate of
$.01645, $.08 and $.24 per share for Series A, B and C, respectively. Such
dividends accrue on a quarterly basis commencing with the first calendar
quarter ending after the issuance of the preferred stock. No dividends were
declared or paid on the Company's preferred stock during the periods ended June
30, 1997, 1998 or 1999, and dividends in arrears totaled $181,000, $1,240,000
and $2,299,000 as of June 30, 1997, 1998 and 1999, respectively.
On July 2, 2002, the Company is required to redeem all outstanding shares of
Series A, B and C Preferred Stock at a per share price of $.205647, $1 and $3
per share, respectively, plus cumulative dividends in arrears if not previously
converted into common stock.
9. Stock Option Plan
Effective March 20, 1997, the board of directors adopted the Company's 1997
Stock Option Plan. On May 21, 1999, the board of directors approved an
amendment to the Company's 1997 Stock Option Plan, subject to stockholder
approval. A total of 4,000,000 shares of common stock have been added to the
1997 Stock Option Plan for issuance to eligible participants under the 1997
Stock Option Plan, plus, commencing on July 1, 2000, annual increases equal to
the lesser of (i) 750,000 shares, (ii) 5% of the outstanding common shares on
the last day of the prior fiscal year or (iii) such amount as determined by the
board of directors. The number of shares of common stock authorized under the
1997 Stock Option Plan at June 30, 1999 was 8,795,000. Options generally have a
ten year term and generally vest over four years. The types of awards that may
be made under the 1997 Stock Option Plan are incentive and nonqualified options
to purchase shares of common stock. The exercise price for incentive stock
options may not be less than 100% of the fair market value of the Company's
common stock on the date of grant or 85% of fair market value for nonstatutory
options. In the event of a
F-36
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
change in control of the Company, an option or award under the 1997 Stock
Option Plan will become fully exercisable and fully vested if the option or
award is not assumed by the surviving corporation or the surviving corporation
does not substitute comparable awards for the awards granted under the 1997
Stock Option Plan.
Additionally, in January 1998, in connection with an employment agreement,
the Company granted a warrant to purchase 100,000 shares of the Company's
Common Stock at an exercise price of $1 per share. No amount was allocated to
the value of the warrant as the amount was not significant (as determined using
the Black-Scholes model with a volatility factor of .6, a risk-free interest
rate of 6%, a dividend yield of 0%, an expected life of 3 years and a fair
value of the Company's common stock at the time of the transaction of $.50 per
share).
1999 Director Option Plan
On May 21, 1999, the board of directors approved the adoption of the
Company's 1999 Director Option Plan, subject to the closing of the Offering. A
total of 250,000 shares of common stock have been reserved for issuance to non-
employee members of the board of directors, plus, commencing on July 1, 2000,
annual increases equal to the lesser of (i) 250,000 shares, (ii) 2% of the
outstanding common shares on the last day of the prior fiscal year or (iii)
such amount as determined by the board of directors.
In connection with the grant of certain stock options to employees through
June 30, 1999, the Company recorded deferred stock compensation of $2,372,000
for the aggregate differences between the exercise prices of options at their
date of grant and the deemed fair value for accounting purposes of the common
stock subject to such options. The amortization of deferred compensation cost
of $493,000 for the fiscal year ended June 30, 1999 relates to options awarded
to employees in all operating expense categories. This amount has not been
separately allocated to these categories.
In April and May 1999, three individuals resigned as members of the Board of
Directors and entered into consulting agreements with the Company. The
consulting agreements allow the individuals to continue to vest in their stock
options in accordance with their original terms during the period of the
consulting agreements, which range in length from one to two years. The Company
has accounted for this event as a new measurement date for the effected stock
options and recorded a deferred compensation charge of $475,000 (as determined
by the Black-Scholes model using a volatility factor of .5, a risk-free
interest rate of 5.75%, a dividend yield of 0%, an expected life of 1 and 2
years and a fair value of the Company's common stock at the time of the
transaction of $14 and $15 per share for the months of April and May 1999,
respectively). The amortization of this charge for the period ended June 30,
1999 was approximately $39,000.
F-37
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under the stock option plan for the
periods ended June 30, 1999:
<TABLE>
<CAPTION>
Weighted
Average Range of
Exercise Exercise
Options Price Prices
--------- -------- ------------
<S> <C> <C> <C>
Options granted............................. 1,495,000 $0.50 $ 0.50
Options forfeited........................... (64,000) 0.50 0.50
Options exercised........................... -- -- --
--------- ----- ------------
Options outstanding, June 30, 1997............ 1,431,000 0.50 0.50
Options granted............................. 2,361,934 0.50 0.50
Options forfeited........................... (266,502) 0.50 0.50
Options exercised........................... (53,621) 0.50 0.50
--------- ----- ------------
Options outstanding, June 30, 1998............ 3,472,811 0.50 0.50
Options granted............................. 2,131,510 9.59 2.50-15.00
Options forfeited........................... (247,401) 0.65 0.50-12.50
Options exercised........................... (822,540) 0.50 0.50
--------- ----- ------------
Options outstanding, June 30, 1999............ 4,534,380 $4.77 $0.50-$15.00
========= ===== ============
Exercisable at:
June 30, 1997............................... -- $ --
========= =====
June 30, 1998............................... 338,620 $0.50
========= =====
June 30, 1999............................... 560,796 $0.50
========= =====
</TABLE>
The following tables summarize information concerning outstanding options
as of June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------- ------------------------
Range of Weighted-Average
Exercise Remaining Weighted-Average Weighted-Average
Prices Number Contractual Life Exercise Price Number Exercise Price
- -------- --------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.50 2,415,370 8.4 years $ 0.50 560,796 $0.50
$ 2.50-
3.00 792,510 9.3 years $ 2.64 -- --
$12.00-
15.00 1,326,500 9.9 years $13.79 -- --
---------
4,534,380
=========
</TABLE>
<TABLE>
<CAPTION>
For the period
ended June 30,
----------------
1997 1998 1999
---- ----- -----
<S> <C> <C> <C>
Weighted-average deemed fair value of stock options granted
during the year:
Exercise price equal to fair value of stock on date of
grant..................................................... $-- $0.18 $4.66
Exercise price less than fair value of stock on date of
grant..................................................... -- -- 2.42
</TABLE>
The fair value of stock based compensation was calculated in accordance
with SFAS 123, Accounting for Stock-Based Compensation, utilizing the minimum
value option pricing model with the following assumptions:
<TABLE>
<CAPTION>
For the period
ended June 30,
--------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected life (in years)................................... 8 8 8
Risk free interest rate.................................... 5.0% 5.8% 5.5%
Volatility................................................. 0% 0% 0%
Dividend yield............................................. 0% 0% 0%
</TABLE>
F-38
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company's pro-forma stock based compensation is as follows (in
thousands):
<TABLE>
<CAPTION>
For the period ended
June 30,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Pro-forma stock based compensation expense... $ -- $ 60 $ 1,433
Pro-forma net loss applicable to common
stockholders................................ $(3,504) $(6,090) $(2,111)
Pro-forma basic and diluted net loss per
share....................................... $ (1.44) $ (2.50) $ (0.80)
</TABLE>
Because options vest over several years and additional option grants are
expected, the above pro-forma effects of FAS 123 are not likely to be
representative of the effects of reported net income (loss) for future periods.
1999 Employee Stock Purchase Plan
On May 21, 1999, the board of directors approved the adoption of the
Company's 1999 Employee Stock Purchase Plan (the "1999 Purchase Plan"), subject
to the closing of the Offering. A total of 600,000 shares of common stock has
been reserved for issuance under the 1999 Purchase Plan, plus, commencing on
July 1, 2000, annual increases equal to the lesser of (i) 500,000 shares, (ii)
4% of the outstanding common shares on the last day of the prior fiscal year or
(iii) such amount as determined by the board of directors. The 1999 Purchase
Plan permits eligible employees to acquire shares of the Company's common stock
through periodic payroll deductions, which may not exceed the lesser of 15% of
an employee's compensation or $25,000, where compensation is defined on Form W-
2. Each offering period will have a maximum duration of 24 months, comprising
four purchase periods of six months each. The price at which the common stock
may be purchased is 85% of the lesser of the fair market value of the Company's
common stock on the first day of the applicable offering period or on the last
day of the respective purchase period. The initial offering period will
commence on the effectiveness of the initial public offering and will end on
July 31, 2001.
10. Acquired In-Process Research and Development
In June 1997, the Company acquired from Serverware, Ltd. in-process research
and development for $2.7 million consisting of cash of $100,000, a $2.5 million
note payable, a warrant to purchase 333,333 shares of common stock at an
exercise price of $1.50 per share and $75,000 of direct costs incurred. No
value was allocated to the warrant as such amount was not significant.
The Company intended to utilize the acquired in-process research and
development to develop an event management product for Windows NT that it did
not possess at the time. In order to capitalize on the event management market,
the Company intended to complete the in-process research and development as
quickly as possible and sell and market that product under the name SeNTry.
From the date of acquisition to June 30, 1998, the Company expended
approximately 80 person months, or approximately $800,000, to complete and
enhance the in-process research and development. In June 1998, the Company
completed SeNTry, which represented the first completed and enhanced version of
the acquired technology. The Company then began internal development of an
entirely new event management product, OnePoint Event Manager, the design of
which was to be more consistent with its long-term product strategy.
A significant amount of uncertainty existed surrounding the successful
development and completion of the research and development acquired, which was
estimated to be 70% complete at the date of the acquisition. This was the
Company's first attempt to develop event management technology. The Company was
uncertain of its ability to complete the development of a new product within a
timeframe acceptable to the market and ahead of competitors. The in-process
research and development effort, at the time of purchase, had not reached
F-39
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
technological feasibility as it lacked many key elements including:
standardized implementation capabilities, a scalable and extensible
architecture, enhanced user interfaces, broad functionality and extensive
reporting capabilities.
The Company assigned a value to the in-process research and development of
$1.5 million and to the core technology of $1.1 million based on a discounted
cash flow model. The Company based the cash flow projections for revenue on the
projected incremental increase in revenue that it expected to receive from the
completed acquired in-process research and development. Revenue derived from
the completed in-process research and development was expected to commence
after completion of the SeNTry product. The Company expected revenue from the
in-process research and development to continue until the release of OnePoint
Event Manager, which was expected to be released in fiscal 2000. The Company
deducted estimated operating expenses and income taxes from estimated revenue
to arrive at estimated after-tax cash flows. Projected operating expenses
included: cost of revenue and general and administrative, customer support and
sales and marketing expenses. The Company estimated operating expenses as a
percentage of revenue and based such estimates primarily on projections it
prepared.
The cash flow projections attributable to the core technology included 50%
of the net income before tax expense anticipated to be generated from the
completed in-process technology and 15% from the net income before tax expense
anticipated to be generated from OnePoint Event Manager, an entirely new and
internally developed product. Revenue derived from OnePoint Event Manager was
estimated through 2004. The Company deducted estimated operating expenses and
income taxes from estimated revenue to arrive at estimated after-tax cash
flows. Projected operating expenses included: cost of revenue and general and
administrative, customer support and sales and marketing expenses. The Company
estimated operating expenses as a percentage of revenue and based such
estimates primarily on projections it prepared.
The rate used to discount the net cash flows to present value was based on
the weighted average cost of capital ("WACC"). The Company used a discount rate
of 35% for valuing the in-process research and development and 25% for the core
technology. These discount rates are higher than the implied WACC due to the
inherent uncertainties surrounding the successful development of the acquired
in-process research and development, the useful life of such in-process
research and development, the profitability levels of such in-process research
and development, and the uncertainty of technological advances that were
unknown at the time.
11. Employee Benefit Plan
The Company sponsors a defined contribution 401(k) plan to provide
substantially all U.S. employees an opportunity to accumulate personal funds
for their retirement. Under the terms of the plan, employees may make pre-tax
contributions to the plan of up to 20% of their annual salary, subject to
annual limitations imposed by the Internal Revenue Code. The Company, in the
sole discretion of the board of directors, may make contributions to the plan.
The Company made no contributions to the plan during the periods ended June 30,
1997, 1998 and 1999.
F-40
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. Commitments and Contingencies
The Company has entered into certain noncancelable operating leases for
office space with terms through year 2005. Rent expense totaled $104,000,
$434,000 and $570,000 for the periods ended June 30, 1997, 1998 and 1999,
respectively. Remaining future minimum lease commitments (including $402,000
and $511,000 in 2000 and 2001, respectively, for payments required pertaining
to the lease abandonment discussed below) related to these lease agreements for
the years ended June 30 are as follows (in thousands):
<TABLE>
<S> <C>
2000............................................................... $1,018
2001............................................................... 1,503
2002............................................................... 1,044
2003............................................................... 1,065
2004 and thereafter................................................ 1,245
------
$5,875
======
</TABLE>
In February 1999, the board of directors approved the relocation of the
Company's corporate offices. As a result, the Company gave notification of its
intent to abandon the related office space lease effective August 1, 1999 in
accordance with a cancellation option in the lease agreement. During the period
ended March 31, 1999, the Company recorded a nonrecurring charge of $1,034,000
for lease abandonment, which represents the required payment for cancellation
of the lease.
The Company is subject to litigation claims and assessments arising in the
ordinary course of business. In the opinion of management, the ultimate outcome
of these claims is not expected to have a material adverse effect on the
financial statements.
13. Segments of Business and Geographic Area Information
The Company considers its business activities to constitute a single
segment. The Company determined that it operates in a single segment based upon
management's decision to organize and operate the Company based its total
product suite rather than around differences in products and services. Also,
the Company has not organized its business by geographic areas. A summary of
the Company's operations by geographic area follows (in thousands):
<TABLE>
<CAPTION>
Periods ended June 30,
----------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Revenue:
Domestic customers.................................... $3,593 $11,997 $19,465
Customers outside North America....................... 674 2,379 5,362
------ ------- -------
$4,267 $14,376 $24,827
====== ======= =======
</TABLE>
14. Stock Offering
In August 1999, the Company issued 3,312,500 shares of its common stock in
connection with its initial public offering at a per share price of $16.00 per
share. Immediately prior to the closing of the offering, all outstanding shares
of redeemable convertible preferred stock were converted to 6,968,650 shares of
common stock.
F-41
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June
30, December 31,
1999 1999
------- ------------
(Unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $11,031 $178,705
Receivables, net...................................... 3,299 3,771
Other current assets.................................. 758 611
------- --------
Total current assets................................ 15,088 183,087
Property and equipment, net............................. 2,048 3,780
Acquired technology, net................................ 607 463
Other assets............................................ 43 50
------- --------
Total assets........................................ $17,786 $187,380
======= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable...................................... $ 918 $ 1,180
Accrued liabilities................................... 5,429 6,594
Short-term borrowings................................. 265 197
Deferred revenue...................................... 4,300 6,800
------- --------
Total current liabilities........................... 10,912 14,771
Deferred revenue, less current portion.................. 838 265
Long-term notes payable, less current maturities........ 81
------- --------
Total liabilities................................... 11,831 15,036
Redeemable convertible preferred stock, Series A, $0.001
par value, 868,650 and no shares authorized and
outstanding, respectively.............................. 179 --
Redeemable convertible preferred stock, Series B, $0.001
par value, 2,650,000 and no shares authorized and
outstanding respectively............................... 2,650 --
Redeemable convertible preferred stock, Series C, $0.001
par value, 3,450,000 and no shares authorized and
outstanding, respectively.............................. 10,350 --
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------
<S> <C> <C>
Preferred Stock, $0.001 par value, 5,000,000 shares
authorized, no shares issued or outstanding............
Common stock, $0.001 par value, 50,000,000 shares
authorized, 3,307,511 and 16,470,277 shares
outstanding, respectively.............................. 3 16
Additional paid-in capital.............................. 3,290 179,317
Deferred stock compensation............................. (2,315) (1,359)
Accumulated deficit..................................... (8,202) (5,630)
------- --------
Total stockholders' equity (deficit)................ (7,224) 172,344
------- --------
Total liabilities and stockholders' equity
(deficit).......................................... $17,786 $187,380
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Three Months Ended Ended December
December 31, 31,
------------------- ----------------
1998 1999 1998 1999
--------- --------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
License.............................. $ 4,744 $ 8,521 $ 8,796 $15,963
Maintenance.......................... 760 1,921 1,373 3,499
-------- --------- ------- -------
Total revenues..................... 5,504 10,442 10,169 19,462
-------- --------- ------- -------
Cost of revenue:
Cost of license...................... 96 61 192 151
Cost of maintenance.................. 215 346 441 602
-------- --------- ------- -------
Total cost of revenue.............. 311 407 633 753
-------- --------- ------- -------
Gross margin........................... 5,193 10,035 9,536 18,709
-------- --------- ------- -------
Operating expenses:
Sales and marketing.................. 2,912 5,601 5,391 10,375
Research and development............. 1,418 2,422 2,641 4,583
General and administrative........... 621 1,007 1,197 1,965
Amortization of deferred stock
compensation........................ 46 231 78 521
-------- --------- ------- -------
Abandoned lease recovery............. (295)
Total operating expenses........... 4,997 9,261 9,307 17,149
-------- --------- ------- -------
Operating income....................... 196 774 229 1,560
-------- --------- ------- -------
Interest income........................ 92 1,056 150 1,476
Interest expense....................... (13) (4) (32) (13)
Other income, net...................... 1 3 5 4
-------- --------- ------- -------
Income before income taxes............. 276 1,829 352 3,027
Income tax expense..................... 275 455
-------- --------- ------- -------
Net income............................. 276 1,554 352 2,572
Increase in dividends in arrears on
redeemable convertible preferred
stock................................. (264) -- (528) --
-------- --------- ------- -------
Net income (loss) applicable to common
stockholders.......................... $ 12 $ 1,554 $ (176) $ 2,572
======== ========= ======= =======
Earnings (loss) per common share:
Basic................................ $ 0.00 $ 0.10 $ (0.07) $ 0.20
Diluted.............................. $ 0.00 $ 0.08 $ (0.07) $ 0.15
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Deferred
----------------- Paid-In Stock Accumulated
Number Amount Capital Compensation Deficit Total
---------- ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1999................... 3,307,511 $ 3 $ 3,290 $(2,315) $(8,202) $ (7,224)
Amortization of deferred
stock compensation..... -- -- -- 956 -- 956
Common stock issued upon
exercise of stock
options including tax
benefit................ 538,283 1 1,212 -- -- 1,213
Common stock issued upon
exercise of stock
warrants............... 243,333 -- 316 -- -- 316
Common stock issued in
initial public
offering, net.......... 3,312,500 3 47,486 -- -- 47,489
Conversion of preferred
stock.................. 6,968,650 7 13,172 -- -- 13,179
Common stock issued in
secondary offering,
net.................... 2,100,000 2 113,841 -- -- 113,843
Net income.............. -- -- -- -- 2,572 2,572
---------- --- -------- ------- ------- --------
Balance at December 31,
1999................... 16,470,277 $16 $179,317 $(1,359) $(5,630) $172,344
========== === ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months
Ended December
31,
----------------
1998 1999
------ --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 352 $ 2,572
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 415 569
Noncash compensation expense............................. 78 956
Gain on disposal of assets............................... (1) --
Changes in operating assets and liabilities:
Accounts receivable...................................... 1,427 (472)
Prepaid and other current assets......................... 86 147
Other assets............................................. 80 (7)
Accounts payable......................................... 89 262
Accrued liabilities and other............................ 1,084 1,286
Deferred revenue......................................... 1,040 1,927
------ --------
Net cash provided by operating activities.................... 4,650 7,240
Cash flows from investing activities:
Proceeds from sale of property and equipment............... 6 27
Purchase of property and equipment......................... (301) (2,305)
------ --------
Net cash used in investing activities........................ (295) (2,278)
Cash flows from financing activities:
Proceeds from initial stock offering, net.................. -- 47,489
Proceeds from secondary stock offering, net................ -- 113,843
Proceeds from exercise of stock options, including related
tax benefits.............................................. 141 1,213
Proceeds from exercise of warrants, net.................... -- 316
Payments on long-term debt................................. (129) (322)
Repayment of capital lease................................. (4) (24)
Proceeds from short-term borrowings........................ -- 197
Repayment of short-term borrowings......................... (275) --
------ --------
Net cash provided by (used in) financing activities.......... (267) 162,712
------ --------
Net increase in cash and cash equivalents.................... 4,088 167,674
------ --------
Beginning cash and cash equivalents.......................... 4,575 11,031
------ --------
Ending cash and cash equivalents............................. $8,663 $178,705
====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and in accordance with Form 10-Q and Rule 10.01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited financial statements contained in
this report reflect all adjustments, consisting of only normal recurring
adjustments considered necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented.
Operating results for interim periods are not necessarily indicative of
results for the full year. These unaudited financial statements, footnote
disclosures and other information should be read in conjunction with the
financial statements and the notes thereto included in the Company's audited
financial statements for the year ended June 30, 1999 which are included in
the Company's Registration Statement on Form S-1, as amended, (Registration
No. 333-89635).
2. STOCKHOLDERS' EQUITY
In the period July 1, 1999 through December 31, 1999, options to purchase
538,283 shares of common stock at exercise prices of $0.50 to $15.00 per share
were exercised. At December 31, 1999, there were options outstanding to
purchase 4,161,537 shares of common stock.
On November 10, 1999, the Company sold 2,100,000 shares of its common stock
and existing stockholders of the Company sold 2,500,000 shares of common stock
pursuant to a Registration Statement on Form S-1, as amended, (Registration
No. 333-89635) as filed with the Securities and Exchange Commission and
declared effective on November 10, 1999.
For the periods ended December 31, 1998 and 1999, comprehensive income was
the same as net income.
3. INCOME TAXES
The provision for income tax expense for the three and six months ended
December 31, 1999 was 15% of pre-tax income. The difference in the effective
rate versus the statutory U.S. tax rate is primarily due to the impact of tax
benefits associated with the anticipated utilization of net operating loss
carryforwards during fiscal 2000. The net operating loss carryforwards begin
to expire in 2012 and may be subject to various IRS code limitations.
During the three months ended December 31, 1999, employees exercised stock
options and sold the related shares generating approximately $6.0 million in
tax benefits for the Company. At December 31, 1999, approximately $430,000 of
the tax benefits resulting from stock option exercises and sales were realized
by the Company and accordingly, the Company recorded a decrease in income
taxes payable and an increase in additional paid-in capital for such amount. A
full valuation allowance has been recorded for the remaining unutilized tax
benefits, including net operating loss carryforwards, due to the uncertainty
of the Company's ability to recognize the future benefits of such amounts.
The Company did not record a provision for income taxes in the three or six
month periods ended December 31, 1998, because it had generated net operating
loss carryforwards of approximately $3.5 million since the Company's
inception. A full valuation allowance was recorded due to the uncertainty of
its ability to recognize the future benefits of such losses.
F-46
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
4. EARNINGS PER SHARE
The Company follows the provisions of SFAS No. 128, Earnings Per Share.
Basic net income (loss) per share is computed by dividing net income (loss)
applicable to common stockholders by the weighted average number of shares of
common stock outstanding during the period. Diluted net income (loss) per share
is computed by dividing net income (loss) applicable to common stockholders by
the weighted average number of shares of common stock outstanding, adjusted to
reflect common stock equivalents, such as convertible preferred stock, stock
options and warrants to purchase common stock, to the extent they are dilutive,
less the number of shares that could have been repurchased with the exercise
proceeds using the treasury stock method.
The following table presents the calculation of basic and diluted net income
(loss) per share and pro forma basic and diluted net income per share (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income................... $ 276 $ 1,554 $ 352 $ 2,572
Increase in dividends in
arrears on redeemable
convertible preferred
stock....................... (264) -- (528) --
----------- ----------- ----------- -----------
Net income (loss) applicable
to common stockholders...... $ 12 $ 1,554 $ (176) $ 2,572
=========== =========== =========== ===========
Pro forma net income
applicable to common
stockholders................ $ 276 $ 352
=========== ===========
Shares used in computing:
Basic net income (loss) per
share....................... 2,678,188 15,277,509 2,613,963 12,658,534
=========== =========== =========== ===========
Diluted net income (loss) per
share....................... 5,315,190 18,856,716 2,613,963 17,381,989
=========== =========== =========== ===========
Pro forma basic net income
per share................... 9,646,838 9,582,613
=========== ===========
Pro forma diluted net income
per share................... 12,283,840 12,382,936
=========== ===========
Computation of:
Basic net income (loss) per
share applicable to common
stockholders.............. $ 0.00 $ 0.10 $ (0.07) $ 0.20
=========== =========== =========== ===========
Diluted net income (loss)
per share applicable to
common stockholders....... $ 0.00 $ 0.08 $ (0.07) $ 0.15
=========== =========== =========== ===========
Pro forma basic net income
per share................. $ 0.03 $ 0.04
=========== ===========
Pro forma diluted net
income per share.......... $ 0.02 $ 0.03
=========== ===========
</TABLE>
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
redeemable convertible preferred stock into common stock concurrent with the
closing of the Company's initial public offering in August 1999. Accordingly, a
pro forma calculation for the three and six month periods ended December 31,
1998 assuming the conversion of all outstanding shares of redeemable
convertible preferred stock into common stock upon the Company's initial public
offering using the if-converted method from their respective dates of issuance
is presented.
F-47
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
5. SEGMENT REPORTING
Effective July 1, 1998, the Company adopted SFAS No. 131 Disclosures About
Segments of an Enterprise and Related Information. The adoption of SFAS 131 did
not have a significant effect on the disclosure of segment information as the
Company continues to consider its business activities to be in a single
segment.
6. LITIGATION
The Company received correspondence from Commerce Funding Corporation, one
of its stockholders, alleging that the Company failed to give it proper notice
of its right of first refusal with respect to the proposed resale of 250,000
shares of its common stock by two of its stockholders. The Company filed a
petition on July 1, 1999 seeking a declaratory judgment that the Company had no
liability with respect to Commerce Funding Corporation's claims. On August 2,
1999, the Company, its Chief Executive Officer and Chief Financial Officer were
named as defendants in a complaint filed by Commerce Funding Corporation. On
December 8, 1999, the parties to these actions entered into a Settlement
Agreement and resolved all claims against each other. Total litigation costs to
the Company were approximately $250,000.
F-48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Ganymede Software Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Ganymede Software Inc. at March
31, 1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
May 12, 1999, except as to Note 10,
which is as of March 9, 2000
F-49
<PAGE>
GANYMEDE SOFTWARE INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
--------------------- December 31,
1999 1998 1999
---------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................. $3,059,135 $1,377,550 $2,159,436
Accounts receivable, net of allowance for
uncollectible accounts and returns of
$81,890, $51,000 and $160,000,
respectively............................. 1,556,186 863,317 1,471,067
Prepaid expenses and other assets......... 278,318 287,300 302,760
---------- ---------- ----------
Total current assets.................... 4,893,639 2,528,167 3,933,263
---------- ---------- ----------
Property and equipment, at cost:
Computer and office equipment............. 1,035,527 744,120 1,253,799
Furniture and fixtures.................... 418,799 317,860 424,614
Software.................................. 393,170 244,619 411,516
Leashold improvements..................... 25,683 25,683 36,072
---------- ---------- ----------
Total cost.............................. 1,873,179 1,332,282 2,126,001
Less accumulated depreciation and
amortization............................... 880,917 328,018 1,349,343
---------- ---------- ----------
Net property and equipment.............. 992,262 1,004,264 776,658
---------- ---------- ----------
Other assets:
Intangible assets, net.................... 50,595 29,872 43,108
Security deposits......................... 2,800 7,484 2,800
---------- ---------- ----------
Total other assets...................... 53,395 37,356 45,908
---------- ---------- ----------
Total Assets............................ $5,939,296 $3,569,787 $4,755,829
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
GANYMEDE SOFTWARE INC.
BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
March 31,
------------------------ December 31,
1999 1998 1999
Liabilities and Stockholders' Equity ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable.................. $ 228,462 $ 422,085 $ 123,135
Accrued expenses.................. 376,626 240,735 682,766
Capital lease obligations......... 4,187 40,167 4,495
Current portion of long-term
debt............................. 386,218 149,985 472,843
Deferred revenue.................. 1,196,302 680,802 1,686,112
Deferred rent..................... 14,718 11,012 17,504
Sales tax payable................. 40,917 3,860 45,125
----------- ----------- -----------
Total current liabilities....... 2,247,430 1,548,646 3,031,980
----------- ----------- -----------
Long-term liabilities:
Capital lease obligations,
excluding current portion........ 8,786 12,973 5,375
Long-term debt, excluding current
portion.......................... 650,093 299,969 509,020
Deferred revenue.................. 73,874 41,459 81,549
Other non-current liabilities..... 34,525 63,888 21,356
----------- ----------- -----------
Total long-term liabilities..... 767,278 418,289 617,300
----------- ----------- -----------
Total liabilities............... 3,014,708 1,966,935 3,649,280
----------- ----------- -----------
Commitments and contingencies (Note
6)................................. -- -- --
Stockholders' equity:
Preferred stock, authorized
5,000,000 shares:
Series A convertible preferred
stock at $.001 par value per
share, 1,000,000 shares
designated as Series A
convertible preferred stock,
656,000 shares issued and
outstanding at March 31, 1999
and 1998 and December 31,
1999........................... 656 656 656
Series B convertible preferred
stock at $.001 par value per
share, 1,055,300 shares
designated as Series B
convertible preferred stock,
1,021,516 shares issued and
outstanding at March 31, 1999
and 1998 and December 31,
1999........................... 1,022 1,022 1,022
Series C convertible preferred
stock at $.001 par value per
share, 618,375 shares
designated as Series C
convertible preferred stock,
604,995 shares issued and
outstanding at March 31, 1999
and 1998 and December 31,
1999........................... 605 605 605
Series D convertible preferred
stock at $.001 par value per
share, 1,322,663 shares
designated as Series D
convertible preferred stock,
1,322,663 shares issued and
outstanding at March 31, 1999
and December 31, 1999.......... 1,323 -- 1,323
Common stock at $.001 par value per
share, 10,000,000 shares
authorized, 3,087,238 and 2,975,392
shares issued and outstanding at
March 31, 1999 and 1998,
respectively and 3,203,566 at
December 31, 1999.................. 3,087 2,975 3,204
Additional paid-in capital.......... 10,014,775 4,550,957 10,069,900
Accumulated deficit................. (7,093,895) (2,950,378) (8,967,176)
----------- ----------- -----------
2,927,573 1,605,837 1,109,534
Stock subscriptions receivable...... (2,985) (2,985) (2,985)
----------- ----------- -----------
Total stockholders' equity...... 2,924,588 1,602,852 1,106,549
----------- ----------- -----------
Total liabilities and
stockholders' equity........... $ 5,939,296 $ 3,569,787 $ 4,755,829
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
GANYMEDE SOFTWARE INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
March 31, December 31,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Software................. $ 6,688,029 $ 3,704,873 $ 6,142,823 $ 4,722,819
Services................. 1,314,060 510,403 1,764,413 894,635
----------- ----------- ----------- -----------
Total revenue.......... 8,002,089 4,215,276 7,907,236 5,617,454
----------- ----------- ----------- -----------
Costs and expenses:
Cost of revenue.......... 343,557 112,602 475,125 242,626
Sales and marketing...... 7,352,151 3,538,178 5,599,922 5,560,540
Research and
development............. 3,615,959 2,068,048 2,907,387 2,638,991
General and
administrative.......... 919,840 503,289 805,486 675,702
----------- ----------- ----------- -----------
Total costs and
expenses.............. 12,231,507 6,222,117 9,787,920 9,117,859
----------- ----------- ----------- -----------
Loss from operations... (4,229,418) (2,006,841) (1,880,684) (3,500,405)
----------- ----------- ----------- -----------
Other income (expenses):
Interest income.......... 165,754 61,428 76,890 128,547
Interest expense......... (79,853) (32,923) (69,487) (58,618)
----------- ----------- ----------- -----------
Total other income..... 85,901 28,505 7,403 69,929
----------- ----------- ----------- -----------
Net loss............... $(4,143,517) $(1,978,336) $(1,873,281) $(3,430,476)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
GANYMEDE SOFTWARE INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Preferred
Stock Preferred Preferred Preferred
Series A Stock Series B Stock Series C Stock Series D
Common Stock Convertible Convertible Convertible Convertible Additional
----------------- --------------- ---------------- -------------- ---------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit
--------- ------ ------- ------ --------- ------ ------- ------ --------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
March 31, 1997... 3,000,000 $3,000 665,000 $665 623,151 $ 623 -- $ -- -- $ -- $ 2,090,287 $ (972,042)
Purchase and
retirement of
common stock..... (25,774) (26) (65,698)
Issuance of
common stock
through the
exercise of
options.......... 1,166 1 349
Purchase and
retirement of
Series A
convertible
preferred stock.. (9,000) (9) (21,141)
Issuance of
Series B
convertible
preferred stock,
less $2,857 of
issuance costs... 289,365 290 676,861
Exercise of
warrants to
purchase Series B
convertible
preferred stock.. 109,000 109 165,571
Issuance of
Series C
convertible
preferred stock,
less $6,803...... 604,995 605 1,704,728
Net loss......... (1,978,336)
--------- ------ ------- ---- --------- ------ ------- ---- --------- ------ ----------- -----------
Balance, March
31, 1998......... 2,975,392 2,975 656,000 656 1,021,516 1,022 604,995 605 -- -- 4,550,957 (2,950,378)
Issuance of
Series D
convertible
preferred stock,
less $35,957 of
issuance costs... 1,332,663 1,323 5,438,545
Issuance of
common stock
through the
exercise of
options.......... 111,846 112 25,273
Net loss......... (4,143,517)
--------- ------ ------- ---- --------- ------ ------- ---- --------- ------ ----------- -----------
Balance, March
31, 1999......... 3,087,238 3,087 656,000 656 1,021,516 1,022 604,995 605 1,332,663 1,323 10,014,775 (7,093,895)
Issuance of
common stock
through the
exercise of
options
(unaudited)...... 116,328 117 55,125
Net loss
(unaudited)...... (1,873,281)
--------- ------ ------- ---- --------- ------ ------- ---- --------- ------ ----------- -----------
Balance,
December 31,
1999
(unaudited)..... 3,203,566 $3,204 656,000 $656 1,021,516 $1,022 604,995 $605 1,332,663 $1,323 $10,069,900 $(8,967,176)
========= ====== ======= ==== ========= ====== ======= ==== ========= ====== =========== ===========
<CAPTION>
Stock Total
Subscriptions Stockholders'
Receivable Equity
------------- -------------
<S> <C> <C>
Balance,
March 31, 1997... $(2,985) $ 1,119,548
Purchase and
retirement of
common stock..... (65,724)
Issuance of
common stock
through the
exercise of
options.......... 350
Purchase and
retirement of
Series A
convertible
preferred stock.. (21,150)
Issuance of
Series B
convertible
preferred stock,
less $2,857 of
issuance costs... 677,151
Exercise of
warrants to
purchase Series B
convertible
preferred stock.. 165,680
Issuance of
Series C
convertible
preferred stock,
less $6,803...... 1,705,333
Net loss......... (1,978,336)
------------- -------------
Balance, March
31, 1998......... (2,985) 1,602,852
Issuance of
Series D
convertible
preferred stock,
less $35,957 of
issuance costs... 5,439,868
Issuance of
common stock
through the
exercise of
options.......... 25,385
Net loss......... (4,143,517)
------------- -------------
Balance, March
31, 1999......... (2,985) 2,924,588
Issuance of
common stock
through the
exercise of
options
(unaudited)...... 55,242
Net loss
(unaudited)...... (1,873,281)
------------- -------------
Balance,
December 31,
1999
(unaudited)..... $(2,985) $ 1,106,545
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
GANYMEDE SOFTWARE INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
March 31, December 31,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................. $(4,143,517) $(1,978,336) $(1,873,281) $(3,430,476)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation............. 552,899 256,671 468,426 410,020
Amortization............. 9,997 8,283 10,036 5,936
Changes in assets and
liabilities:
Accrued expenses........ 135,891 162,367 306,140 (7,403)
Accounts receivable..... (692,869) (676,752) 85,119 (454,227)
Prepaid expenses and
other assets........... 8,982 (170,243) (24,442) (60,682)
Security deposits....... 4,684 62,949 -- 3,184
Accounts payable........ (193,623) 292,032 (105,327) (185,144)
Deferred revenue........ 547,915 459,017 497,485 315,685
Deferred rent........... 3,706 34,459 2,786 2,779
Other non-current
liabilities............ (29,363) -- (13,169) (10,382)
Sales tax payable....... 37,057 3,073 4,208 49,635
----------- ----------- ----------- -----------
Net cash used in
operating activities.. (3,758,241) (1,546,480) (642,019) (3,361,075)
----------- ----------- ----------- -----------
Cash flows from investing
activities:
Investment in intangible
assets.................. (30,719) (1,254) (2,549) (10,697)
Purchase of property and
equipment............... (540,898) (883,160) (252,822) (509,343)
----------- ----------- ----------- -----------
Net cash used in
investing activities.. (571,617) (884,414) (255,371) (520,040)
----------- ----------- ----------- -----------
Cash flows from financing
activities:
Proceeds from issuance of
stock:
Common stock............. 25,385 350 55,242 12,550
Series B convertible
preferred stock, net.... -- 842,831 -- --
Series C convertible
preferred stock, net.... -- 1,705,333 -- --
Series D convertible
preferred stock, net.... 5,439,868 -- -- 5,439,868
Payments for the
repurchase of stock:
Common stock............. -- (65,724) -- --
Series A convertible
preferred stock......... -- (21,150) -- --
Repayment of notes
payable to founders..... -- (40,000) -- --
Proceeds from issuance of
long-term debt.......... 586,357 449,954 (54,448) 487,512
Principal payments on
capital lease
obligations............. (40,167) (44,557) (3,103) (38,857)
----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities............ 6,011,443 2,827,037 (2,309) 5,901,073
----------- ----------- ----------- -----------
Net change in cash and
cash equivalents...... 1,681,585 396,143 (899,699) 2,019,958
Cash and cash equivalents
at beginning of period... 1,377,550 981,407 3,059,135 1,377,550
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period......... $ 3,059,135 $ 1,377,550 $ 2,159,436 $ 3,397,508
=========== =========== =========== ===========
Supplemental disclosure of
cash flow information:
Cash paid during the
period for interest..... $ 79,853 $ 39,419 $ 69,487 $ 58,618
=========== =========== =========== ===========
Supplemental schedule of
non-cash investing and
financing activities:
Property and equipment
included in accounts
payable................. $ 10,869 $ 181,132 $ 13,815 $ 7,025
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
GANYMEDE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Description of Business
Ganymede Software Inc. (the "Company") develops, sells and supports
enterprise performance management application software. The Company's first
product, Chariot (R), was released in February 1996, to measure application
traffic performance across network hardware and software systems. The Company"s
second product, Pegasus(TM), an application for active, end-to-end network
response time monitoring, was released in June 1998. The Pegasus product
provides network managers a user's view of network performance and alerts
network managers of performance problems as they arise.
The Company markets its products primarily through both a direct sales force
domestically and indirect channels internationally, though some sales are made
through domestic indirect channels. During fiscal 1999, the Company expanded
its sales organization, placing territory managers and system engineers in the
field to sell directly to customers and manage indirect channels. Domestic
indirect channels include systems integrators, independent sales
representatives and major corporate partners. Internationally, the Company has
built a distribution network by engaging established distributors in various
countries throughout Europe and Asia, which are selling complementary
networking products.
Unaudited Interim Financial Statements
The financial statements as of December 31, 1999 and for the nine month
periods ended December 31, 1999 and 1998 are unaudited and in the opinion of
Company management reflect all adjustments, consisting of only normal recurring
adjustments considered necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented.
Operating results for interim periods are not necessarily indicative of results
for the full year.
Business Risk
The Company faces business risks associated with developing products in a
highly competitive market. The Company's success will be dependent on
delivering high quality products that continue to meet its customers' needs.
Concentration of Credit Risk
The Company's principal financial instruments subject to potential
concentration of credit risk are cash and cash equivalents and accounts
receivable. The Company places cash deposits with federally insured financial
institutions; however, at times deposits have exceeded the amounts insured by
the Federal Deposit Insurance Corporation. Although the Company does not
require collateral for unpaid accounts receivable balances, the Company
performs ongoing credit evaluations to reduce credit risk. The Company provided
an allowance for doubtful accounts and returns of $81,890 and $51,000 at March
31, 1999 and 1998, respectively.
Sales to international customers comprised 16% and 7% of total product sales
during the years ended March 31, 1999 and 1998, respectively. Sales to a single
customer did not exceed 10% of total sales in 1999 or 1998.
F-55
<PAGE>
GANYMEDE SOFTWARE INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates.
Revenue Recognition
Revenue consists primarily of fees for licenses of the Company's software
products and software maintenance fees for these products. Revenues from
software license sales are generally recognized upon shipment, provided that no
significant obligations remain and collection of the resulting receivable is
probable. Maintenance revenues from customer support and software updates are
deferred and recognized ratably over the term of the maintenance period,
generally one year. Revenue from customer training, technical support, and
other services is recognized as the service is performed.
Cost of Revenue
Cost of revenue includes the cost of providing software maintenance
services, license fee related royalties, documentation, packaging and shipping
costs.
Software Development Costs
Direct labor costs and related payroll taxes of producing product masters
incurred subsequent to establishing technological feasibility are capitalized.
Those costs include coding and testing performed subsequent to establishing
technological feasibility. Software production costs for computer software that
is to be used as an integral part of a product or process is charged to expense
until both (a) technological feasibility has been established for the software
and (b) all research and development activities for the other components of the
product or process have been completed. Capitalization of computer software
costs is discontinued when the product is available for general release to
customers. Software development costs are recorded at the lower of unamortized
capitalized costs or net realizable value.
Realization of these costs requires considerable judgment from management
related to the estimated useful lives and anticipated future sales. During
fiscal year 1996, the Company capitalized $6,904 of software costs that are
amortized over five years. There were no software costs capitalized during
fiscal year 1998 or 1999 since costs incurred subsequent to establishment of
technological feasibility were not significant. Amortization of software
development costs for the years ended March 31, 1999 and 1998 was $1,381 each
year and is included in cost of revenue in the statements of operations.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. Cash equivalents are stated at cost and the
carrying amount approximates fair value.
Advertising Expenses
Advertising expenses for the year ended March 31, 1999 and 1998 were
$1,190,886 and $895,050, respectively and were expensed as incurred.
Advertising expenses, as defined in SOP 93-7, include direct mail, print
advertisements, tradeshows, public relations, and promotions.
F-56
<PAGE>
GANYMEDE SOFTWARE INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
Deferred income tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-
line method over estimated useful lives, primarily three years. Expenditures
for maintenance and repairs are charged to operations as incurred; major
expenditures for renewals and betterments are capitalized and depreciated over
their useful lives. The cost and related accumulated depreciation of property
and equipment are removed from the accounts upon retirement or other
disposition and any resulting gain or loss is reflected in operations
Intangible Assets
Intangible assets are recorded at cost, net of accumulated amortization and
consist primarily of patents and trademarks. Patent costs are amortized over
five years beginning with the patent application date. Trademark costs are
amortized over seventeen years beginning with the trademark application date.
Accounting for Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123"), which was
effective for the year ended December 31, 1996. FAS No. 123 allows companies to
either account for stock-based compensation under the provisions of FAS No. 123
or under the provisions of Accounting Principles Board Opinion No. 25 ("APB No.
25"). The Company accounts for its stock-based compensation in accordance with
the provisions of APB No. 25; however, the Company has disclosed in Note 7 the
pro forma effects as if the measurement provisions of FAS No. 123 had been
adopted.
Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB" 101), "Revenue Recognition," which
provides guidance on the recognition, presentation, and disclosure of revenue
in financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the impact of
SAB 101 would have no material effect on the financial position or results of
operations of the Company.
2. Working Capital Line of Credit
A $1,500,000 working capital line of credit ("Working Capital Line") was
executed on October 20, 1998. Borrowings under the Working Capital Line are
permitted through October 28, 1999. Accrued unpaid interest at prime plus .5%
is payable monthly. All outstanding principal plus all accrued unpaid interest
will be payable on October 28, 1999. Advances are secured by equipment that is
being financed as described in Note 3 and accounts receivable. The Working
Capital Line agreement requires the Company to comply with certain restrictive
covenants, which include the maintenance of a minimum tangible net worth, quick
ratio and liquidity ratio, if amounts are outstanding under this line. There
were no advances under this line of credit as of March 31, 1999.
F-57
<PAGE>
GANYMEDE SOFTWARE INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Accrued Expenses
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
March 31,
----------------- December 31,
1999 1998 1999
-------- -------- ------------
(Unaudited)
<S> <C> <C> <C>
Accrued compensation and related costs...... $185,863 $128,692 $288,459
Manufacturer commissions.................... 44,926 68,214 96,312
Accrued sales events........................ 5,000 -- 80,231
Software update shipment costs.............. 34,377 -- 57,916
Relocation expenses......................... 3,672 -- 49,021
Accounting and legal expenses............... 16,638 8,981 23,558
Other....................................... 86,150 34,848 86,503
-------- -------- --------
Total accrued expenses.................. $376,626 $240,735 $682,000
======== ======== ========
</TABLE>
4. Long-Term Debt
During fiscal 1998, the Company borrowed $449,954 against a $450,000 line of
credit for the purchase of equipment under a loan agreement executed on March
19, 1997 (the "Loan Agreement"). Advances were available for 90% of the base
invoice amount of equipment acceptable to the bank through March 19, 1998. The
unpaid principal balance of advances plus interest at prime plus 1.0%, is
payable over thirty-six months beginning April 19, 1998.
On February 28, 1998 the Loan Agreement was modified to allow for an
additional $600,000 line of credit for the purchase of equipment. Advances were
available for 100% of the base invoice amount of equipment acceptable to bank
through December 31, 1998. The unpaid principal balance of advances plus
interest at prime plus 1.0%, is payable over thirty-six months beginning
January 31, 1999. During fiscal 1999, the Company borrowed $600,000 against the
line of credit for the purchase of equipment.
On December 17, 1998, the Company modified the Loan Agreement to allow for
an additional $600,000 line of credit for the purchase of equipment. Advances
are available for 100% of the base invoice amount of equipment approved by the
bank. Up to $120,000 of the aggregate advances is allowable for the purchases
of software assets. Advances are available through June 17, 1999. The unpaid
principal balance of advances plus interest at prime plus 1.0%, is payable over
thirty-six months beginning July 17, 1999. Advances on the loan through March
31, 1999 were $186,341. The lines of credit under the Loan Agreement are
collateralized by the equipment being financed and accounts receivable and are
cross-secured with the working capital line described in Note 2. Upon default
of payments on any of the lines, all will be due in full. The Loan Agreement
requires the Company to comply with certain restrictive covenants which include
the maintenance of a minimum tangible net worth, liquidity ratio and quick
ratio. The Company was in compliance with these covenants at March 31, 1999.
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Years ending March 31,
----------------------
<S> <C>
2000.............................................................. $ 386,218
2001.............................................................. 422,451
2002.............................................................. 212,114
2003.............................................................. 15,528
----------
$1,036,311
==========
</TABLE>
F-58
<PAGE>
GANYMEDE SOFTWARE INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Retirement Plan
During the year ended March 31, 1997, the Company adopted a 401(k)
retirement plan, which allows employees to participate after certain periods of
service with the Company. The Company may voluntarily contribute to the Plan a
discretionary amount of matching contributions as determined by the board of
directors. No company contributions have been made since the adoption of the
plan.
6. Lease Commitments
As of March 31, 1999, the Company leased office space and certain equipment
under various non-cancelable operating and capital leases. Future minimum lease
payments required under the operating and capital leases at March 31, 1999 are
as follows:
<TABLE>
<CAPTION>
Capital Operating
Year ending March 31, Leases Leases
--------------------- ------- ----------
<S> <C> <C>
2000..................................................... $ 5,241 $ 267,397
2001..................................................... 5,241 270,332
2002..................................................... 4,367 276,518
2003..................................................... -- 260,524
------- ----------
Total minimum lease payments............................. 14,849 $1,074,771
==========
Less amount representing interest........................ 1,876
-------
Present value of capital lease obligations............... 12,973
Less current maturity.................................... 4,187
-------
Capital lease obligations, less current maturity......... $ 8,786
=======
</TABLE>
As of March 31, 1999 and 1998, the Company has equipment purchased under
non-cancelable capital leases with a cost of $17,520 and $148,126,
respectively, and accumulated amortization of $5,110 and $95,651, respectively.
Rent expense under operating leases was $248,956 and $185,774 for the years
ended March 31, 1999 and 1998, respectively.
F-59
<PAGE>
GANYMEDE SOFTWARE INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Income Taxes
No provision for federal or state income taxes has been recorded as the
Company has incurred net operating losses since inception.
Significant components of the Company's deferred tax assets and liabilities
at March 31, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Domestic net operating loss carryforwards............ $2,655,712 $1,085,599
Accounts receivable.................................. 32,031 19,949
Accrued expenses..................................... 42,452 42,216
Research and development credit...................... 301,824 42,113
Fixed assets......................................... 8,503 --
Other................................................ 17 --
---------- ----------
Total deferred tax assets.......................... 3,040,539 1,189,877
Valuation allowance for deferred assets............ (3,039,504) (1,174,197)
---------- ----------
Deferred tax assets................................ 1,035 15,680
---------- ----------
Deferred tax liabilities:
Capitalized software................................. 1,035 1,575
Fixed assets......................................... -- 14,105
---------- ----------
Total deferred tax liabilities..................... 1,035 15,680
---------- ----------
Net deferred tax asset (liability)................. $ -- $ --
========== ==========
</TABLE>
For the years ended March 31, 1999 and 1998, the Company provided a full
valuation allowance against its net deferred tax assets since realization of
these benefits could not be reasonably assured.
As of March 31, 1999, the Company has federal net operating loss
carryforwards of approximately $6,785,000 and state net economic loss
carryforwards of approximately $6,817,000 to offset future taxable income. The
federal and state loss carryforwards begin to expire in 2012. The federal net
operating loss carryforwards may be subject to limitation under the rules
regarding a change in stock ownership as determined by the Internal Revenue
Code.
At March 31, 1999, the Company had available approximately $302,000 of
research and development credits. These credits begin to expire in 2012.
Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision for income taxes as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Effective rate....................................... 0% 0%
=========== =========
United States Federal tax at statutory rate.......... $(1,408,796) $(672,634)
State taxes (net of Federal benefit)................. (209,961) (100,110)
Change in valuation reserves......................... 1,865,307 796,931
Research and development credit...................... (259,711) (42,113)
Other................................................ 13,161 17,926
----------- ---------
Provision for income taxes........................... $ -- $ --
=========== =========
</TABLE>
F-60
<PAGE>
GANYMEDE SOFTWARE INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Stockholders' Equity
Capital Structure
On April 17, 1997, the Company amended its capital structure and authorized
10,000,000 shares of common stock with a par value of $.001 per share and
5,000,000 shares of preferred stock. The preferred stock includes 1,000,000
shares designated as Series A convertible preferred stock, 1,055,300 shares
designated as Series B convertible preferred stock, 618,375 shares designated
as Series C convertible preferred stock, and 1,328,503 Series D convertible
preferred stock, all with a par value of $.001 per share. The holders of each
share of common and preferred stock are entitled to voting rights. Incentive
stock options vest 25% in twelve months, after the employee's hire date or the
grant date for additional grants and 2.083% per month thereafter.
Common Stock
Common stock purchased by the founders are subject to a right of first
refusal in favor of the Company before they may be sold.
Common stock purchased by the founders and directors is subject to stock
subscriptions receivable.
Preferred Stock
During the year ended March 31, 1996, the Company issued 665,000 shares of
the 1,000,000 designated shares of Series A convertible preferred stock for
$1.00 per share plus warrants to purchase up to 133,000 shares of common stock
or those securities issued in a subsequent qualified financing at $1.52 per
share. During the years ended March 31, 1998 and 1997, 109,000 and 20,000
warrants were exercised at $1.52 per share, respectively, for the purchase of
Series B preferred stock, while the remaining 4,000 warrants were forfeited.
Between December 26, 1996 and November 21, 1997, the Company issued
1,021,516 shares of the 1,055,300 designated shares of Series B convertible
preferred stock. The shares issued to investors include 892,516 shares issued
at $2.35 per share and 129,000 shares issued through the exercise of warrants
held by Series A preferred stockholders at $1.52 per share as described in the
above note.
Between December 5, 1997 and January 21, 1998, the Company issued 604,995
shares of the 618,375 designated shares of Series C convertible preferred stock
at $2.83 per share.
On June 30, 1998, the Company issued 1,322,663 shares of the 1,328,503
designated shares of Series D convertible preferred stock, convertible into
1,654,327 shares of common, for an effective price of $3.31; however, if
certain performance goals were met by the Company by September 30, 1999, the
conversion rate would be changed such that the effective price per share would
be $4.14. Performance goals were not met by the Company.
The holders of Series A, B, C and D preferred stock are entitled to receive,
before any amount is paid to the holders of common stock, an amount equal to
initial sales price per share plus all accumulated and unpaid dividends
declared by the board of directors in the event of a liquidation. Dividends on
all preferred stock are non-cumulative and declared at the discretion of the
board of directors.
Each share of Series A, B, C and D preferred stock can be converted to
common stock at the option of the holder. Each share together with accumulated
dividends is convertible to common stock at a conversion price of one for one,
subject to adjustment for certain events including the issuance of common stock
at a price less than $1.00 per share.
F-61
<PAGE>
GANYMEDE SOFTWARE INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Each share of Series A, B, C and D preferred stock, together with
accumulated dividends, is automatically converted into shares of common stock
at the effective conversion rate upon closing of an underwritten public
offering.
The holders of Series C and D preferred stock have the right of first
refusal to purchase newly issued stock on a pro rata basis until the date of an
initial public offering. In addition, the Series A, B, C and D preferred shares
are subject to a right of first refusal in favor of the Company and then major
stockholders, before they can be sold.
Common Stock Options
On June 30, 1998 the Company amended its stock option plan (the "Plan") to
reserve 975,000 shares of common stock for incentive and non-statutory stock
option grants to employees, directors or consultants. The option price of each
grant is equal to the fair market value of the Company's common stock at the
date of the grant as determined by the board of directors. Terms of the stock
purchase or stock option agreements, including vesting requirements, are
determined by the board of directors. The maximum term of options granted is
ten years. Incentive stock options vest 25% in twelve months, after the
employee's hire date or the grant date for additional grants and 2.083% per
month thereafter.
A summary of the Plan's activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
-------- --------
<S> <C> <C>
Outstanding at March 31, 1997............................. 307,500 $ .11
Granted................................................... 331,700 .69
Exercised................................................. (1,166) .30
Forfeited................................................. (17,834) .24
--------
Outstanding at March 31, 1998............................. 620,200 .42
Granted................................................... 286,800 2.68
Exercised................................................. (111,846) .23
Forfeited................................................. (81,818) 1.46
--------
Outstanding at March 31, 1999............................. 713,336 $1.24
========
</TABLE>
The weighted average fair value of options granted, as calculated under the
Black-Scholes option pricing model, was $.45 for the year ended March 31, 1999.
As of March 31, 1999, options for 305,797 shares were vested and 148,652 shares
were available for grant after considering options exercised, respectively.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Number Exercise Contractual Number Exercise
Price Outstanding Price Life Exercisable Price
-------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10--$0.50 426,136 $ .27 7.97 years 297,266 $.12
$2.55 238,650 2.55 9.38 years 8,531 2.55
$3.31 48,550 3.31 9.98 years -- --
------- ----- ------- ----
713,336 $1.24 305,797 $.24
======= ===== ======= ====
</TABLE>
Had compensation cost been recognized based on the fair value of the options
at the grant date for awards under the Plan consistent with the method of FAS
No. 123, the Company's net loss would have increased to
F-62
<PAGE>
GANYMEDE SOFTWARE INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
$4,154,813 and $1,983,487 for the years ended March 31, 1999 and March 31,
1998, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants.
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Dividend yield............................................... 0% 0%
Expected volatility.......................................... 0% 0%
Risk-free interest rate...................................... 4.8% 6.25%
Weighted-average expected life............................... 4 years 4 years
</TABLE>
The Company has reserved 4,467,162 common shares as of March 31, 1999 for
possible future issuance in the event that convertible preferred stock is
converted and common stock options are exercised.
9. Related Party Transactions
During the year ended March 31, 1998, the Company was party to a
distribution and license agreement with Network Associates, Inc. (NAI) which
was a stockholder of the Company. The agreement appoints NAI as a non-exclusive
reseller. Total product sales to NAI for the year ended March 31, 1998 was
$1,012,537. Accounts receivable from NAI as of March 31, 1998 was $118,033.
This relationship was terminated during the year ended March 31, 1999.
10. Subsequent Event
On February 26, 2000, the Company entered into a letter of intent to be
acquired by Mission Critical Software, Inc. ("Mission Critical"). The letter of
intent provides for the Company to receive 2.75 million shares of Mission
Critical stock. Such transaction is to be accounted for as a purchase. One the
same date, Mission Critical announced that they would merge with NetIQ, whereby
Mission Critical Shareholders would receive 0.9413 shares of NetIQ common stock
for each Mission Critical Common Share.
F-63
<PAGE>
Annex A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
NETIQ CORP.,
PLANET ACQUISITION CORP.
AND
MISSION CRITICAL SOFTWARE INC.
Dated as of February 26, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I THE MERGER.................................................... 2
1.1 The Merger..................................................... 2
1.2 Effective Time; Closing........................................ 2
1.3 Effect of the Merger........................................... 2
1.4 Formation of Merger Sub; Certificate of Incorporation and
Bylaws of Surviving Corporation................................ 2
1.5 Board of Directors; Officers................................... 2
1.6 Headquarters................................................... 4
1.7 Effect on Capital Stock........................................ 4
1.8 Surrender of Certificates...................................... 5
1.9 No Further Ownership Rights in MCS Common Stock................ 6
1.10 Lost, Stolen or Destroyed Certificates......................... 6
1.11 Tax Consequences............................................... 6
1.12 Taking of Necessary Action; Further Action..................... 6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF MCS........................ 6
2.1 Organization of MCS............................................ 6
2.2 MCS Capital Structure.......................................... 7
2.3 Obligations With Respect to Capital Stock...................... 7
2.4 Authority...................................................... 7
2.5 SEC Filings; MCS Financial Statements.......................... 8
2.6 Absence of Certain Changes or Events........................... 9
2.7 Taxes.......................................................... 9
2.8 MCS Intellectual Property...................................... 10
2.9 Compliance; Permits; Restrictions.............................. 12
2.10 Litigation..................................................... 12
2.11 Brokers' and Finders' Fees..................................... 12
2.12 Employee Benefit Plans......................................... 13
2.13 Absence of Liens and Encumbrances.............................. 14
2.14 Environmental Matters.......................................... 14
2.15 Labor Matters.................................................. 15
2.16 Agreements, Contracts and Commitments.......................... 15
2.17 Statements; Proxy Statement/Prospectus......................... 16
2.18 Board Approval................................................. 16
2.19 State Takeover Statutes........................................ 16
2.20 Fairness Opinion............................................... 17
ARTICLE III REPRESENTATIONS AND WARRANTIES OF NETIQ AND MERGER SUB...... 17
3.1 Organization of NetIQ.......................................... 17
3.2 NetIQ Capital Structure........................................ 17
3.3 Obligations With Respect to Capital Stock...................... 18
3.4 Authority...................................................... 18
3.5 SEC Filings; NetIQ Financial Statements........................ 19
3.6 Absence of Certain Changes or Events........................... 19
3.7 Taxes.......................................................... 19
3.8 NetIQ Intellectual Property.................................... 20
3.9 Compliance; Permits; Restrictions.............................. 22
3.10 Litigation..................................................... 22
3.11 Brokers' and Finders' Fees..................................... 22
3.12 Employee Benefit Plans......................................... 22
3.13 Absence of Liens and Encumbrances.............................. 24
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
3.14 Environmental Matters.......................................... 24
3.15 Labor Matters.................................................. 24
3.16 Agreements, Contracts and Commitments.......................... 24
3.17 Statements; Proxy Statement/Prospectus......................... 25
3.18 Board Approval................................................. 26
3.19 State Takeover Statutes........................................ 26
3.20 Fairness Opinion............................................... 26
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME.......................... 26
4.1 Conduct of Business............................................ 26
ARTICLE V ADDITIONAL AGREEMENTS......................................... 29
5.1 Proxy Statement/Prospectus; Registration Statement; Other
Filings........................................................ 29
5.2 Meetings of Stockholders....................................... 29
5.3 Access to Information; Confidentiality......................... 31
5.4 No Solicitation................................................ 31
5.5 Public Disclosure.............................................. 34
5.6 Legal Requirements............................................. 34
5.7 Third Party Consents........................................... 34
5.8 FIRPTA......................................................... 34
5.9 Notification of Certain Matters................................ 34
5.10 Commercially Reasonable Efforts and Further Assurances......... 35
5.11 Stock Options; Employee Stock Purchase Plans................... 35
5.12 Form S-8....................................................... 35
5.13 Service Credit................................................. 35
5.14 Indemification................................................. 35
5.15 Tax-Free Reorganization........................................ 36
5.16 Nasdaq Listing................................................. 36
5.17 Action by Boards of Directors.................................. 36
5.18 MCS Affiliate Agreement........................................ 36
5.19 Regulatory Filings; Reasonable Efforts......................... 36
5.20 Rights Under the LOI........................................... 36
ARTICLE VI CONDITIONS TO THE MERGER..................................... 37
6.1 Conditions to Obligations of Each Party to Effect the Merger... 37
6.2 Additional Conditions to Obligations of MCS.................... 37
6.3 Additional Conditions to the Obligations of NetIQ and Merger
Sub............................................................ 38
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER........................... 38
7.1 Termination.................................................... 38
7.2 Notice of Termination; Effect of Termination................... 40
7.3 Fees and Expenses.............................................. 40
7.4 Amendment...................................................... 41
7.5 Extension; Waiver.............................................. 41
ARTICLE VIII GENERAL PROVISIONS......................................... 42
8.1 Non-Survival of Representations and Warranties................. 42
8.2 Notices........................................................ 42
8.3 Interpretation; Knowledge...................................... 43
8.4 Counterparts................................................... 43
8.5 Entire Agreement............................................... 43
8.6 Severability................................................... 43
8.7 Other Remedies; Specific Performance........................... 43
8.8 Governing Law.................................................. 44
8.9 Rules of Construction.......................................... 44
8.10 Assignment..................................................... 44
8.11 WAIVER OF JURY TRIAL........................................... 44
</TABLE>
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<C> <S>
Exhibit A NetIQ Stock Option Agreement
Exhibit B MCS Stock Option Agreement
Exhibit C NetIQ Voting Agreement
Exhibit D MCS Voting Agreement
Exhibit E MCS Affiliate Agreement
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of February 26, 2000 among NetIQ Corp., a Delaware corporation
("NetIQ"), Planet Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of NetIQ ("Merger Sub"), and Mission Critical Software Inc., a
Delaware corporation ("MCS").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware General Corporation Law ("Delaware Law"), NetIQ
and MCS will enter into a business combination transaction pursuant to which
Merger Sub will merge with and into MCS (the "Merger").
B. The Board of Directors of NetIQ (i) has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of NetIQ
and fair to, advisable and in the best interests of, NetIQ and its
stockholders, (ii) has approved this Agreement, the Merger and the other
transactions contemplated by this Agreement and (iii) has determined to
recommend that the stockholders of NetIQ vote to approve the issuance of shares
of NetIQ Common Stock (as defined below) to the stockholders of MCS pursuant to
the terms of the Merger.
C. The Board of Directors of MCS (i) has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of MCS
and fair to, advisable and in the best interests of, MCS and its stockholders,
(ii) has approved this Agreement, the Merger and the other transactions
contemplated by this Agreement and (iii) has determined to recommend the
approval of this Agreement and the Merger by the stockholders of MCS.
D. Concurrently with the execution of this Agreement, and as a condition and
inducement to NetIQ's and MCS's willingness to enter into this Agreement, NetIQ
shall execute and deliver a Stock Option Agreement in favor of MCS in
substantially the form attached hereto as Exhibit A (the "NetIQ Stock Option
Agreement") and MCS shall execute and deliver a Stock Option Agreement in favor
of NetIQ in substantially the form attached hereto as Exhibit B (the "MCS Stock
Option Agreement" and, together with the NetIQ Stock Option Agreement, the
"Stock Option Agreements"). The Board of Directors of NetIQ and MCS have each
approved the Stock Option Agreements.
E. Concurrently with the execution of this Agreement, and as a condition and
inducement to NetIQ's and MCS's willingness to enter into this Agreement,
certain affiliates of NetIQ shall enter into a Voting Agreement in
substantially the form attached hereto as Exhibit C (the "NetIQ Voting
Agreements"), and certain affiliates of MCS shall enter into a Voting Agreement
in substantially the form attached hereto as Exhibit D (the "MCS Voting
Agreements" and, collectively with the NetIQ Voting Agreements, the "Voting
Agreements").
F. NetIQ, MCS and Merger Sub desire to make certain representations and
warranties and other agreements in connection with the Merger.
G. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code").
H. MCS is contemporaneously entering into a letter of intent (the "LOI"),
which contemplates MCS's acquisition of Gannymede Software, Inc. The Board of
Directors of MCS has determined that the transactions contemplated by the LOI
are consistent with and in furtherance of its long-term business strategy.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
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ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject
to and upon the terms and conditions of this Agreement and the applicable
provisions of Delaware Law, Merger Sub shall be merged with and into MCS, the
separate corporate existence of Merger Sub shall cease and MCS shall continue
as the surviving corporation. MCS as the surviving corporation after the Merger
is hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement, the
parties hereto shall cause the Merger to be consummated by filing a Certificate
of Merger (the "Certificate of Merger") with the Secretary of State of Delaware
in accordance with the relevant provisions of Delaware Law (the time of such
filing (or such later time as may be agreed in writing by the parties and
specified in the Certificate of Merger) being the "Effective Time") as soon as
practicable on or after the Closing Date (as herein defined). The closing of
the Merger (the "Closing") shall take place at the offices of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, at a time and date to be specified
by the parties, which shall be no later than the second business day after the
satisfaction or waiver of the conditions set forth in Article VI, or at such
other time, date and location as the parties hereto agree in writing (the
"Closing Date").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of
Delaware Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers and
franchises of MCS and Merger Sub shall vest in the Surviving Corporation, and
all debts, liabilities and duties of MCS and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Formation of Merger Sub; Certificate of Incorporation and Bylaws of
Surviving Corporation.
(a) Prior to the Effective Time, MCS and NetIQ agree to take such action as
is necessary to amend this Agreement to add Merger Sub as a party. NetIQ agrees
to take such action as is necessary to cause Merger Sub to perform the various
covenants and agreements contained herein which are contemplated herein to be
performed by Merger Sub. Any covenants or agreements of Merger Sub contained
herein shall be binding on such entity as of the time such entity becomes a
party to this Agreement.
(b) The Certificate of Incorporation of Merger Sub as in effect immediately
prior to the Effective Time shall be the Certificate of Incorporation of the
Surviving Corporation until thereafter amended as provided by law and such
Certificate of Incorporation; provided, however, that the name of the Surviving
Corporation shall be changed to Mission Critical Software Inc.
(c) The Bylaws of Merger Sub as in effect immediately prior to the Effective
Time shall be the Bylaws of the Surviving Corporation until thereafter amended.
(d) At the Effective Time, NetIQ shall take all necessary actions to change
its name to such name as shall be agreed by MCS and NetIQ.
1.5 Board of Directors; Officers.
(a) At or prior to the Effective Time, each of MCS and NetIQ agrees to take
such action as is necessary to cause the number of directors comprising the
full Board of Directors of NetIQ to be nine (9) persons, including (i) four of
the current members of NetIQ's Board of Directors (or, if fewer than four of
the current members of NetIQ's Board of Directors are available or willing to
serve as a director of NetIQ after the Effective Time, such replacement
directors as may be nominated by the remaining members of NetIQ's Board of
Directors in accordance with the Bylaws of NetIQ) (the "NetIQ Designees"), (ii)
four of MCS's current directors nominated by MCS (or, if fewer than four of the
current members of MCS's Board of Directors are available
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or willing to serve as a director of NetIQ after the Effective Time, such
replacement directors as may be nominated by the remaining directors of MCS)
(the "MCS Designees") and (iii) one additional independent director either (A)
mutually selected by the Chairman of MCS and the Chief Executive Officer of
NetIQ at or prior to the Effective Time or (B) selected by the Committee (as
defined in Section 1.5(b)) after the Effective Time (the "Joint Designee").
(b) At the Effective Time, NetIQ's Board of Directors shall constitute a
Compensation and Nominating committee (the "Committee"), which shall include
four members, of whom two shall be MCS Designees (who shall be designated by
Mr. Michael Bennett as Chairman of NetIQ after the Effective Time) and two
shall be NetIQ Designees (who shall be designated by Mr. Ching-Fa Hwang as
Chief Executive Officer of NetIQ after the Effective Time). The Committee shall
have the customary responsibilities of the compensation committee of a publicly
owned company, and shall in addition have the responsibility for recommending
to the NetIQ Board of Directors the renomination of incumbent directors and the
nomination of new candidates.
(c) At or prior to the Effective Time, NetIQ shall take all necessary action
to assure that the MCS Designees and the Joint Designee, if then designated,
shall be appointed to the Board of Directors of NetIQ, and shall be directors
of NetIQ as of the Effective Time.
(d) The NetIQ Board of Directors shall be classified so that each of the
three classes contains at least one MCS Designee and at least one NetIQ
Designee, and so that the Joint Designee is in the class to be elected at the
next annual meeting of NetIQ.
(e) From and after the Effective Time, until successors are duly elected or
appointed and qualified in accordance with applicable law, (i) the directors of
the Surviving Corporation shall be the same as those of NetIQ, and (ii) the
directors of subsidiaries of NetIQ and MCS shall be such persons who were
serving in such capacities immediately prior to the Effective Time.
(f) From and after the Effective Time, and until successors are duly elected
or appointed and qualified in accordance with applicable law, the following
persons shall hold the titles indicated at NetIQ and shall serve at the
pleasure of the Board of Directors of NetIQ:
<TABLE>
<C> <S>
Executive Chairman Michael Bennett
Chief Executive Officer Ching-Fa Hwang
Chief Operating Officer Steve Odom
Chief Financial Officer James Barth
Chief Technical Officer Tom Bernhardt
</TABLE>
These persons shall also hold the same offices in the Surviving Corporation.
Other management positions of NetIQ shall be determined by agreement between
Mr. Bennett and Mr. Hwang in consultation with their respective boards of
directors. In the absence of such agreement, the positions will be filled by
the Board of Directors of NetIQ after the Effective Time.
(g) At or prior to the Effective Time, NetIQ will amend its Bylaws to
delineate the responsibilities associated with the positions described in the
prior paragraph in accordance with the joint recommendation of Mr. Bennett and
Mr. Hwang. In particular, the description of the role of Executive Chairman
shall reflect the parties' agreement that it shall be a full-time position with
active operational responsibilities determined from time to time by the Board
of Directors in consultation with the Chief Executive Officer.
(h) From and after the Effective Time, the existing officers of the
subsidiaries of NetIQ and MCS shall continue to serve in such capacities at the
pleasure of their respective boards of directors.
(i) The Board of Directors of NetIQ after the Effective Time shall use its
best efforts to preserve the proportion and classification of NetIQ and MCS
Designees on the Board of Directors of NetIQ and the Committee as described in
this Section 1.5 for a period of three years from the Effective Time.
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1.6 Headquarters. Following the Effective Time, the headquarters of NetIQ and
the Surviving Corporation shall be maintained at the current headquarters of
NetIQ.
1.7 Effect on Capital Stock. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any
action on the part of Merger Sub, MCS or the holders of any of the following
securities, the following shall occur:
(a) Conversion of MCS Common Stock. Each share of Common Stock, $0.001 par
value per share, of MCS (the "MCS Common Stock") issued and outstanding
immediately prior to the Effective Time (other than any shares of MCS Common
Stock to be canceled pursuant to Section 1.7(b)) will be canceled and
extinguished and automatically converted (subject to Sections 1.7(e) and (f))
into the right to receive 0.9413 (the "Exchange Ratio") shares of Common Stock,
par value $0.001 per share, of NetIQ (the "NetIQ Common Stock") upon surrender
of the certificate representing such share of MCS Common Stock in the manner
provided in Section 1.8 (or in the case of a lost, stolen or destroyed
certificate, upon delivery of an affidavit (and bond, if required) in the
manner provided in Section 1.10).
(b) Cancellation of NetIQ-Owned Stock. Each share of MCS Common Stock held in
the treasury of MCS or owned by Merger Sub, NetIQ or any direct or indirect
wholly-owned subsidiary of MCS or of NetIQ immediately prior to the Effective
Time shall be canceled and extinguished without any conversion thereof.
(c) Stock Options; Employee Stock Purchase Plan. At the Effective Time, all
options to purchase MCS Common Stock then outstanding under MCS's 1997 Stock
Option Plan and 1999 Director Option Plan (collectively, the "MCS Stock Option
Plans") shall be assumed by NetIQ in accordance with Section 5.11 hereof. At
the Effective Time, in accordance with the terms of MCS's 1999 Employee Stock
Purchase Plan (the "MCS ESPP"), all rights to purchase shares of MCS Common
Stock under the MCS ESPP shall be converted (in accordance with the Exchange
Ratio) into rights to purchase shares of NetIQ Common Stock (with the number of
shares rounded down to the nearest whole share and the purchase price rounded
up to the nearest whole cent) and all such converted rights shall be assumed by
NetIQ and the offering periods in effect under the MCS ESPP immediately prior
to the Effective Time shall be continued substantially in accordance with the
terms of the MCS ESPP until the end of the offering periods in effect as of the
Effective Time.
(d) Capital Stock of Merger Sub. Each share of Common Stock, $0.001 par value
per share, of Merger Sub issued and outstanding immediately prior to the
Effective Time shall be converted into and exchanged for one validly issued,
fully paid and nonassessable share of Common Stock, $0.001 par value, of the
Surviving Corporation. Each stock certificate of Merger Sub evidencing
ownership of any such shares shall continue to evidence ownership of such
shares of capital stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect appropriately the effect of any stock split, reverse stock split, stock
dividend (including any dividend or distribution of securities convertible into
NetIQ Common Stock or MCS Common Stock), extraordinary cash dividends,
reorganization, recapitalization, reclassification, combination, exchange of
shares or other like change with respect to NetIQ Common Stock or MCS Common
Stock occurring on or after the date hereof and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of NetIQ Common Stock will be
issued by virtue of the Merger, but in lieu thereof each holder of shares of
MCS Common Stock who would otherwise be entitled to a fraction of a share of
NetIQ Common Stock (after aggregating all fractional shares of NetIQ Common
Stock to be received by such holder) shall receive from NetIQ an amount of cash
(rounded to the nearest whole cent), without interest, equal to the product of
(i) such fraction, multiplied by (ii) the average closing price of one share of
NetIQ Common Stock for the five (5) most recent days that NetIQ Common Stock
has traded ending on the trading day immediately prior to the Effective Time,
as reported on the Nasdaq National Market System ("Nasdaq").
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1.8 Surrender of Certificates.
(a) Exchange Agent. NetIQ shall select an institution reasonably satisfactory
to MCS to act as the exchange agent (the "Exchange Agent") in the Merger.
(b) NetIQ to Provide Common Stock. Promptly after the Effective Time, NetIQ
shall make available to the Exchange Agent for exchange in accordance with this
Article I, the shares of NetIQ Common Stock issuable pursuant to Section 1.7 in
exchange for outstanding shares of MCS Common Stock, and cash in an amount
sufficient for payment in lieu of fractional shares pursuant to Section 1.7(f)
and any dividends or distributions to which holders of shares of MCS Common
Stock may be entitled pursuant to Section 1.8(d).
(c) Exchange Procedures. Promptly after the Effective Time, NetIQ shall cause
the Exchange Agent to mail to each holder of record (as of the Effective Time)
of a certificate or certificates (the "Certificates") which immediately prior
to the Effective Time represented outstanding shares of MCS Common Stock whose
shares were converted into the right to receive shares of NetIQ Common Stock
pursuant to Section 1.7, cash in lieu of any fractional shares pursuant to
Section 1.7(f) and any dividends or other distributions pursuant to Section
1.8(d), (i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent and shall be in such form
and have such other provisions as NetIQ may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of NetIQ Common Stock, cash in lieu of any
fractional shares pursuant to Section 1.7(f) and any dividends or other
distributions pursuant to Section 1.8(d). Upon surrender of Certificates for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by NetIQ, together with such letter of transmittal, duly completed
and validly executed in accordance with the instructions thereto, the holders
of such Certificates shall be entitled to receive in exchange therefor
certificates representing the number of whole shares of NetIQ Common Stock,
payment in lieu of fractional shares which such holders have the right to
receive pursuant to Section 1.7(f) and any dividends or distributions payable
pursuant to Section 1.8(d), and the Certificates so surrendered shall forthwith
be canceled. Until so surrendered, outstanding Certificates will be deemed from
and after the Effective Time, for all corporate purposes, subject to Section
1.8(d) as to the payment of dividends, to evidence the ownership of the number
of full shares of NetIQ Common Stock into which such shares of MCS Common Stock
shall have been so converted and the right to receive an amount in cash in lieu
of the issuance of any fractional shares in accordance with Section 1.7(f) and
any dividends or distributions payable pursuant to Section 1.8(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the date of this Agreement with respect to
NetIQ Common Stock with a record date after the Effective Time will be paid to
the holders of any unsurrendered Certificates with respect to the shares of
NetIQ Common Stock represented thereby until the holders of record of such
Certificates shall surrender such Certificates. Subject to applicable law,
following surrender of any such Certificates, the Exchange Agent shall deliver
to the record holders thereof, without interest, certificates representing
whole shares of NetIQ Common Stock issued in exchange therefor along with
payment in lieu of fractional shares pursuant to Section 1.7(f) hereof and the
amount of any such dividends or other distributions with a record date after
the Effective Time payable with respect to such whole shares of NetIQ Common
Stock.
(e) Transfers of Ownership. If certificates for shares of NetIQ Common Stock
are to be issued in a name other than that in which the Certificates
surrendered in exchange therefor are registered, it will be a condition of the
issuance thereof that the Certificates so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the persons requesting such
exchange will have paid to NetIQ or any agent designated by it any transfer or
other taxes required by reason of the issuance of certificates for shares of
NetIQ Common Stock in any name other than that of the registered holders of the
Certificates surrendered, or established to the satisfaction of NetIQ or any
agent designated by it that such tax has been paid or is not payable.
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(f) No Liability. Notwithstanding anything to the contrary in this Section
1.8, neither the Exchange Agent, NetIQ, the Surviving Corporation nor any party
hereto shall be liable to a holder of shares of NetIQ Common Stock or MCS
Common Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.9 No Further Ownership Rights in MCS Common Stock. All shares of NetIQ
Common Stock issued in accordance with the terms hereof (including any cash
paid in respect thereof pursuant to Section 1.7(f) and 1.8(d)) shall be deemed
to have been issued in full satisfaction of all rights pertaining to such
shares of MCS Common Stock, and there shall be no further registration of
transfers on the records of the Surviving Corporation of shares of MCS Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, such shares of NetIQ
Common Stock, cash for fractional shares, if any, as may be required pursuant
to Section 1.7(f) and any dividends or distributions payable pursuant to
Section 1.8(d); provided, however, that NetIQ may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against NetIQ
or the Exchange Agent with respect to the Certificates alleged to have been
lost, stolen or destroyed.
1.11 Tax Consequences. It is intended by the parties hereto that the Merger
shall constitute a reorganization within the meaning of Section 368 of the
Code. The parties hereto adopt this Agreement as a "plan of reorganization"
within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States
Income Tax Regulations.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of MCS and Merger Sub, the officers and directors of MCS and
Merger Sub will take all such lawful and necessary action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF MCS
MCS represents and warrants to NetIQ and Merger Sub, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by MCS to NetIQ (the "MCS Schedules"), as follows:
2.1 Organization of MCS.
(a) MCS and each of its subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation; has the corporate power and authority to own, lease and operate
its assets and property and to carry on its business as now being conducted and
as proposed to be conducted; and is duly qualified to do business and in good
standing as a foreign corporation in each jurisdiction in which the failure to
be so qualified would have a Material Adverse Effect (as defined in
Section 8.3) on MCS.
(b) MCS has delivered to NetIQ a true and complete list of all of MCS's
subsidiaries, indicating the jurisdiction of incorporation of each subsidiary
and MCS's equity interest therein.
(c) MCS has delivered or made available to NetIQ a true and correct copy of
the Certificate of Incorporation and Bylaws of MCS and similar governing
instruments of each of its material subsidiaries, each
A-6
<PAGE>
]as amended to date, and each such instrument is in full force and effect.
Neither MCS nor any of its subsidiaries is in violation of any of the
provisions of its Certificate of Incorporation or Bylaws or equivalent
governing instruments.
2.2 MCS Capital Structure. The authorized capital stock of MCS consists of
50,000,000 shares of Common Stock, par value $0.001 per share, of which there
were 17,088,809 shares issued and outstanding as of February 22, 2000, and
5,000,000 shares of Preferred Stock, par value $0.001 per share, of which no
shares are issued or outstanding. All outstanding shares of MCS Common Stock
are duly authorized, validly issued, fully paid and nonassessable and are not
subject to preemptive rights created by statute, the Certificate of
Incorporation or Bylaws of MCS or any agreement or document to which MCS is a
party or by which it is bound. As of February 22, 2000, MCS had reserved an
aggregate of 7,273,370 shares of MCS Common Stock, net of exercises, for
issuance to employees, consultants and non-employee directors pursuant to the
MCS Stock Option Plans, under which options are outstanding for an aggregate of
4,176,392 shares and under which 3,096,978 shares are available for grant as of
February 22, 2000. All shares of MCS Common Stock subject to issuance as
aforesaid, upon issuance on the terms and conditions specified in the
instruments pursuant to which they are issuable, would be duly authorized,
validly issued, fully paid and nonassessable. Section 2.2 of the MCS Schedules
lists each outstanding option to acquire shares of MCS Common Stock at February
22, 2000, the name of the holder of such option, the number of shares subject
to such option, the exercise price of such option, the number of shares as to
which such option will have vested at such date, the vesting schedule for such
option and whether the exercisability of such option will be accelerated in any
way by the transactions contemplated by this Agreement or for any other reason,
and indicates the extent of acceleration, if any.
2.3 Obligations With Respect to Capital Stock. Except as set forth in Section
2.2, there are no equity securities, partnership interests or similar ownership
interests of any class of MCS, or any securities exchangeable or convertible
into or exercisable for such equity securities, partnership interests or
similar ownership interests issued, reserved for issuance or outstanding.
Except for securities MCS owns, directly or indirectly through one or more
subsidiaries, there are no equity securities, partnership interests or similar
ownership interests of any class of any subsidiary of MCS, or any security
exchangeable or convertible into or exercisable for such equity securities,
partnership interests or similar ownership interests issued, reserved for
issuance or outstanding. Except as set forth in Section 2.2, there are no
options, warrants, equity securities, partnership interests or similar
ownership interests, calls, rights (including preemptive rights), commitments
or agreements of any character to which MCS or any of its subsidiaries is a
party or by which it is bound obligating MCS or any of its subsidiaries to
issue, deliver or sell, or cause to be issued, delivered or sold, or
repurchase, redeem or otherwise acquire, or cause the repurchase, redemption or
acquisition, of any shares of capital stock of MCS or any of its subsidiaries
or obligating MCS or any of its subsidiaries to grant, extend, accelerate the
vesting of or enter into any such option, warrant, equity security, partnership
interest or similar ownership interest, call, right, commitment or agreement.
There are no registration rights and, to the knowledge of MCS there are no
voting trusts, proxies or other agreements or understandings with respect to
any equity security of any class of MCS or with respect to any equity security,
partnership interest or similar ownership interest of any class of any of its
subsidiaries.
2.4 Authority.
(a) MCS has all requisite corporate power and authority to enter into this
Agreement and the Stock Option Agreements and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby, and the execution
and delivery of the Stock Option Agreements and the consummation of the
transactions contemplated thereby, have been duly authorized by all necessary
corporate action on the part of MCS, subject only to the approval and adoption
of this Agreement and the approval of the Merger by MCS's stockholders and the
filing and recordation of the Certificate of Merger pursuant to Delaware Law. A
vote of the holders of at least a majority of the outstanding shares of the MCS
Common Stock is required for MCS's stockholders to approve and adopt this
Agreement and approve the Merger. This Agreement and the MCS Stock Option
Agreements have been duly executed and delivered by MCS and, assuming the due
authorization, execution and delivery by NetIQ
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and, if applicable, Merger Sub, constitute the valid and binding obligations of
MCS, enforceable in accordance with their respective terms, except as
enforceability may be limited by bankruptcy and other similar laws and general
principles of equity. The execution and delivery of this Agreement and the
Stock Option Agreements by MCS do not, and the performance of this Agreement
and the Stock Option Agreements by MCS will not, (i) conflict with or violate
the Certificate of Incorporation or Bylaws of MCS or the equivalent
organizational documents of any of its subsidiaries, (ii) subject to obtaining
the approval and adoption of this Agreement and the approval of the Merger by
NetIQ's stockholders as contemplated in Section 5.2 and compliance with the
requirements set forth in Section 2.4(b) below, conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to MCS or any of
its subsidiaries or by which its or any of their respective properties is bound
or affected, or (iii) result in any breach of, or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or impair MCS's rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of MCS or any of its subsidiaries pursuant to, any
material note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which MCS or any of its
subsidiaries is a party or by which MCS or any of its subsidiaries or its or
any of their respective properties are bound or affected, except to the extent
such conflict, violation, breach, default, impairment or other effect could
not, in the case of clause (ii) or (iii), individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on MCS.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to MCS in connection with the execution and
delivery of this Agreement and the Stock Option Agreements or the consummation
of the transactions contemplated hereby or thereby, except for (i) the filing
of a Form S-4 Registration Statement (the "Registration Statement") with the
Securities and Exchange Commission ("SEC") in accordance with the Securities
Act of 1933, as amended (the "Securities Act"), (ii) the filing of the
Certificate of Merger with the Secretary of State of Delaware, (iii) the filing
of the Proxy Statement (as defined in Section 2.18) with the SEC in accordance
with the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (iv)
such consents, approvals, orders, authorizations, registrations, declarations
and filings as may be required under applicable federal and state securities
laws and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act") and the laws of any foreign country and (v) such other
consents, authorizations, filings, approvals and registrations which, if not
obtained or made, would not be material to MCS or NetIQ or have a material
adverse effect on the ability of the parties to consummate the Merger.
2.5 SEC Filings; MCS Financial Statements.
(a) MCS has filed all forms, reports and documents required to be filed with
the SEC since August 5, 1999, and has made available to NetIQ such forms,
reports and documents in the form filed with the SEC. All such required forms,
reports and documents (including those that MCS may file subsequent to the date
hereof) are referred to herein as the "MCS SEC Reports." As of their respective
dates, the MCS SEC Reports (i) were prepared in accordance with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the SEC thereunder applicable to such MCS SEC
Reports, and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. None of MCS's subsidiaries is required to file any forms,
reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the MCS SEC Reports (the "MCS
Financials"), including any MCS SEC Reports filed after the date hereof until
the Closing, (i) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (ii) was
prepared in accordance with generally accepted accounting
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principles ("GAAP") applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited interim financial statements, as may be permitted by the SEC on Form
10-Q under the Exchange Act) and (iii) fairly presented the consolidated
financial position of MCS and its subsidiaries at the respective dates thereof
and the consolidated results of its operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which were not, or are not
expected to be, material in amount. The balance sheet of MCS contained in the
MCS SEC Reports as of December 31, 1999 is hereinafter referred to as the "MCS
Balance Sheet." Except as disclosed in the MCS Financials, neither MCS nor any
of its subsidiaries has any liabilities (absolute, accrued, contingent or
otherwise) of a nature required to be disclosed on a balance sheet or in the
related notes to the consolidated financial statements prepared in accordance
with GAAP which are, individually or in the aggregate, material to the
business, results of operations or financial condition of MCS and its
subsidiaries taken as a whole, except liabilities (i) provided for in the MCS
Balance Sheet, or (ii) incurred since the date of the MCS Balance Sheet in the
ordinary course of business consistent with past practices and immaterial in
the aggregate.
(c) MCS has heretofore furnished to NetIQ a complete and correct copy of any
amendments or modifications, which have not yet been filed with the SEC but
which are required to be filed, to agreements, documents or other instruments
which previously had been filed by MCS with the SEC pursuant to the Securities
Act or the Exchange Act.
2.6 Absence of Certain Changes or Events. Since the date of the MCS Balance
Sheet, there has not been: (i) any Material Adverse Effect on MCS, (ii) any
material change by MCS in its accounting methods, principles or practices,
except as required by concurrent changes in GAAP, or (iii) any revaluation by
MCS of any of its assets, including, without limitation, writing down the value
of capitalized inventory or writing off notes or accounts receivable other than
in the ordinary course of business.
2.7 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or "Taxes"
refers to any and all federal, state, local and foreign taxes, assessments and
other governmental charges, duties, impositions and liabilities relating to
taxes, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts and any obligations under any agreements or arrangements with
any other person with respect to such amounts and including any liability for
taxes of a predecessor entity.
(b) Tax Returns and Audits.
(i) MCS and each of its subsidiaries have timely filed all federal,
state, local and foreign returns, estimates, information statements and
reports ("Returns") relating to Taxes required to be filed by MCS and each
of its subsidiaries with any Tax authority, except such Returns which are
not material to MCS. MCS and each of its subsidiaries have paid all Taxes
shown to be due on such Returns.
(ii) MCS and each of its subsidiaries as of the Effective Time will have
withheld with respect to its employees all federal and state income taxes,
Taxes pursuant to the Federal Insurance Contribution Act, Taxes pursuant to
the Federal Unemployment Tax Act and other Taxes required to be withheld,
except such Taxes which are not material to MCS.
(iii) Neither MCS nor any of its subsidiaries has been delinquent in the
payment of any material Tax nor is there any material Tax deficiency
outstanding, proposed or assessed against MCS or any of its subsidiaries,
nor has MCS or any of its subsidiaries executed any unexpired waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax.
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(iv) No audit or other examination of any Return of MCS or any of its
subsidiaries by any Tax authority is presently in progress, nor has MCS or
any of its subsidiaries been notified of any request for such an audit or
other examination.
(v) No adjustment relating to any Returns filed by MCS or any of its
subsidiaries has been proposed in writing formally or informally by any Tax
authority to MCS or any of its subsidiaries or any representative thereof.
(vi) Neither MCS nor any of its subsidiaries has any liability for any
material unpaid Taxes which has not been accrued for or reserved on MCS
Balance Sheet in accordance with GAAP, whether asserted or unasserted,
contingent or otherwise, which is material to MCS, other than any liability
for unpaid Taxes that may have accrued since December 31, 1999 in
connection with the operation of the business of MCS and its subsidiaries
in the ordinary course.
(vii) There is no contract, agreement, plan or arrangement to which MCS
or any of its subsidiaries is a party as of the date of this Agreement,
including but not limited to the provisions of this Agreement, covering any
employee or former employee of MCS or any of its subsidiaries that,
individually or collectively, would reasonably be expected to give rise to
the payment of any amount that would not be deductible pursuant to Sections
280G, 404 or 162(m) of the Code. There is no contract, agreement, plan or
arrangement to which MCS is a party or by which it is bound to compensate
any individual for excise taxes paid pursuant to Section 4999 of the Code.
(viii) Neither MCS nor any of its subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as defined in Section 341(f)(4) of the Code) owned by MCS or any of its
subsidiaries.
(ix) Neither MCS nor any of its subsidiaries is party to or has any
obligation under any tax-sharing, tax indemnity or tax allocation agreement
or arrangement.
(x) None of MCS's or its subsidiaries' assets are tax exempt use property
within the meaning of Section 168(h) of the Code.
2.8 MCS Intellectual Property. For the purposes of this Agreement, the
following terms have the following definitions:
"Intellectual Property" shall mean any or all of the following and all rights
in, arising out of, or associated therewith: (i) all United States,
international and foreign patents and applications therefor and all reissues,
divisions, renewals, extensions, provisionals, continuations and continuations-
in-part thereof; (ii) all inventions (whether patentable or not), invention
disclosures, improvements, trade secrets, proprietary information, know how,
technology, technical data and customer lists, and all documentation relating
to any of the foregoing; (iii) all copyrights, copyrights registrations and
applications therefor, and all other rights corresponding thereto throughout
the world; (iv) all industrial designs and any registrations and applications
therefor throughout the world; (v) all trade names, logos, common law
trademarks and service marks, trademark and service mark registrations and
applications therefor throughout the world; (vi) all databases and data
collections and all rights therein throughout the world; (vii) all moral and
economic rights of authors and inventors, however denominated, throughout the
world, and (viii) any similar or equivalent rights to any of the foregoing
anywhere in the world.
"MCS Intellectual Property" shall mean any Intellectual Property that is
owned by, or exclusively licensed to, MCS.
"Registered Intellectual Property" means all United States, international and
foreign: (i) patents and patent applications (including provisional
applications); (ii) registered trademarks, applications to register trademarks,
intent-to-use applications, or other registrations or applications related to
trademarks; (iii) registered
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copyrights and applications for copyright registration; and (iv) any other
Intellectual Property that is the subject of an application, certificate,
filing, registration or other document issued, filed with, or recorded by any
state, government or other public legal authority.
"MCS Registered Intellectual Property" means all of the Registered
Intellectual Property owned by, or filed in the name of, MCS or any of its
subsidiaries.
(a) Section 2.8(a) of the MCS Schedules is a complete and accurate list of
all MCS Registered Intellectual Property and specifies, where applicable, the
jurisdictions in which each such item of MCS Registered Intellectual Property
has been issued or registered.
(b) No MCS Intellectual Property or product or service of MCS or any of its
subsidiaries is subject to any proceeding or outstanding decree, order,
judgment, contract, license, agreement, or stipulation restricting in any
manner the use, transfer, or licensing thereof by MCS or any of its
subsidiaries, or which may affect the validity, use or enforceability of such
MCS Intellectual Property.
(c) MCS owns and has good and exclusive title to, or has license (sufficient
for the conduct of its business as currently conducted and as proposed to be
conducted), each material item of MCS Intellectual Property or other
Intellectual Property used by MCS free and clear of any lien or encumbrance
(excluding licenses and related restrictions); and MCS is the exclusive owner
of all trademarks and trade names used in connection with the operation or
conduct of the business of MCS and its subsidiaries, including the sale of any
products or the provision of any services by MCS and its subsidiaries.
(d) MCS owns exclusively, and has good title to, all copyrighted works that
are MCS products or which MCS or any of its subsidiaries otherwise expressly
purports to own.
(e) To the extent that any material Intellectual Property has been developed
or created by a third party for MCS or any of its subsidiaries, MCS has a
written agreement with such third party with respect thereto and MCS thereby
either (i) has obtained ownership of, and is the exclusive owner of, or (ii)
has obtained a license (sufficient for the conduct of its business as currently
conducted and as proposed to be conducted) to all such third party's
Intellectual Property in such work, material or invention by operation of law
or by valid assignment, to the fullest extent it is legally possible to do so.
(f) Neither MCS nor any of its subsidiaries has transferred ownership of, or
granted any exclusive license with respect to, any Intellectual Property that
is or was material MCS Intellectual Property, to any third party.
(g) To the knowledge of MCS, the operation of the business of MCS and its
subsidiaries as such business currently is conducted, including MCS's and its
subsidiaries' design, development, manufacture, marketing and sale of the
products or services of MCS and its subsidiaries (including products currently
under development) has not, does not and will not infringe or misappropriate
the Intellectual Property of any third party or, to its knowledge, constitute
unfair competition or trade practices under the laws of any jurisdiction.
(h) Neither MCS nor any of its subsidiaries has received notice from any
third party that the operation of the business of MCS or any of its
subsidiaries or any act, product or service of MCS or any of its subsidiaries,
infringes or misappropriates the Intellectual Property of any third party or
constitutes unfair competition or trade practices under the laws of any
jurisdiction.
(i) To the knowledge of MCS, no person has or is infringing or
misappropriating any MCS Intellectual Property.
(j) MCS and each of its subsidiaries has taken reasonable steps to protect
MCS's and its subsidiaries' rights in MCS's confidential information and trade
secrets that it wishes to protect or any trade secrets or confidential
information of third parties provided to MCS or any of its subsidiaries, and,
without limiting the foregoing, each of MCS and its subsidiaries has and
enforces a policy requiring each employee and contractor
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to execute a proprietary information/confidentiality agreement substantially in
the form provided to NetIQ and all current and former employees and contractors
of MCS and any of its subsidiaries have executed such an agreement, except
where the failure to do so is not reasonably expected to be material to MCS.
(k) All of MCS's and its subsidiaries' products (including products currently
under development) (i) will record, store, process, calculate and present
calendar dates falling on and after (and if applicable, spans of time
including) January 1, 2000, and will calculate any information dependent on or
relating to such dates in the same manner, and with the same functionality,
data integrity and performance, as the products record, store, process,
calculate and present calendar dates on or before December 31, 1999, or
calculate any information dependent on or relating to such dates (collectively,
"Year 2000 Compliant"), (ii) will lose no functionality with respect to the
introduction of records containing dates falling on or after January 1, 2000,
and (iii) will be interoperable with other products used and distributed by
NetIQ that may reasonably deliver records to MCS's or any of its subsidiaries'
products or receive records from MCS's or any of its subsidiaries' products, or
interact with MCS's or any of its subsidiaries' products. All of MCS's or its
subsidiaries' Information Technology (as defined below) is Year 2000 Compliant,
and will not cause an interruption in the ongoing operations of MCS's or any of
its subsidiaries' business on or after January 1, 2000. For purposes of the
foregoing, the term "Information Technology" shall mean and include all
software, hardware, firmware, telecommunications systems, network systems,
embedded systems and other systems, components and/or services (other than
general utility services including gas, electric, telephone and postal) that
are owned or used by MCS or any of its subsidiaries in the conduct of their
business, or purchased by MCS or any of its subsidiaries from third-party
suppliers.
2.9 Compliance; Permits; Restrictions.
(a) Neither MCS nor any of its subsidiaries is, in any material respect, in
conflict with, or in default or violation of (i) any law, rule, regulation,
order, judgment or decree applicable to MCS or any of its subsidiaries or by
which its or any of their respective properties is bound or affected, or (ii)
any material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which MCS or
any of its subsidiaries is a party or by which MCS or any of its subsidiaries
or its or any of their respective properties is bound or affected. To the
knowledge of MCS, no investigation or review by any Governmental Entity is
pending or threatened against MCS or its subsidiaries, nor has any Governmental
Entity indicated an intention to conduct the same. There is no material
agreement, judgment, injunction, order or decree binding upon MCS or any of its
subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of MCS or any of its
subsidiaries, any acquisition of material property by MCS or any of its
subsidiaries or the conduct of business by MCS as currently conducted.
(b) MCS and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities which are
material to the operation of the business of MCS (collectively, the "MCS
Permits"). MCS and its subsidiaries are in compliance in all material respects
with the terms of the MCS Permits.
2.10 Litigation. As of the date of this Agreement, there is no action, suit,
proceeding, claim, arbitration or investigation pending, or as to which MCS or
any of its subsidiaries has received any notice of assertion nor, to MCS's
knowledge, is there a threatened action, suit, proceeding, claim, arbitration
or investigation against MCS or any of its subsidiaries which reasonably would
be likely to be material to MCS, or which in any manner challenges or seeks to
prevent, enjoin, alter or delay any of the transactions contemplated by this
Agreement.
2.11 Brokers' and Finders' Fees. Except for fees payable to Chase Securities
Inc. pursuant to engagement letters dated December 7, 1999 and February 21,
2000, copies of which have been provided to NetIQ, MCS has not incurred, nor
will it incur, directly or indirectly, any liability for brokerage or finders'
fees or agents' commissions or any similar charges in connection with this
Agreement or any transaction contemplated hereby.
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2.12 Employee Benefit Plans.
(a) All employee compensation, incentive, fringe or benefit plans, programs,
policies, commitments, agreements or other arrangements (whether or not set
forth in a written document and including, without limitation, all "employee
benefit plans" within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) covering any active or
former employee, director or consultant of MCS ("MCS Employee" which shall for
this purpose mean an employee of MCS or an Affiliate (as defined below)), any
subsidiary of MCS or any trade or business (whether or not incorporated) which
is a member of a controlled group or which is under common control with MCS
within the meaning of Section 414 of the Code (an "Affiliate"), or with respect
to which MCS has or, to its knowledge, may in the future have liability, are
listed in Section 2.12(a) of the MCS Schedules (the "MCS Plans"). MCS has
provided or will make available to NetIQ: (i) correct and complete copies of
all documents embodying each MCS Plan including (without limitation) all
amendments thereto, all related trust documents, and all material written
agreements and contracts relating to each such MCS Plan; (ii) the most recent
annual reports (Form Series 5500 and all schedules and financial statements
attached thereto), if any, required under ERISA or the Code in connection with
each MCS Plan; (iii) the most recent summary plan description together with the
summary(ies) of material modifications thereto, if any, required under ERISA
with respect to each MCS Plan; (iv) all IRS determination, opinion,
notification and advisory letters; (v) all material correspondence to or from
any governmental agency relating to any MCS Plan; (vi) all forms and related
notices required under the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA"); (vii) the most recent discrimination tests for each
MCS Plan; (viii) the most recent actuarial valuations, if any, prepared for
each MCS Plan; (ix) if the MCS Plan is funded, the most recent annual and
periodic accounting of the MCS Plan assets; and (x) all communication to MCS
Employees relating to any MCS Plan and any proposed MCS Plan, in each case,
relating to any amendments, terminations, establishments, increases or
decreases in benefits, acceleration of payments or vesting schedules, or other
events which would result in any material liability to MCS or any Affiliate.
(b) Each MCS Plan has been maintained and administered in all material
respects in compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations (foreign or domestic),
including but not limited to ERISA and the Code, which are applicable to such
MCS Plans. No suit, action or other litigation (excluding claims for benefits
incurred in the ordinary course of MCS Plan activities) has been brought, or to
the knowledge of MCS, is threatened, against or with respect to any such MCS
Plan. There are no audits, inquiries or proceedings pending or, to the
knowledge of MCS, threatened by the Internal Revenue Service (the "IRS") or
Department of Labor (the "DOL") with respect to any MCS Plans. All
contributions, reserves or premium payments required to be made or accrued as
of the date hereof to the MCS Plans have been timely made or accrued. Any MCS
Plan intended to be qualified under Section 401(a) of the Code and each trust
intended to qualify under Section 501(a) of the Code (i) has either obtained a
favorable determination, notification, advisory and/or opinion letter, as
applicable, as to its qualified status from the IRS or still has a remaining
period of time under applicable Treasury Regulations or IRS pronouncements in
which to apply for such letter and to make any amendments necessary to obtain a
favorable determination, and (ii) incorporates or has been amended to
incorporate all provisions required to comply with the Tax Reform Act of 1986
and subsequent legislation. To the knowledge of MCS, no condition or
circumstance exists giving rise to a material likelihood that any such MCS Plan
would not be treated as qualified by the IRS. MCS does not have any plan or
commitment to establish any new MCS Plan, to modify any MCS Plan (except to the
extent required by law or to conform any such MCS Plan to the requirements of
any applicable law, in each case as previously disclosed to NetIQ in writing,
or as required by the terms of any MCS Plan or this Agreement), or to enter
into any new MCS Plan. Each MCS Plan can be amended, terminated or otherwise
discontinued after the Effective Time in accordance with its terms, without
liability to NetIQ, MCS or any of its Affiliates (other than ordinary
administration expenses).
(c) Neither MCS, any of its subsidiaries, nor any of their Affiliates has at
any time ever maintained, established, sponsored, participated in, or
contributed to any plan subject to Title IV of ERISA or Section 412 of the Code
and at no time has MCS contributed to or been requested to contribute to any
"multiemployer
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plan," as such term is defined in ERISA. Neither MCS, any of its subsidiaries,
nor any officer or director of MCS or any of its subsidiaries is subject to any
material liability or penalty under Section 4975 through 4980B of the Code or
Title I of ERISA. No "prohibited transaction," within the meaning of Section
4975 of the Code or Sections 406 and 407 of ERISA, and not otherwise exempt
under Section 4975 of the Code and Section 408 of ERISA, has occurred with
respect to any MCS Plan which could subject MCS or its Affiliates to material
liability.
(d) None of the MCS Plans promises or provides retiree medical or other
retiree welfare benefits to any person except as required by applicable law,
and neither MCS nor any of its subsidiaries has represented, promised or
contracted (whether in oral or written form) to provide such retiree benefits
to any MCS Employee, former employee, director, consultant or other person,
except to the extent required by statute.
(e) Except as would not have a material effect, MCS is in compliance in all
material respects with all applicable material foreign, federal, state and
local laws, rules and regulations respecting employment, employment practices,
terms and conditions of employment and wages and hours.
(f) Neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby will (i) result in any payment
(including severance, unemployment compensation, golden parachute, bonus or
otherwise) becoming due to any stockholder, director or MCS Employee or any of
its subsidiaries under any MCS Plan or otherwise, (ii) materially increase any
benefits otherwise payable under any MCS Plan, or (iii) result in the
acceleration of the time of payment or vesting of any such benefits.
(g) Each MCS International Employee Plan (as defined below) has been
established, maintained and administered in compliance with its terms and
conditions and with the requirements prescribed by any and all statutory or
regulatory laws that are applicable to such MCS International Employee Plan.
Furthermore, no MCS International Employee Plan has unfunded liabilities that,
as of the Effective Time, will not be offset by insurance or fully accrued.
Except as required by law, no condition exists that would prevent MCS or NetIQ
from terminating or amending any MCS International Employee Plan at any time
for any reason. For purposes of this Section "MCS International Employee Plan"
shall mean each MCS Plan that has been adopted or maintained by MCS or any of
its subsidiaries, whether informally or formally, for the benefit of current or
former employees of MCS or any of its subsidiaries outside the United States.
2.13 Absence of Liens and Encumbrances. MCS and each of its subsidiaries has
good and valid title to, or, in the case of leased properties and assets, valid
leasehold interests in, all of its material tangible properties and assets,
real, personal and mixed, used in its business, free and clear of any liens or
encumbrances except as reflected in the MCS Financials and except for liens for
taxes not yet due and payable and such imperfections of title and encumbrances,
if any, which would not be material to MCS.
2.14 Environmental Matters.
(a) Hazardous Materials Activities. Except as would not reasonably be likely
to result in a material liability to MCS (in any individual case or in the
aggregate), (i) neither MCS nor any of its subsidiaries has transported,
stored, used, manufactured, disposed of, released or exposed its employees or
others to pollutants, contaminants, wastes, any toxic, radioactive or otherwise
hazardous materials ("Hazardous Materials") in violation of any law in effect
on or before the Closing Date, and (ii) neither MCS nor any of its subsidiaries
has disposed of, transported, sold, used, released, exposed its employees or
others to or manufactured any product containing a Hazardous Material
(collectively, "Hazardous Materials Activities") in violation of any rule,
regulation, treaty or statute promulgated by any Governmental Entity in effect
prior to or as of the date hereof to prohibit, regulate or control Hazardous
Materials or any Hazardous Material Activity.
(b) Environmental Liabilities. No action, proceeding, revocation proceeding,
amendment procedure, writ, injunction or claim is pending, or to MCS's
knowledge, threatened concerning any MCS Permit relating to any environmental
matter, Hazardous Material or any Hazardous Materials Activity of MCS or any of
its
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subsidiaries. MCS is not aware of any fact or circumstance which could involve
MCS or any of its subsidiaries in any environmental litigation or impose upon
MCS or any of its subsidiaries any environmental liability.
2.15 Labor Matters. (i) There are no controversies pending or, to the
knowledge of each of MCS and its respective subsidiaries, threatened, between
MCS or any of its subsidiaries and any of their respective employees; (ii) as
of the date of this Agreement, neither MCS nor any of its subsidiaries is a
party to any collective bargaining agreement or other labor union contract
applicable to persons employed by MCS or its subsidiaries nor does MCS or its
subsidiaries know of any activities or proceedings of any labor union to
organize any such employees; and (iii) as of the date of this Agreement,
neither MCS nor any of its subsidiaries has any knowledge of any strikes,
slowdowns, work stoppages or lockouts, or threats thereof, by or with respect
to any employees of MCS or any of its subsidiaries.
2.16 Agreements, Contracts and Commitments. Neither Company nor any of its
subsidiaries is a party to or is bound by:
(a) any employment or consulting agreement, contract or commitment with any
officer or director or higher level employee or member of MCS's Board of
Directors, other than those that are terminable by MCS or any of its
subsidiaries on no more than thirty (30) days' notice without liability or
financial obligation to MCS;
(b) any agreement or plan, including, without limitation, any stock option
plan, stock appreciation right plan or stock purchase plan, any of the benefits
of which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on
the basis of any of the transactions contemplated by this Agreement;
(c) any agreement of indemnification or any guaranty other than any agreement
of indemnification entered into in connection with the sale or license of
software products in the ordinary course of business;
(d) any agreement, contract or commitment containing any covenant limiting in
any respect the right of MCS or any of its subsidiaries to engage in any line
of business or to compete with any person or granting any exclusive
distribution rights;
(e) any agreement, contract or commitment currently in force relating to the
disposition or acquisition by MCS or any of its subsidiaries after the date of
this Agreement of a material amount of assets not in the ordinary course of
business or pursuant to which MCS has any material ownership interest in any
corporation, partnership, joint venture or other business enterprise other than
MCS's subsidiaries;
(f) any dealer, distributor, joint marketing or development agreement
currently in force under which MCS or any of its subsidiaries have continuing
material obligations to jointly market any product, technology or service and
which may not be canceled without penalty upon notice of ninety (90) days or
less, or any material agreement pursuant to which MCS or any of its
subsidiaries have continuing material obligations to jointly develop any
intellectual property that will not be owned, in whole or in part, by MCS or
any of its subsidiaries and which may not be canceled without penalty upon
notice of ninety (90) days or less;
(g) any agreement, contract or commitment currently in force to provide
source code to any third party for any product or technology that is material
to MCS and its subsidiaries taken as a whole;
(h) any agreement, contract or commitment currently in force to license any
third party to manufacture or reproduce any MCS product, service or technology
or any agreement, contract or commitment currently in force to sell or
distribute any MCS products, service or technology except agreements with
distributors or sales representative in the normal course of business
cancelable without penalty upon notice of ninety (90) days or less and
substantially in the form previously provided to NetIQ;
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(i) any mortgages, indentures, guarantees, loans or credit agreements,
security agreements or other agreements or instruments relating to the
borrowing of money or extension of credit;
(j) any settlement agreement entered into within five (5) years prior to the
date of this Agreement; or
(k) any other agreement, contract or commitment that has a value of
$2,000,000 or more individually, other than the transactions contemplated by
the LOI.
Neither MCS nor any of its subsidiaries, nor to MCS's knowledge any other
party to a MCS Contract (as defined below), is in breach, violation or default
under, and neither MCS nor any of its subsidiaries has received written notice
that it has breached, violated or defaulted under, any of the material terms or
conditions of any of the agreements, contracts or commitments to which MCS or
any of its subsidiaries is a party or by which it is bound that are required to
be disclosed in the MCS Schedules (any such agreement, contract or commitment,
a "MCS Contract") in such a manner as would permit any other party to cancel or
terminate any such MCS Contract, or would permit any other party to seek
material damages or other remedies (for any or all of such breaches, violations
or defaults, in the aggregate).
2.17 Statements; Proxy Statement/Prospectus. None of the information supplied
or to be supplied by MCS for inclusion or incorporation by reference in (i) the
Registration Statement (as defined in Section 2.4(b)) will at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading and (ii)
the proxy statement/prospectus to be sent to the stockholders of MCS and
stockholders of NetIQ in connection with the meeting of MCS's stockholders to
consider the approval and adoption of this Agreement and the approval of the
Merger (the "MCS Stockholders' Meeting") and in connection with the meeting of
NetIQ's stockholders to consider the approval of the issuance of shares of
NetIQ Common Stock pursuant to the terms of the Merger (the "NetIQ
Stockholders' Meeting") (such proxy statement/prospectus as amended or
supplemented is referred to herein as the "Proxy Statement") shall not, on the
date the Proxy Statement is first mailed to MCS's stockholders and NetIQ's
stockholders, at the time of the MCS Stockholders' Meeting or the NetIQ
Stockholders' Meeting and at the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the MCS
Stockholders' Meeting or the NetIQ Stockholders' Meeting which has become false
or misleading. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder. If at any time prior to the Effective Time, any event relating to
MCS or any of its affiliates, officers or directors should be discovered by MCS
which should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, MCS shall promptly inform NetIQ.
Notwithstanding the foregoing, MCS makes no representation or warranty with
respect to any information supplied by NetIQ or Merger Sub which is contained
in any of the foregoing documents.
2.18 Board Approval. The Board of Directors of MCS has, as of the date of
this Agreement, (i) determined that the Merger is fair to, advisable and in the
best interests of MCS and its stockholders, (ii) determined to recommend that
the stockholders of MCS approve this Agreement and (iii) duly approved the
Merger, this Agreement and the transactions contemplated hereby.
2.19 State Takeover Statutes. The Board of Directors of MCS has approved the
Merger, this Agreement, the Stock Option Agreements, the NetIQ Voting Agreement
and the transactions contemplated hereby and thereby, and such approval is
sufficient to render inapplicable to the Merger, this Agreement, the Stock
Option Agreements, the NetIQ Voting Agreement and the transactions contemplated
hereby and thereby the provisions of Section 203 of Delaware Law to the extent,
if any, such section is applicable to the Merger, this Agreement, the Stock
Option Agreements, the NetIQ Voting Agreement and the transactions contemplated
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hereby and thereby. No other state takeover statute or similar statute or
regulation applies to or purports to apply to the Merger, this Agreement, the
Stock Option Agreements, the NetIQ Voting Agreement or the transactions
contemplated hereby and thereby.
2.20 Fairness Opinion. MCS has received a written opinion from Chase
Securities Inc., dated as of the date hereof, to the effect that as of the date
hereof, the Exchange Ratio is fair to MCS's stockholders from a financial point
of view and has delivered to NetIQ a copy of such opinion.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NETIQ AND MERGER SUB
NetIQ and Merger Sub represent and warrant to MCS, subject to the exceptions
specifically disclosed in the disclosure letter supplied by NetIQ to MCS (the
"NetIQ Schedules"), as follows:
3.1 Organization of NetIQ.
(a) NetIQ and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation; has the corporate power and authority to own, lease and operate
its assets and property and to carry on its business as now being conducted and
as proposed to be conducted; and is duly qualified to do business and in good
standing as a foreign corporation in each jurisdiction in which the failure to
be so qualified would have a Material Adverse Effect (as defined in
Section 8.3) on NetIQ.
(b) NetIQ has delivered to MCS a true and complete list of all of NetIQ's
subsidiaries, indicating the jurisdiction of incorporation of each subsidiary
and NetIQ's equity interest therein.
(c) NetIQ has delivered or made available to MCS a true and correct copy of
the Certificate of Incorporation and Bylaws of NetIQ and similar governing
instruments of each of its material subsidiaries, each as amended to date, and
each such instrument is in full force and effect. Neither NetIQ nor any of its
subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation or Bylaws or equivalent governing instruments.
3.2 NetIQ Capital Structure. The authorized capital stock of NetIQ consists
of 100,000,000 shares of Common Stock, par value $0.001 per share, of which
17,609,978 shares are issued and outstanding as of February 24, 2000 and
5,000,000 shares of Preferred Stock, par value $0.001 per share, of which no
shares are issued or outstanding. The authorized capital stock of Merger Sub
consists of 1,000 shares of Common Stock, par value $0.001 per share, all of
which, as of the date hereof, are issued and outstanding and are held by NetIQ.
All outstanding shares of NetIQ Common Stock are duly authorized, validly
issued, fully paid and non-assessable and are not subject to preemptive rights
created by statute, the Certificate of Incorporation or Bylaws of NetIQ or any
agreement or document to which NetIQ is a party or by which it is bound. As of
February 24, 2000, NetIQ had reserved an aggregate of 3,614,938 shares of NetIQ
Common Stock, net of exercises, for issuance to employees, consultants and non-
employee directors pursuant to NetIQ's 1995 Stock Plan (the "NetIQ Stock Option
Plan"), under which options are outstanding for 2,638,531 shares and under
which 976,407 shares are available for grant as of February 24, 2000. All
shares of NetIQ Common Stock subject to issuance as aforesaid, upon issuance on
the terms and conditions specified in the instruments pursuant to which they
are issuable, would be duly authorized, validly issued, fully paid and
nonassessable. Section 3.2 of NetIQ Schedules lists each outstanding option to
acquire shares of NetIQ Common Stock at February 24, 2000, the name of the
holder of such option, the number of shares subject to such option, the
exercise price of such option, the number of shares as to which such option
will have vested at such date, the vesting schedule for such option and whether
the exercisability of such option will be accelerated in any way by the
transactions contemplated by this Agreement or for any other reason, and
indicates the extent of acceleration, if any.
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3.3 Obligations With Respect to Capital Stock. Except as set forth in Section
3.2, there are no equity securities, partnership interests or similar ownership
interests of any class of NetIQ, or any securities exchangeable or convertible
into or exercisable for such equity securities, partnership interests or
similar ownership interests issued, reserved for issuance or outstanding.
Except for securities NetIQ owns, directly or indirectly through one or more
subsidiaries, there are no equity securities, partnership interests or similar
ownership interests of any class of any subsidiary of NetIQ, or any security
exchangeable or convertible into or exercisable for such equity securities,
partnership interests or similar ownership interests issued, reserved for
issuance or outstanding. Except as set forth in Section 3.2, there are no
options, warrants, equity securities, partnership interests or similar
ownership interests, calls, rights (including preemptive rights), commitments
or agreements of any character to which NetIQ or any of its subsidiaries is a
party or by which it is bound obligating NetIQ or any of its subsidiaries to
issue, deliver or sell, or cause to be issued, delivered or sold, or
repurchase, redeem or otherwise acquire, or cause the repurchase, redemption or
acquisition, of any shares of capital stock of NetIQ or any of its subsidiaries
or obligating NetIQ or any of its subsidiaries to grant, extend, accelerate the
vesting of or enter into any such option, warrant, equity security, partnership
interest or similar ownership interest, call, right, commitment or agreement.
There are no registration rights and, to the knowledge of NetIQ there are no
voting trusts, proxies or other agreements or understandings with respect to
any equity security of any class of NetIQ or with respect to any equity
security, partnership interest or similar ownership interest of any class of
any of its subsidiaries.
3.4 Authority. (a) NetIQ has all requisite corporate power and authority to
enter into this Agreement and the Stock Option Agreements and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby,
and the execution and delivery of the Stock Option Agreements and the
consummation of the transactions contemplated thereby, have been duly
authorized by all necessary corporate action on the part of NetIQ, subject only
to the approval and adoption of this Agreement and the approval or the Merger
by NetIQ's stockholders and the filing and recordation of the Certificate of
Merger pursuant to Delaware Law. A vote of the holders of at least a majority
of the outstanding shares of the NetIQ Common Stock is required for NetIQ's
stockholders to approve and adopt this Agreement and approve the Merger. This
Agreement and the Stock Option Agreements have been duly executed and delivered
by NetIQ and, assuming the due authorization, execution and delivery by MCS
and, if applicable, Merger Sub, constitute the valid and binding obligations of
NetIQ, enforceable in accordance with their respective terms, except as
enforceability may be limited by bankruptcy and other similar laws and general
principles of equity. The execution and delivery of this Agreement and the
Stock Option Agreements by NetIQ do not, and the performance of this Agreement
and the Stock Option Agreements by NetIQ will not, (i) conflict with or violate
the Certificate of Incorporation or Bylaws of NetIQ or the equivalent
organizational documents of any of its subsidiaries, (ii) subject to obtaining
the approval and adoption of this Agreement and the approval of the Merger by
NetIQ's stockholders as contemplated in Section 5.2 and compliance with the
requirements set forth in Section 3.4(b) below, conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to NetIQ or any of
its subsidiaries or by which its or any of their respective properties is bound
or affected, or (iii) result in any breach of, or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or impair NetIQ's rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of NetIQ or any of its subsidiaries pursuant to, any
material note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which NetIQ or any of
its subsidiaries is a party or by which NetIQ or any of its subsidiaries or its
or any of their respective properties are bound or affected, except to the
extent such conflict, violation, breach, default, impairment or other effect
could not, in the case of clause (ii) or (iii), individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on NetIQ.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required by or with
respect to NetIQ in connection with the execution and delivery of this
Agreement and the Stock Option Agreements or the consummation of the
transactions contemplated hereby
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or thereby, except for (i) the filing of a Registration Statement with the SEC
in accordance with the Securities Act, (ii) the filing of the Certificate of
Merger with the Secretary of State of Delaware, (iii) the filing of the Proxy
Statement with the SEC in accordance with the Exchange Act, (iv) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable federal and state securities laws and the HSR
Act and the laws of any foreign country and (v) such other consents,
authorizations, filings, approvals and registrations which, if not obtained or
made, would not be material to NetIQ or MCS or have a material adverse effect
on the ability of the parties to consummate the Merger.
3.5 SEC Filings; NetIQ Financial Statements. (a) NetIQ has filed all forms,
reports and documents required to be filed with the SEC since July 30, 1999,
and has made available to MCS such forms, reports and documents in the form
filed with the SEC. All such required forms, reports and documents (including
those that NetIQ may file subsequent to the date hereof) are referred to herein
as the "NetIQ SEC Reports." As of their respective dates, the NetIQ SEC Reports
(i) were prepared in accordance with the requirements of the Securities Act or
the Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such NetIQ SEC Reports, and (ii) did not at the time
they were filed (or if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. None of NetIQ's
subsidiaries is required to file any forms, reports or other documents with the
SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the NetIQ SEC Reports (the "NetIQ
Financials"), including any NetIQ SEC Reports filed after the date hereof until
the Closing, (i) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (ii) was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited interim financial statements, as may be permitted by the SEC
on Form 10-Q under the Exchange Act) and (iii) fairly presented the
consolidated financial position of NetIQ and its subsidiaries at the respective
dates thereof and the consolidated results of its operations and cash flows for
the periods indicated, except that the unaudited interim financial statements
were or are subject to normal and recurring year-end adjustments which were
not, or are not expected to be, material in amount. The balance sheet of NetIQ
contained in the NetIQ SEC Reports as of December 31, 1999 is hereinafter
referred to as the "NetIQ Balance Sheet." Except as disclosed in the NetIQ
Financials, neither NetIQ nor any of its subsidiaries has any liabilities
(absolute, accrued, contingent or otherwise) of a nature required to be
disclosed on a balance sheet or in the related notes to the consolidated
financial statements prepared in accordance with GAAP which are, individually
or in the aggregate, material to the business, results of operations or
financial condition of NetIQ and its subsidiaries taken as a whole, except
liabilities (i) provided for in the NetIQ Balance Sheet, or (ii) incurred since
the date of the NetIQ Balance Sheet in the ordinary course of business
consistent with past practices and immaterial in the aggregate.
(c) NetIQ has heretofore furnished to MCS a complete and correct copy of any
amendments or modifications, which have not yet been filed with the SEC but
which are required to be filed, to agreements, documents or other instruments
which previously had been filed by NetIQ with the SEC pursuant to the
Securities Act or the Exchange Act.
3.6 Absence of Certain Changes or Events. Since the date of the NetIQ Balance
Sheet, there has not been: (i) any Material Adverse Effect on NetIQ, (ii) any
material change by NetIQ in its accounting methods, principles or practices,
except as required by concurrent changes in GAAP, or (iii) any revaluation by
NetIQ of any of its assets, including, without limitation, writing down the
value of capitalized inventory or writing off notes or accounts receivable
other than in the ordinary course of business.
3.7 Taxes. (a) NetIQ and each of its subsidiaries have timely filed all
Returns relating to Taxes required to be filed by NetIQ and each of its
subsidiaries with any Tax authority, except such Returns which are not material
to NetIQ. NetIQ and each of its subsidiaries have paid all Taxes shown to be
due on such Returns.
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(b) NetIQ and each of its subsidiaries as of the Effective Time will have
withheld with respect to its employees all federal and state income taxes,
Taxes pursuant to the Federal Insurance Contribution Act, Taxes pursuant to the
Federal Unemployment Tax Act and other Taxes required to be withheld, except
such Taxes which are not material to NetIQ.
(c) Neither NetIQ nor any of its subsidiaries has been delinquent in the
payment of any material Tax nor is there any material Tax deficiency
outstanding, proposed or assessed against NetIQ or any of its subsidiaries, nor
has NetIQ or any of its subsidiaries executed any unexpired waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax.
(d) No audit or other examination of any Return of NetIQ or any of its
subsidiaries by any Tax authority is presently in progress, nor has NetIQ or
any of its subsidiaries been notified of any request for such an audit or other
examination.
(e) No adjustment relating to any Returns filed by NetIQ or any of its
subsidiaries has been proposed in writing formally or informally by any Tax
authority to NetIQ or any of its subsidiaries or any representative thereof.
(f) Neither NetIQ nor any of its subsidiaries has any liability for any
material unpaid Taxes which has not been accrued for or reserved on NetIQ
Balance Sheet in accordance with GAAP, whether asserted or unasserted,
contingent or otherwise, which is material to NetIQ, other than any liability
for unpaid Taxes that may have accrued since December 31, 1999 in connection
with the operation of the business of NetIQ and its subsidiaries in the
ordinary course.
(g) There is no contract, agreement, plan or arrangement to which NetIQ or
any of its subsidiaries is a party as of the date of this Agreement, including
but not limited to the provisions of this Agreement, covering any employee or
former employee of NetIQ or any of its subsidiaries that, individually or
collectively, would reasonably be expected to give rise to the payment of any
amount that would not be deductible pursuant to Sections 280G, 404 or 162(m) of
the Code. There is no contract, agreement, plan or arrangement to which NetIQ
is a party or by which it is bound to compensate any individual for excise
taxes paid pursuant to Section 4999 of the Code.
(h) Neither NetIQ nor any of its subsidiaries has filed any consent agreement
under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the
Code apply to any disposition of a subsection (f) asset (as defined in Section
341(f)(4) of the Code) owned by NetIQ or any of its subsidiaries.
(i) Neither NetIQ nor any of its subsidiaries is party to or has any
obligation under any tax-sharing, tax indemnity or tax allocation agreement or
arrangement.
(j) None of NetIQ's or its subsidiaries' assets are tax exempt use property
within the meaning of Section 168(h) of the Code.
3.8 NetIQ Intellectual Property. For the purposes of this Agreement, the
following terms have the following definitions:
"NetIQ Intellectual Property" shall mean any Intellectual Property that is
owned by, or exclusively licensed to, NetIQ.
"NetIQ Registered Intellectual Property" means all of the Registered
Intellectual Property owned by, or filed in the name of, NetIQ or any of its
subsidiaries.
(a) Section 3.8(a) of the NetIQ Schedules is a complete and accurate list of
all NetIQ Registered Intellectual Property and specifies, where applicable, the
jurisdictions in which each such item of NetIQ Registered Intellectual Property
has been issued or registered.
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(b) No NetIQ Intellectual Property or product or service of NetIQ or any of
its subsidiaries is subject to any proceeding or outstanding decree, order,
judgment, contract, license, agreement, or stipulation restricting in any
manner the use, transfer, or licensing thereof by NetIQ or any of its
subsidiaries, or which may affect the validity, use or enforceability of such
NetIQ Intellectual Property.
(c) NetIQ owns and has good and exclusive title to, or has license
(sufficient for the conduct of its business as currently conducted and as
proposed to be conducted), each material item of NetIQ Intellectual Property or
other Intellectual Property used by NetIQ free and clear of any lien or
encumbrance (excluding licenses and related restrictions); and NetIQ is the
exclusive owner of all trademarks and trade names used in connection with the
operation or conduct of the business of NetIQ and its subsidiaries, including
the sale of any products or the provision of any services by NetIQ and its
subsidiaries.
(d) NetIQ owns exclusively, and has good title to, all copyrighted works that
are NetIQ products or which NetIQ or any of its subsidiaries otherwise
expressly purports to own.
(e) To the extent that any material Intellectual Property has been developed
or created by a third party for NetIQ or any of its subsidiaries, NetIQ has a
written agreement with such third party with respect thereto and NetIQ thereby
either (i) has obtained ownership of, and is the exclusive owner of, or (ii)
has obtained a license (sufficient for the conduct of its business as currently
conducted and as proposed to be conducted) to all such third party's
Intellectual Property in such work, material or invention by operation of law
or by valid assignment, to the fullest extent it is legally possible to do so.
(f) Neither NetIQ nor any of its subsidiaries has transferred ownership of,
or granted any exclusive license with respect to, any Intellectual Property
that is or was material NetIQ Intellectual Property, to any third party.
(g) To the knowledge of NetIQ, the operation of the business of NetIQ and its
subsidiaries as such business currently is conducted, including NetIQ's and its
subsidiaries' design, development, manufacture, marketing and sale of the
products or services of NetIQ and its subsidiaries (including products
currently under development) has not, does not and will not infringe or
misappropriate the Intellectual Property of any third party or, to its
knowledge, constitute unfair competition or trade practices under the laws of
any jurisdiction.
(h) Neither NetIQ nor any of its subsidiaries has received notice from any
third party that the operation of the business of NetIQ or any of its
subsidiaries or any act, product or service of NetIQ or any of its
subsidiaries, infringes or misappropriates the Intellectual Property of any
third party or constitutes unfair competition or trade practices under the laws
of any jurisdiction.
(i) To the knowledge of NetIQ, no person has or is infringing or
misappropriating any NetIQ Intellectual Property.
(j) NetIQ and each of its subsidiaries has taken reasonable steps to protect
NetIQ's and its subsidiaries' rights in NetIQ's confidential information and
trade secrets that it wishes to protect or any trade secrets or confidential
information of third parties provided to NetIQ or any of its subsidiaries, and,
without limiting the foregoing, each of NetIQ and its subsidiaries has and
enforces a policy requiring each employee and contractor to execute a
proprietary information/confidentiality agreement substantially in the form
provided to MCS and all current and former employees and contractors of NetIQ
and any of its subsidiaries have executed such an agreement, except where the
failure to do so is not reasonably expected to be material to NetIQ.
(k) All of NetIQ's and its subsidiaries' products (including products
currently under development) (i) are Year 2000 Compliant, (ii) will lose no
functionality with respect to the introduction of records containing dates
falling on or after January 1, 2000, and (iii) will be interoperable with other
products used and distributed by MCS that may reasonably deliver records to
NetIQ's or any of its subsidiaries' products or receive records from NetIQ's or
any of its subsidiaries' products, or interact with NetIQ's or any of its
subsidiaries' products. All of NetIQ's or its subsidiaries' Information
Technology (as defined below) is Year 2000 Compliant, and will not cause an
interruption in the ongoing operations of NetIQ's or any of its subsidiaries'
business on or after
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January 1, 2000. For purposes of the foregoing, the term "Information
Technology" shall mean and include all software, hardware, firmware,
telecommunications systems, network systems, embedded systems and other
systems, components and/or services (other than general utility services
including gas, electric, telephone and postal) that are owned or used by NetIQ
or any of its subsidiaries in the conduct of their business, or purchased by
NetIQ or any of its subsidiaries from third-party suppliers.
3.9 Compliance; Permits; Restrictions.
(a) Neither NetIQ nor any of its subsidiaries is, in any material respect, in
conflict with, or in default or violation of (i) any law, rule, regulation,
order, judgment or decree applicable to NetIQ or any of its subsidiaries or by
which its or any of their respective properties is bound or affected, or (ii)
any material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which NetIQ or
any of its subsidiaries is a party or by which NetIQ or any of its subsidiaries
or its or any of their respective properties is bound or affected. To the
knowledge of NetIQ, no investigation or review by any Governmental Entity is
pending or threatened against NetIQ or its subsidiaries, nor has any
Governmental Entity indicated an intention to conduct the same. There is no
material agreement, judgment, injunction, order or decree binding upon NetIQ or
any of its subsidiaries which has or could reasonably be expected to have the
effect of prohibiting or materially impairing any business practice of NetIQ or
any of its subsidiaries, any acquisition of material property by NetIQ or any
of its subsidiaries or the conduct of business by NetIQ as currently conducted.
(b) NetIQ and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities which are
material to the operation of the business of NetIQ (collectively, the "NetIQ
Permits"). NetIQ and its subsidiaries are in compliance in all material
respects with the terms of the NetIQ Permits.
3.10 Litigation. As of the date of this Agreement, there is no action, suit,
proceeding, claim, arbitration or investigation pending, or as to which NetIQ
or any of its subsidiaries has received any notice of assertion nor, to NetIQ's
knowledge, is there a threatened action, suit, proceeding, claim, arbitration
or investigation against NetIQ or any of its subsidiaries which reasonably
would be likely to be material to NetIQ, or which in any manner challenges or
seeks to prevent, enjoin, alter or delay any of the transactions contemplated
by this Agreement.
3.11 Brokers' and Finders' Fees. Except for fees payable to Credit Suisse
First Boston Corporation pursuant to an engagement letter dated February 1,
2000, a copy of which has been provided to MCS, NetIQ has not incurred, nor
will it incur, directly or indirectly, any liability for brokerage or finders'
fees or agents' commissions or any similar charges in connection with this
Agreement or any transaction contemplated hereby.
3.12 Employee Benefit Plans.
(a) All employee compensation, incentive, fringe or benefit plans, programs,
policies, commitments, agreements or other arrangements (whether or not set
forth in a written document and including, without limitation, all "employee
benefit plans" within the meaning of Section 3(3) of ERISA) covering any active
or former employee, director or consultant of NetIQ ("NetIQ Employee" which
shall for this purpose mean an employee of MCS or any Affiliate (as defined
below)), any subsidiary of NetIQ or any trade or business (whether or not
incorporated) which is an Affiliate, or with respect to which NetIQ has or, to
its knowledge, may in the future have liability, are listed in Section 3.12(a)
of the NetIQ Schedules (the "NetIQ Plans"). NetIQ has provided or will make
available to MCS: (i) correct and complete copies of all documents embodying
each NetIQ Plan including (without limitation) all amendments thereto, all
related trust documents, and all material written agreements and contracts
relating to each such NetIQ Plan; (ii) the most recent annual reports (Form
Series 5500 and all schedules and financial statements attached thereto), if
any, required under ERISA or the Code in connection with each NetIQ Plan; (iii)
the most recent summary plan description together with the summary(ies) of
material modifications thereto, if any, required under ERISA with respect to
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each NetIQ Plan; (iv) all IRS determination, opinion, notification and advisory
letters; (v) all material correspondence to or from any governmental agency
relating to any NetIQ Plan; (vi) all forms and related notices required by
COBRA; (vii) the most recent discrimination tests for each NetIQ Plan; (viii)
the most recent actuarial valuations, if any, prepared for each NetIQ Plan;
(ix) if the NetIQ Plan is funded, the most recent annual and periodic
accounting of the NetIQ Plan assets; and (x) all communication to NetIQ
Employees relating to any NetIQ Plan and any proposed NetIQ Plan, in each case
relating to any amendments, terminations, establishments, increases or
decreases in benefits, acceleration of payments or vesting schedules, or other
events which would result in any material liability to NetIQ or any Affiliate.
(b) Each NetIQ Plan has been maintained and administered in all material
respects in compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations (foreign or domestic),
including but not limited to ERISA and the Code, which are applicable to such
NetIQ Plans. No suit, action or other litigation (excluding claims for benefits
incurred in the ordinary course of NetIQ Plan activities) has been brought, or
to the knowledge of NetIQ, is threatened, against or with respect to any such
NetIQ Plan. There are no audits, inquiries or proceedings pending or, to the
knowledge of NetIQ, threatened by the IRS or the DOL with respect to any NetIQ
Plans. All contributions, reserves or premium payments required to be made or
accrued as of the date hereof to the NetIQ Plans have been timely made or
accrued. Any NetIQ Plan intended to be qualified under Section 401(a) of the
Code and each trust intended to qualify under Section 501(a) of the Code (i)
has either obtained a favorable determination, notification, advisory and/or
opinion letter, as applicable, as to its qualified status from the IRS or still
has a remaining period of time under applicable Treasury Regulations or IRS
pronouncements in which to apply for such letter and to make any amendments
necessary to obtain a favorable determination, and (ii) incorporates or has
been amended to incorporate all provisions required to comply with the Tax
Reform Act of 1986 and subsequent legislation. To the knowledge of NetIQ, no
condition or circumstance exists giving rise to a material likelihood that any
such NetIQ Plan would not be treated as qualified by the IRS. NetIQ does not
have any plan or commitment to establish any new NetIQ Plan, to modify any
NetIQ Plan (except to the extent required by law or to conform any such NetIQ
Plan to the requirements of any applicable law, in each case as previously
disclosed to MCS in writing, or as required by the terms of any NetIQ Plan or
this Agreement), or to enter into any new NetIQ Plan. Each NetIQ Plan can be
amended, terminated or otherwise discontinued after the Effective Time in
accordance with its terms, without liability to MCS, NetIQ or any of its
Affiliates (other than ordinary administration expenses).
(c) Neither NetIQ, any of its subsidiaries, nor any of their Affiliates has
at any time ever maintained, established, sponsored, participated in, or
contributed to any plan subject to Title IV of ERISA or Section 412 of the Code
and at no time has NetIQ contributed to or been requested to contribute to any
"multiemployer plan," as such term is defined in ERISA. Neither NetIQ, any of
its subsidiaries, nor any officer or director of NetIQ or any of its
subsidiaries is subject to any material liability or penalty under Section 4975
through 4980B of the Code or Title I of ERISA. No "prohibited transaction,"
within the meaning of Section 4975 of the Code or Sections 406 and 407 of
ERISA, and not otherwise exempt under Section 4975 of the Code and Section 408
of ERISA, has occurred with respect to any NetIQ Plan which could subject NetIQ
or its Affiliates to material liability.
(d) None of the NetIQ Plans promises or provides retiree medical or other
retiree welfare benefits to any person except as required by applicable law,
and neither NetIQ nor any of its subsidiaries has represented, promised or
contracted (whether in oral or written form) to provide such retiree benefits
to any NetIQ Employee, former employee, director, consultant or other person,
except to the extent required by statute.
(e) Except as would not have a material effect, NetIQ is in compliance in all
material respects with all applicable material foreign, federal, state and
local laws, rules and regulations respecting employment, employment practices,
terms and conditions of employment and wages and hours.
(f) Neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby will (i) result in any payment
(including severance, unemployment compensation, golden parachute, bonus or
otherwise) becoming due to any stockholder, director or NetIQ Employee or any
of its
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subsidiaries under any NetIQ Plan or otherwise, (ii) materially increase any
benefits otherwise payable under any NetIQ Plan, or (iii) result in the
acceleration of the time of payment or vesting of any such benefits.
(g) Each NetIQ International Employee Plan (as defined below) has been
established, maintained and administered in compliance with its terms and
conditions and with the requirements prescribed by any and all statutory or
regulatory laws that are applicable to such NetIQ International Employee Plan.
Furthermore, no NetIQ International Employee Plan has unfunded liabilities
that, as of the Effective Time, will not be offset by insurance or fully
accrued. Except as required by law, no condition exists that would prevent
NetIQ or MCS from terminating or amending any International Employee Plan at
any time for any reason. For purposes of this Section "NetIQ International
Employee Plan" shall mean each NetIQ Plan that has been adopted or maintained
by NetIQ or any of its subsidiaries, whether informally or formally, for the
benefit of current or former employees of NetIQ or any of its subsidiaries
outside the United States.
3.13 Absence of Liens and Encumbrances. NetIQ and each of its subsidiaries
has good and valid title to, or, in the case of leased properties and assets,
valid leasehold interests in, all of its material tangible properties and
assets, real, personal and mixed, used in its business, free and clear of any
liens or encumbrances except as reflected in the NetIQ Financials and except
for liens for taxes not yet due and payable and such imperfections of title and
encumbrances, if any, which would not be material to NetIQ.
3.14 Environmental Matters.
(a) Hazardous Materials Activities. Except as would not reasonably be likely
to result in a material liability to NetIQ (in any individual case or in the
aggregate), (i) neither NetIQ nor any of its subsidiaries has transported,
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before
the Closing Date, and (ii) neither NetIQ nor any of its subsidiaries has
engaged in Hazardous Materials Activities in violation of any rule, regulation,
treaty or statute promulgated by any Governmental Entity in effect prior to or
as of the date hereof to prohibit, regulate or control Hazardous Materials or
any Hazardous Material Activity.
(b) Environmental Liabilities. No action, proceeding, revocation proceeding,
amendment procedure, writ, injunction or claim is pending, or to NetIQ's
knowledge, threatened concerning any NetIQ Permit relating to any environmental
matter, Hazardous Material or any Hazardous Materials Activity of NetIQ or any
of its subsidiaries. NetIQ is not aware of any fact or circumstance which could
involve NetIQ or any of its subsidiaries in any environmental litigation or
impose upon NetIQ or any of its subsidiaries any environmental liability.
3.15 Labor Matters. (i) There are no controversies pending or, to the
knowledge of each of NetIQ and its respective subsidiaries, threatened, between
NetIQ or any of its subsidiaries and any of their respective employees; (ii) as
of the date of this Agreement, neither NetIQ nor any of its subsidiaries is a
party to any collective bargaining agreement or other labor union contract
applicable to persons employed by NetIQ or its subsidiaries nor does NetIQ or
its subsidiaries know of any activities or proceedings of any labor union to
organize any such employees; and (iii) as of the date of this Agreement,
neither NetIQ nor any of its subsidiaries has any knowledge of any strikes,
slowdowns, work stoppages or lockouts, or threats thereof, by or with respect
to any employees of NetIQ or any of its subsidiaries.
3.16 Agreements, Contracts and Commitments. Neither Company nor any of its
subsidiaries is a party to or is bound by:
(a) any employment or consulting agreement, contract or commitment with any
officer or director or higher level employee or member of NetIQ's Board of
Directors, other than those that are terminable by NetIQ or any of its
subsidiaries on no more than thirty (30) days' notice without liability or
financial obligation to NetIQ;
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(b) any agreement or plan, including, without limitation, any stock option
plan, stock appreciation right plan or stock purchase plan, any of the benefits
of which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on
the basis of any of the transactions contemplated by this Agreement;
(c) any agreement of indemnification or any guaranty other than any agreement
of indemnification entered into in connection with the sale or license of
software products in the ordinary course of business;
(d) any agreement, contract or commitment containing any covenant limiting in
any respect the right of NetIQ or any of its subsidiaries to engage in any line
of business or to compete with any person or granting any exclusive
distribution rights;
(e) any agreement, contract or commitment currently in force relating to the
disposition or acquisition by NetIQ or any of its subsidiaries after the date
of this Agreement of a material amount of assets not in the ordinary course of
business or pursuant to which NetIQ has any material ownership interest in any
corporation, partnership, joint venture or other business enterprise other than
NetIQ's subsidiaries;
(f) any dealer, distributor, joint marketing or development agreement
currently in force under which NetIQ or any of its subsidiaries have continuing
material obligations to jointly market any product, technology or service and
which may not be canceled without penalty upon notice of ninety (90) days or
less, or any material agreement pursuant to which NetIQ or any of its
subsidiaries have continuing material obligations to jointly develop any
intellectual property that will not be owned, in whole or in part, by NetIQ or
any of its subsidiaries and which may not be canceled without penalty upon
notice of ninety (90) days or less;
(g) any agreement, contract or commitment currently in force to provide
source code to any third party for any product or technology that is material
to NetIQ and its subsidiaries taken as a whole;
(h) any agreement, contract or commitment currently in force to license any
third party to manufacture or reproduce any NetIQ product, service or
technology or any agreement, contract or commitment currently in force to sell
or distribute any NetIQ products, service or technology except agreements with
distributors or sales representative in the normal course of business
cancelable without penalty upon notice of ninety (90) days or less and
substantially in the form previously provided to MCS;
(i) any mortgages, indentures, guarantees, loans or credit agreements,
security agreements or other agreements or instruments relating to the
borrowing of money or extension of credit;
(j) any settlement agreement entered into within five (5) years prior to the
date of this Agreement; or
(k) any other agreement, contract or commitment that has a value of
$2,000,000 or more individually, other than in the event of an assignment of
the LOI pursuant to Section 5.20, the transactions contemplated by the LOI.
Neither NetIQ nor any of its subsidiaries, nor to NetIQ's knowledge any other
party to a NetIQ Contract (as defined below), is in breach, violation or
default under, and neither NetIQ nor any of its subsidiaries has received
written notice that it has breached, violated or defaulted under, any of the
material terms or conditions of any of the agreements, contracts or commitments
to which NetIQ or any of its subsidiaries is a party or by which it is bound
that are required to be disclosed in the NetIQ Schedules (any such agreement,
contract or commitment, a "NetIQ Contract") in such a manner as would permit
any other party to cancel or terminate any such NetIQ Contract, or would permit
any other party to seek material damages or other remedies (for any or all of
such breaches, violations or defaults, in the aggregate).
3.17 Statements; Proxy Statement/Prospectus. None of the information supplied
or to be supplied by NetIQ for inclusion or incorporation by reference in (i)
the Registration Statement will at the time it becomes
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effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading and (ii) the
Proxy Statement shall not, on the date the Proxy Statement is first mailed to
NetIQ's stockholders and MCS's stockholders, at the time of the NetIQ
Stockholders' Meeting or the MCS Stockholders' Meeting and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not false or misleading, or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the NetIQ Stockholders' Meeting or the MCS
Stockholders' Meeting which has become false or misleading. The Proxy Statement
will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder. If at any time prior to
the Effective Time, any event relating to NetIQ or any of its affiliates,
officers or directors should be discovered by NetIQ which should be set forth
in an amendment to the Registration Statement or a supplement to the Proxy
Statement, NetIQ shall promptly inform MCS. Notwithstanding the foregoing,
NetIQ makes no representation or warranty with respect to any information
supplied by MCS which is contained in any of the foregoing documents.
3.18 Board Approval. The Board of Directors of NetIQ has, as of the date of
this Agreement, (i) determined that the Merger is fair to and in the best
interests of NetIQ and its stockholders, (ii) determined to recommend that the
stockholders of NetIQ approve this Agreement and (iii) duly approved the
Merger, this Agreement and the transactions contemplated hereby.
3.19 State Takeover Statutes. The Board of Directors of NetIQ has approved
the Merger, this Agreement, the Stock Option Agreements, and the MCS Voting
Agreement and the transactions contemplated hereby and thereby, and such
approval is sufficient to render inapplicable to the Merger, this Agreement,
the Stock Option Agreements, the MCS Voting Agreement and the transactions
contemplated hereby and thereby the provisions of Section 203 of Delaware Law
to the extent, if any, such section is applicable to the Merger, this
Agreement, the Stock Option Agreements, the MCS Voting Agreement and the
transactions contemplated hereby and thereby. No other state takeover statute
or similar statute or regulation applies to or purports to apply to the Merger,
this Agreement, the Stock Option Agreements, the MCS Voting Agreement or the
transactions contemplated hereby and thereby.
3.20 Fairness Opinion. NetIQ has received a written opinion from Credit
Suisse First Boston Corporation, dated as of the date hereof, to the effect
that as of the date hereof, the Exchange Ratio is fair to NetIQ's stockholders
from a financial point of view and has delivered to MCS a copy of such opinion.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business. During the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement pursuant
to its terms or the Effective Time, MCS (which for the purposes of this Article
IV shall include MCS and each of its subsidiaries) and NetIQ (which for the
purposes of this Article IV shall include NetIQ and each of its subsidiaries)
agree, except (i) in the case of MCS as provided in Article IV of the MCS
Schedules and in the case of NetIQ as provided in Article IV of the NetIQ
Schedules, or (ii) to the extent that the other party shall otherwise consent
in writing, to carry on its business diligently and in accordance with good
commercial practice and to carry on its business in the ordinary course, in
substantially the same manner as heretofore conducted and in compliance with
all applicable laws and regulations, to pay its debts and taxes when due
subject to good faith disputes over such debts or taxes, to pay or perform
other material obligations when due, and use its commercially reasonable
efforts consistent with past practices and policies to preserve intact its
present business organization, keep available the services of its present
officers and employees and preserve its relationships with customers,
suppliers, distributors, licensors, licensees and others with which it has
business dealings. In furtherance of the foregoing and subject to applicable
law, MCS and NetIQ agree to confer, as promptly as practicable, prior to taking
any material actions
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or making any material management decisions with respect to the conduct of
business. In addition, except (i) in the case of MCS as provided in Article IV
of the MCS Schedules; (ii) in the case of NetIQ as provided in Article IV of
the NetIQ Schedules; and (iii) in connection with the transactions contemplated
by the LOI, without the prior written consent of the other, neither MCS nor
NetIQ shall do any of the following, and neither MCS nor NetIQ shall permit its
subsidiaries to do any of the following:
(a) Except as required by law or pursuant to the terms of a MCS Plan or a
NetIQ Plan, as the case may be, in effect as of the date hereof, waive any
stock repurchase rights, accelerate, amend or change the period of
exercisability of options or restricted stock, or reprice options granted under
any employee, consultant or director stock plans or authorize cash payments in
exchange for any options granted under any of such plans;
(b) Enter into any material partnership arrangements, joint development
agreements or strategic alliances other than in the ordinary course of business
consistent with past practice;
(c) Grant any severance or termination pay to any officer or employee except
pursuant to written agreements outstanding, or policies existing, on the date
hereof and as previously disclosed in writing to the other, or adopt any new
severance plan or amend or modify or alter in any manner any severance plan,
agreement or arrangement existing on the date hereof;
(d) Transfer or license to any person or entity or otherwise extend, amend or
modify in any material respect any rights to the MCS Intellectual Property or
the NetIQ Intellectual Property, as the case may be, or enter into grants to
transfer or license to any person future patent rights, other than in the
ordinary course of business or amend or modify or alter in any manner any
severance plan, agreement or arrangement existing on the date hereof;
(e) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for any capital stock;
(f) Purchase, redeem or otherwise acquire, directly or indirectly, any shares
of capital stock of MCS or its subsidiaries, or NetIQ or its subsidiaries, as
the case may be, except repurchases of unvested shares at cost in connection
with the termination of the employment relationship with any employee pursuant
to stock option or purchase agreements in effect on the date hereof;
(g) Issue, deliver, sell, authorize, pledge or otherwise encumber or propose
any of the foregoing with respect to any shares of capital stock or any
securities convertible into shares of capital stock, or subscriptions, rights,
warrants or options to acquire any shares of capital stock or any securities
convertible into shares of capital stock, or enter into other agreements or
commitments of any character obligating it to issue any such shares or
convertible securities, other than (i) the issuance, delivery and/or sale of
shares of MCS Common Stock or NetIQ Common Stock, as the case may be, pursuant
to the exercise of stock options therefor outstanding as of the date of this
Agreement, (ii) the granting of options to purchase shares of MCS Common Stock
or NetIQ Common Stock, as the case may be, to be granted at fair market value
in the ordinary course of business, consistent with past practice and in
accordance with existing stock option plans in an amount not to exceed options
to purchase 500,000 shares in the aggregate, (iii) shares of MCS Common Stock
or NetIQ Common Stock, as the case may be, issuable upon the exercise of the
options referred to in clause (ii), and (iv) shares of MCS Common Stock or
NetIQ Common Stock, as the case may be, issuable to participants in NetIQ's
1999 Employee Stock Purchase Plan (the "NetIQ ESPP") or the MCS ESPP consistent
with the terms thereof;
(h) Cause, permit or propose any amendments to any charter document or Bylaw
(or similar governing instruments of any subsidiaries);
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(i) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a material portion of the assets of, or by
any other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or agree
to acquire any assets which are material, individually or in the aggregate, to
the business of MCS or NetIQ, as the case may be, or enter into any joint
ventures, strategic partnerships or alliances, other than in the ordinary
course of business consistent with past practice;
(j) Adopt a plan of complete or partial liquidation, dissolution,
consolidation, restructuring, recapitalization or other reorganization;
(k) Sell, lease, license, encumber or otherwise dispose of any properties or
assets except sales of inventory in the ordinary course of business consistent
with past practice, except for the sale, lease or disposition (other than
through licensing) of property or assets which are not material, individually
or in the aggregate, to the business of MCS or NetIQ, as the case may be;
(l) Incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or options,
warrants, calls or other rights to acquire any debt securities of MCS or NetIQ,
as the case may be, enter into any "keep well" or other agreement to maintain
any financial statement condition or enter into any arrangement having the
economic effect of any of the foregoing other than (i) in connection with the
financing of ordinary course trade payables consistent with past practice or
(ii) pursuant to existing credit facilities in the ordinary course of business;
(m) Adopt or amend any employee benefit plan or employee stock purchase or
employee stock option plan, or enter into any employment contract or collective
bargaining agreement (other than offer letters and letter agreements entered
into in the ordinary course of business consistent with past practice with
employees who are terminable "at will"), pay any special bonus or special
remuneration to any director or employee other than in the ordinary course of
business consistent with past practice, or increase the salaries or wage rates
or fringe benefits (including rights to severance or indemnification) of its
directors, officers, employees or consultants;
(n) Make any individual or series of related payments outside of the ordinary
course of business in excess of $1,000,000;
(o) Except in the ordinary course of business consistent with past practice,
modify, amend or terminate any material contract or agreement to which MCS or
any of its subsidiaries or NetIQ or any of its subsidiaries, as the case may
be, is a party or waive, delay the exercise of, release or assign any material
rights or claims thereunder;
(p) Enter into or materially modify any contracts, agreements or obligations
relating to the distribution, sale, license or marketing by third parties of
MCS's or NetIQ's products, as the case may be, or products licensed by MCS or
NetIQ, as the case may be;
(q) Revalue any of its assets or, except as required by GAAP, make any change
in accounting methods, principles or practices;
(r) Incur or enter into any agreement or commitment, other than any agreement
with a customer entered into in the ordinary course of business consistent with
past practice, in excess of $1,000,000 individually;
(s) Engage in any action that could reasonably be expected to cause the
Merger to fail to qualify as a "reorganization" under Section 368(a) of the
Code, whether or not otherwise permitted by the provisions of this Article IV;
(t) Make any tax election or settle or compromise any material tax liability;
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(u) Hire any employee with an annual compensation level in excess of
$125,000;
(v) Pay, discharge or satisfy any claim, liability or obligation (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business;
(w) Make any grant of exclusive rights to any third party; or
(x) Agree in writing or otherwise to take any of the actions described in
Section 4.1 (a) through (w) above.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings.
(a) As promptly as practicable after the execution of this Agreement, MCS and
NetIQ will prepare and file with the SEC the Proxy Statement, and NetIQ will
prepare and file with the SEC the Registration Statement in which the Proxy
Statement will be included as a prospectus. Each of MCS and NetIQ will respond
to any comments of the SEC, will use its respective best efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing and will cause the Proxy Statement to be
mailed to its stockholders at the earliest practicable time. As promptly as
practicable after the date of this Agreement, MCS and NetIQ will prepare and
file any other filings required under the Exchange Act, the Securities Act or
any other Federal, foreign or Blue Sky laws relating to the Merger and the
transactions contemplated by this Agreement (the "Other Filings"). Each party
will notify the other promptly upon the receipt of any comments from the SEC or
its staff and of any request by the SEC or its staff or any other government
officials for amendments or supplements to the Registration Statement, the
Proxy Statement or any Other Filing or for additional information and will
supply the other with copies of all correspondence between such party or any of
its representatives, on the one hand, and the SEC, or its staff or any other
government officials, on the other hand, with respect to the Registration
Statement, the Proxy Statement, the Merger or any Other Filing. The Proxy
Statement, the Registration Statement and the Other Filings will comply in all
material respects with all applicable requirements of law and the rules and
regulations promulgated thereunder. Whenever any event occurs which is required
to be set forth in an amendment or supplement to the Proxy Statement, the
Registration Statement or any Other Filing, MCS or NetIQ, as the case may be,
will promptly inform the other party of such occurrence and cooperate in filing
with the SEC or its staff or any other government officials, and/or mailing to
stockholders of MCS or stockholders of NetIQ, such amendment or supplement.
(b) Subject to Sections 5.2(c) and 5.2(d), the Proxy Statement will also
include the recommendations of (i) the Board of Directors of MCS in favor of
adoption and approval of this Agreement and the Merger, and (ii) the Board of
Directors of NetIQ in favor of the issuance of shares of NetIQ Common Stock in
the Merger and in favor of adoption and approval of this Agreement and the
Merger.
5.2 Meetings of Stockholders.
(a) Promptly after the date hereof, MCS will take all action necessary in
accordance with Delaware Law and its Certificate of Incorporation and Bylaws to
convene the MCS Stockholders' Meeting to be held as promptly as practicable,
for the purpose of voting upon this Agreement. MCS will consult with NetIQ and
use its commercially reasonable efforts to hold the MCS Stockholders' Meeting
on the same day as the NetIQ Stockholders' Meeting. Promptly after the date
hereof, NetIQ will take all action necessary in accordance with Delaware Law
and its Certificate of Incorporation and Bylaws to convene the NetIQ
Stockholders' Meeting to be held as promptly as practicable for the purpose of
voting upon the issuance of shares of NetIQ Common Stock by virtue of the
Merger. NetIQ will consult with MCS and will use its commercially reasonable
efforts to hold the NetIQ Stockholders' Meeting on the same day as the MCS
Stockholders' Meeting. Subject to
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Sections 5.2(c) and 5.2(d), NetIQ and MCS will each use its commercially
reasonable efforts to solicit from its stockholders proxies in favor of the
adoption and approval of this Agreement and the approval of the Merger and will
take all other action necessary or advisable to secure the vote or consent of
their respective stockholders or stockholders required by the rules of the
National Association of Securities Dealers, Inc. or Delaware Law and all other
applicable legal requirements to obtain such approvals.
(b) Subject to Sections 5.2(c) and 5.2(d): (i) the Board of Directors of MCS
shall unanimously recommend that MCS's stockholders vote in favor of and adopt
and approve this Agreement and the Merger at the MCS Stockholders' Meeting, and
the Board of Directors of NetIQ shall unanimously recommend that NetIQ's
stockholders vote in favor of and adopt and approve this Agreement and the
Merger at the NetIQ Stockholders' Meeting; (ii) the Proxy Statement shall
include a statement to the effect that the Board of Directors of MCS has
unanimously recommended that MCS's stockholders vote in favor of and adopt and
approve this Agreement and the Merger at the MCS Stockholders' Meeting, and a
statement to the effect that the Board of Directors of NetIQ has unanimously
recommended that NetIQ's stockholders vote in favor of and adopt and approve
this Agreement and the Merger at the NetIQ Stockholders' Meeting; and (iii)
neither the Board of Directors of MCS, the Board of Directors of NetIQ, nor any
committee of either shall withdraw, amend or modify, or propose or resolve to
withdraw, amend or modify in a manner adverse to the other party, the unanimous
recommendation of the Board of Directors of MCS or the Board of Directors of
NetIQ that MCS's stockholders or NetIQ's stockholders, as the case may be, vote
in favor of and adopt and approve this Agreement and approve the Merger. For
purposes of this Agreement, said recommendation of the Board of Directors shall
be deemed to have been modified in a manner adverse to the other party if said
recommendation shall no longer be unanimous.
(c) Nothing in this Agreement shall prevent the Board of Directors of MCS
from withholding, withdrawing, amending or modifying its unanimous
recommendation in favor of the Merger if (i) a MCS Superior Offer (as defined
below) is made to MCS and is not withdrawn, (ii) neither MCS nor any of its
representatives shall have violated any of the restrictions set forth in
Section 5.4(a), and (iii) the Board of Directors of MCS concludes in good
faith, after consultation with its outside counsel, that, in light of such MCS
Superior Offer, the withholding, withdrawal, amendment or modification of such
recommendation is required in order for the Board of Directors of MCS to comply
with its fiduciary obligations to MCS's stockholders under applicable law.
Nothing contained in this Section 5.2 shall limit MCS's obligation to hold and
convene the MCS Stockholders' Meeting (regardless of whether the unanimous
recommendation of the Board of Directors of MCS shall have been withdrawn,
amended or modified). For purposes of this Agreement, "MCS Superior Offer"
shall mean an unsolicited, bona fide written offer made by a third party to
consummate any of the following transactions: (i) a merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving MCS, pursuant to which the stockholders of MCS
immediately preceding such transaction hold less than 50% of the equity
interest in the surviving or resulting entity of such transaction; (ii) a sale
or other disposition by MCS of assets (excluding inventory and used equipment
sold in the ordinary course of business) representing in excess of 50% of the
fair market value of MCS's business immediately prior to such sale, or (iii)
the acquisition by any person or group (including by way of a tender offer or
an exchange offer or issuance by MCS), directly or indirectly, of beneficial
ownership or a right to acquire beneficial ownership of shares representing in
excess of 50% of the voting power of the then outstanding shares of capital
stock of the MCS, in each case on terms that the Board of Directors of MCS
determines, in its reasonable judgment (after consultation with its financial
advisor) to be more favorable to the MCS stockholders from a financial point of
view than the terms of the Merger; provided, however, that any such offer shall
not be deemed to be a "MCS Superior Offer" if any financing required to
consummate the transaction contemplated by such offer is not committed and is
not likely in the judgment of MCS's Board of Directors to be obtained by such
third party on a timely basis.
(d) Nothing in this Agreement shall prevent the Board of Directors of NetIQ
from withholding, withdrawing, amending or modifying its unanimous
recommendation in favor of the Merger if (i) a NetIQ Superior Offer (as defined
below) is made to NetIQ and is not withdrawn, (ii) neither NetIQ nor any of its
representatives shall have violated any of the restrictions set forth in
Section 5.4(b), and (iii) the Board of
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Directors of NetIQ concludes in good faith, after consultation with its outside
counsel, that, in light of such NetIQ Superior Offer, the withholding,
withdrawal, amendment or modification of such recommendation is required in
order for the Board of Directors of NetIQ to comply with its fiduciary
obligations to NetIQ's stockholders under applicable law. Nothing contained in
this Section 5.2 shall limit NetIQ's obligation to hold and convene the NetIQ
Stockholders' Meeting (regardless of whether the unanimous recommendation of
the Board of Directors of NetIQ shall have been withdrawn, amended or
modified). For purposes of this Agreement, "NetIQ Superior Offer" shall mean an
unsolicited, bona fide written offer made by a third party to consummate any of
the following transactions: (i) a merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
NetIQ, pursuant to which the stockholders of NetIQ immediately preceding such
transaction hold less than 50% of the equity interest in the surviving or
resulting entity of such transaction; (ii) a sale or other disposition by NetIQ
of assets (excluding inventory and used equipment sold in the ordinary course
of business) representing in excess of 50% of the fair market value of NetIQ's
business immediately prior to such sale, or (iii) the acquisition by any person
or group (including by way of a tender offer or an exchange offer or issuance
by NetIQ), directly or indirectly, of beneficial ownership or a right to
acquire beneficial ownership of shares representing in excess of 50% of the
voting power of the then outstanding shares of capital stock of the NetIQ, in
each case on terms that the Board of Directors of NetIQ determines, in its
reasonable judgment (after consultation with its financial advisor) to be more
favorable to the NetIQ stockholders from a financial point of view than the
terms of the Merger; provided, however, that any such offer shall not be deemed
to be a "NetIQ Superior Offer" if any financing required to consummate the
transaction contemplated by such offer is not committed and is not likely in
the judgment of NetIQ's Board of Directors to be obtained by such third party
on a timely basis.
5.3 Access to Information; Confidentiality.
(a) Each party will afford the other party and its accountants, counsel and
other representatives reasonable access during normal business hours to the
properties, books, records and personnel of the other party during the period
prior to the Effective Time to obtain all information concerning the business,
including the status of product development efforts, properties, results of
operations and personnel of such party, as the other party may reasonably
request. No information or knowledge obtained in any investigation pursuant to
this Section 5.3 will affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties
to consummate the Merger.
(b) The parties acknowledge that MCS and NetIQ have previously executed a
Confidentiality Agreement, dated February 4, 2000 (the "Confidentiality
Agreement"), which Confidentiality Agreement will continue in full force and
effect in accordance with its terms.
5.4 No Solicitation.
(a) Restrictions on MCS.
(i) From and after the date of this Agreement until the Effective Time or
termination of this Agreement pursuant to Article VII, MCS and its
subsidiaries will not, nor will they authorize or permit any of their
respective officers, directors, affiliates or employees or any investment
banker, attorney or other advisor or representative retained by any of them
to, directly or indirectly (i) solicit, initiate, encourage or induce the
making, submission or announcement of any MCS Acquisition Proposal (as
defined below), (ii) participate in any discussions or negotiations
regarding, or furnish to any person any non-public information with respect
to, or take any other action to facilitate any inquiries or the making of
any proposal that constitutes or may reasonably be expected to lead to, any
MCS Acquisition Proposal, (iii) engage in discussions with any person with
respect to any MCS Acquisition Proposal, except as to the existence of
these provisions, (iv) subject to Section 5.2(c), approve, endorse or
recommend any MCS Acquisition Proposal or (v) enter into any letter of
intent or similar document or any contract, agreement or commitment
contemplating or otherwise relating to any MCS Acquisition Transaction (as
defined below); provided, however, until the date on which this Agreement
is approved by the required vote of the MCS stockholders, this Section
5.4(a) shall not prohibit MCS from furnishing nonpublic information
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regarding MCS and its subsidiaries to, entering into a confidentiality
agreement with or entering into discussions with, any person or group in
response to a MCS Superior Offer submitted by such person or group (and not
withdrawn) if (1) neither MCS nor any representative of MCS and its
subsidiaries shall have violated any of the restrictions set forth in this
Section 5.4(a), (2) the Board of Directors of MCS concludes in good faith,
after consultation with its outside legal counsel, that such action is
required in order for the Board of Directors of MCS to comply with its
fiduciary obligations to MCS's stockholders under applicable law, (3) (x)
at least three (3) days prior to furnishing any such nonpublic information
to, or entering into discussions or negotiations with, such person or
group, MCS gives NetIQ written notice of the identity of such person or
group and of MCS's intention to furnish nonpublic information to, or enter
into discussions or negotiations with, such person or group and (y) MCS
receives from such person or group an executed confidentiality agreement
containing customary limitations on the use and disclosure of all nonpublic
written and oral information furnished to such person or group by or on
behalf of MCS and containing terms no less favorable to the disclosing
party than the terms of the Confidentiality Agreement, and (4)
contemporaneously with furnishing any such nonpublic information to such
person or group, MCS furnishes such nonpublic information to NetIQ (to the
extent such nonpublic information has not been previously furnished by MCS
to NetIQ). MCS and its subsidiaries will immediately cease any and all
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any MCS Acquisition Proposal. Without limiting
the foregoing, it is understood that any violation of the restrictions set
forth in the preceding two sentences by any officer or director of MCS or
any of its subsidiaries or any investment banker, attorney or other advisor
or representative of MCS or any of its subsidiaries shall be deemed to be a
breach of this Section 5.4(a) by MCS. In addition to the foregoing, MCS
shall (i) provide NetIQ with at least forty-eight (48) hours prior notice
(or such lesser prior notice as provided to the members of MCS's Board of
Directors but in no event less than eight hours) of any meeting of MCS's
Board of Directors at which MCS's Board of Directors is reasonably expected
to consider a MCS Superior Offer and (ii) provide NetIQ with at least three
(3) business days prior written notice of a meeting of MCS's Board of
Directors at which MCS's Board of Directors is reasonably expected to
recommend a MCS Superior Offer to its stockholders and together with such
notice a copy of the definitive documentation relating to such MCS Superior
Offer.
(ii) For purposes of this Agreement, "MCS Acquisition Proposal" shall
mean any offer or proposal (other than an offer or proposal by NetIQ)
relating to any MCS Acquisition Transaction. For the purposes of this
Agreement, "MCS Acquisition Transaction" shall mean any transaction or
series of related transactions other than the transactions contemplated by
this Agreement involving: (A) any acquisition or purchase from MCS by any
person or "group" (as defined under Section 13(d) of the Exchange Act and
the rules and regulations thereunder) of more than a 5% interest in the
total outstanding voting securities of MCS or any of its subsidiaries or
any tender offer or exchange offer that if consummated would result in any
person or "group" (as defined under Section 13(d) of the Exchange Act and
the rules and regulations thereunder) beneficially owning 5% or more of the
total outstanding voting securities of MCS or any of its subsidiaries or
any merger, consolidation, business combination or similar transaction
involving MCS pursuant to which the stockholders of MCS immediately
preceding such transaction hold less than 95% of the equity interests in
the surviving or resulting entity of such transaction; (B) any sale, lease
(other than in the ordinary course of business), exchange, transfer,
license (other than in the ordinary course of business), acquisition or
disposition of more than 5% of the assets of MCS; or (C) any liquidation or
dissolution of MCS.
(iii) In addition to the obligations of MCS set forth in paragraph (i) of
this Section 5.4(a), MCS as promptly as practicable, and in any event
within twenty-four (24) hours, shall advise NetIQ orally and in writing of
any request received by MCS for non-public information which MCS reasonably
believes would lead to a MCS Acquisition Proposal or of any MCS Acquisition
Proposal, the material terms and conditions of such request, MCS
Acquisition Proposal or inquiry, and the identity of the person or group
making any such request, MCS Acquisition Proposal or inquiry. MCS will keep
NetIQ informed in all material respects of the status and details
(including material amendments or proposed amendments) of any such request,
MCS Acquisition Proposal or inquiry.
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(b) Restrictions on NetIQ.
(i) From and after the date of this Agreement until the Effective Time or
termination of this Agreement pursuant to Article VII, NetIQ and its
subsidiaries will not, nor will they authorize or permit any of their
respective officers, directors, affiliates or employees or any investment
banker, attorney or other advisor or representative retained by any of them
to, directly or indirectly (i) solicit, initiate, encourage or induce the
making, submission or announcement of any NetIQ Acquisition Proposal (as
defined below), (ii) participate in any discussions or negotiations
regarding, or furnish to any person any non-public information with respect
to, or take any other action to facilitate any inquiries or the making of
any proposal that constitutes or may reasonably be expected to lead to, any
NetIQ Acquisition Proposal, (iii) engage in discussions with any person
with respect to any NetIQ Acquisition Proposal, except as to the existence
of these provisions, (iv) subject to Section 5.2(d), approve, endorse or
recommend any NetIQ Acquisition Proposal or (v) enter into any letter of
intent or similar document or any contract, agreement or commitment
contemplating or otherwise relating to any NetIQ Acquisition Transaction
(as defined below); provided, however, until the date on which this
Agreement is approved by the required vote of the NetIQ stockholders, this
Section 5.4(b) shall not prohibit NetIQ from furnishing nonpublic
information regarding NetIQ and its subsidiaries to, entering into a
confidentiality agreement with or entering into discussions with, any
person or group in response to a NetIQ Superior Offer submitted by such
person or group (and not withdrawn) if (1) neither NetIQ nor any
representative of NetIQ and its subsidiaries shall have violated any of the
restrictions set forth in this Section 5.4(b), (2) the Board of Directors
of NetIQ concludes in good faith, after consultation with its outside legal
counsel, that such action is required in order for the Board of Directors
of NetIQ to comply with its fiduciary obligations to NetIQ's stockholders
under applicable law, (3) (x) at least three (3) days prior to furnishing
any such nonpublic information to, or entering into discussions or
negotiations with, such person or group, NetIQ gives MCS written notice of
the identity of such person or group and of NetIQ's intention to furnish
nonpublic information to, or enter into discussions or negotiations with,
such person or group and (y) NetIQ receives from such person or group an
executed confidentiality agreement containing customary limitations on the
use and disclosure of all nonpublic written and oral information furnished
to such person or group by or on behalf of NetIQ and containing terms no
less favorable to the disclosing party than the terms of the
Confidentiality Agreement, and (4) contemporaneously with furnishing any
such nonpublic information to such person or group, NetIQ furnishes such
nonpublic information to MCS (to the extent such nonpublic information has
not been previously furnished by NetIQ to MCS). NetIQ and its subsidiaries
will immediately cease any and all existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any
NetIQ Acquisition Proposal. Without limiting the foregoing, it is
understood that any violation of the restrictions set forth in the
preceding two sentences by any officer or director of NetIQ or any of its
subsidiaries or any investment banker, attorney or other advisor or
representative of NetIQ or any of its subsidiaries shall be deemed to be a
breach of this Section 5.4(b) by NetIQ. In addition to the foregoing, NetIQ
shall (i) provide MCS with at least forty-eight (48) hours prior notice (or
such lesser prior notice as provided to the members of NetIQ's Board of
Directors but in no event less than eight hours) of any meeting of NetIQ's
Board of Directors at which NetIQ's Board of Directors is reasonably
expected to consider a NetIQ Superior Offer and (ii) provide MCS with at
least three (3) business days prior written notice of a meeting of NetIQ's
Board of Directors at which NetIQ's Board of Directors is reasonably
expected to recommend a NetIQ Superior Offer to its stockholders and
together with such notice a copy of the definitive documentation relating
to such NetIQ Superior Offer.
(ii) For purposes of this Agreement, "NetIQ Acquisition Proposal" shall
mean any offer or proposal (other than an offer or proposal by MCS)
relating to any NetIQ Acquisition Transaction. For the purposes of this
Agreement, "NetIQ Acquisition Transaction" shall mean any transaction or
series of related transactions other than the transactions contemplated by
this Agreement involving: (A) any acquisition or purchase from NetIQ by any
person or "group" (as defined under Section 13(d) of the Exchange Act and
the rules and regulations thereunder) of more than a 5% interest in the
total outstanding voting securities of NetIQ or any of its subsidiaries or
any tender offer or exchange offer that if consummated would result in any
person or "group" (as defined under Section 13(d) of the Exchange Act and
the rules and
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regulations thereunder) beneficially owning 5% or more of the total
outstanding voting securities of NetIQ or any of its subsidiaries or any
merger, consolidation, business combination or similar transaction
involving NetIQ pursuant to which the stockholders of NetIQ immediately
preceding such transaction hold less than 95% of the equity interests in
the surviving or resulting entity of such transaction; (B) any sale, lease
(other than in the ordinary course of business), exchange, transfer,
license (other than in the ordinary course of business), acquisition or
disposition of more than 5% of the assets of NetIQ; or (C) any liquidation
or dissolution of NetIQ.
(iii) In addition to the obligations of NetIQ set forth in paragraph (i)
of this Section 5.4(b), NetIQ as promptly as practicable, and in any event
within twenty-four (24) hours, shall advise MCS orally and in writing of
any request received by NetIQ for non-public information which NetIQ
reasonably believes would lead to a NetIQ Acquisition Proposal or of any
NetIQ Acquisition Proposal, the material terms and conditions of such
request, NetIQ Acquisition Proposal or inquiry, and the identity of the
person or group making any such request, NetIQ Acquisition Proposal or
inquiry. NetIQ will keep MCS informed in all material respects of the
status and details (including material amendments or proposed amendments)
of any such request, NetIQ Acquisition Proposal or inquiry.
5.5 Public Disclosure. NetIQ and MCS will consult with each other and agree
before issuing any press release or otherwise making any public statement with
respect to the Merger, this Agreement, a MCS Acquisition Proposal or a NetIQ
Acquisition Proposal and will not issue any such press release or make any such
public statement prior to such agreement, except as may be required by law or
any listing agreement with a national securities exchange or Nasdaq, in which
case reasonable efforts to consult with the other party will be made prior to
such release or public statement; provided, however, that no such consultation
or agreement shall be required if, prior to the date of such release or public
statement, either party shall have withheld, withdrawn, amended or modified its
unanimous recommendation in favor of the Merger.
5.6 Legal Requirements. Each of NetIQ, Merger Sub and MCS will take all
reasonable actions necessary or desirable to comply promptly with all legal
requirements which may be imposed on them with respect to the consummation of
the transactions contemplated by this Agreement (including furnishing all
information required in connection with approvals of or filings with any
Governmental Entity, and prompt resolution of any litigation prompted hereby)
and will promptly cooperate with and furnish information to any party hereto
necessary in connection with any such requirements imposed upon any of them or
their respective subsidiaries in connection with the consummation of the
transactions contemplated by this Agreement. NetIQ will use its commercially
reasonable efforts to take such steps as may be necessary to comply with the
securities and blue sky laws of all jurisdictions which are applicable to the
issuance of NetIQ Common Stock pursuant hereto. MCS will use its commercially
reasonable efforts to assist NetIQ as may be necessary to comply with the
securities and blue sky laws of all jurisdictions which are applicable in
connection with the issuance of NetIQ Common Stock pursuant hereto.
5.7 Third Party Consents. As soon as practicable following the date hereof,
NetIQ and MCS will each use its commercially reasonable efforts to obtain all
material consents, waivers and approvals under any of its or its subsidiaries'
agreements, contracts, licenses or leases required to be obtained in connection
with the consummation of the transactions contemplated hereby.
5.8 FIRPTA. At or prior to the Closing, MCS, if requested by NetIQ, shall
deliver to the IRS a notice that the MCS Common Stock is not a "U.S. Real
Property Interest" as defined and in accordance with the requirements of
Treasury Regulation Section 1.897-2(h)(2).
5.9 Notification of Certain Matters. NetIQ and Merger Sub will give prompt
notice to MCS, and MCS will give prompt notice to NetIQ, of the occurrence, or
failure to occur, of any event, which occurrence or failure to occur would be
reasonably likely to cause (a) any representation or warranty contained in this
Agreement to be untrue or inaccurate at any time from the date of this
Agreement to the Effective Time, such that the conditions set forth in Section
6.2(a) or 6.3(a), as the case may be, would not be satisfied as a result
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thereof, or (b) any material failure of NetIQ and Merger Sub or MCS, as the
case may be, or of any officer, director, employee or agent thereof, to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement. Notwithstanding the above, the delivery
of any notice pursuant to this section will not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
5.10 Commercially Reasonable Efforts and Further Assurances. Subject to the
respective rights and obligations of NetIQ and MCS under this Agreement, each
of the parties to this Agreement will use its commercially reasonable efforts
to effectuate the Merger and the other transactions contemplated hereby and to
fulfill and cause to be fulfilled the conditions to closing under this
Agreement. Each party hereto, at the reasonable request of another party
hereto, will execute and deliver such other instruments and do and perform such
other acts and things as may be necessary or desirable for effecting completely
the consummation of the transactions contemplated hereby.
5.11 Stock Options; Employee Stock Purchase Plans.
(a) Stock Options. At the Effective Time, each outstanding option to purchase
shares of MCS Common Stock (each, a "MCS Stock Option") under the MCS Stock
Option Plans, whether or not vested, shall by virtue of the Merger be assumed
by NetIQ. NetIQ shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of NetIQ Common Stock for issuance upon
exercise of all MCS Stock Options assumed in accordance with this Section 5.11.
Each MCS Stock Option so assumed by NetIQ under this Agreement will continue to
have, and be subject to, the same terms and conditions of such options
immediately prior to the Effective Time (including, without limitation, any
repurchase rights or vesting provisions), except that (i) each MCS Stock Option
will be exercisable (or will become exercisable in accordance with its terms)
for that number of whole shares of NetIQ Common Stock equal to the product of
the number of shares of MCS Common Stock that were issuable upon exercise of
such MCS Stock Option immediately prior to the Effective Time multiplied by the
Exchange Ratio, rounded down to the nearest whole number of shares of NetIQ
Common Stock and (ii) the per share exercise price for the shares of NetIQ
Common Stock issuable upon exercise of such assumed MCS Stock Option will be
equal to the quotient determined by dividing the exercise price per share of
MCS Common Stock at which such MCS Stock Option was exercisable immediately
prior to the Effective Time by the Exchange Ratio, rounded up to the nearest
whole cent.
(b) ESPP. NetIQ agrees that from and after the Effective Time, MCS employees
may participate in the NetIQ ESPP, subject to the terms and conditions of the
NetIQ ESPP.
5.12 Form S-8. NetIQ agrees to file a registration statement on Form S-8 for
the shares of NetIQ Common Stock issuable with respect to assumed MCS Stock
Options as soon as is reasonably practicable after the Effective Time.
5.13 Service Credit. Service of MCS Employees, as credited under the MCS
Plans, prior to the Effective Time shall be credited against all service and
waiting period requirements under NetIQ's comparable employee benefit plans.
5.14 Indemnification.
(a) From and after the Effective Time, the Surviving Corporation will fulfill
and honor in all respects the obligations of MCS pursuant to any
indemnification agreements between MCS and its directors and officers existing
prior to the date hereof. The Certificate of Incorporation and Bylaws of the
Surviving Corporation will contain the provisions with respect to
indemnification and elimination of liability for monetary damages set forth in
the Certificate of Incorporation and Bylaws of MCS, which provisions will not
be amended, repealed or otherwise modified for a period of six (6) years from
the Effective Time in any manner that would adversely affect the rights
thereunder of individuals who, at the Effective Time, were directors, officers,
employees or agents of MCS, unless such modification is required by law.
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(b) For a period of six years after the Effective Time, NetIQ will cause the
Surviving Corporation to use its commercially reasonable efforts to maintain in
effect, if available, directors' and officers' liability insurance covering
those persons who are currently covered by MCS's directors' and officers'
liability insurance policy on terms comparable to those applicable to the then
current directors and officers of NetIQ; provided, however, that in no event
will NetIQ or the Surviving Corporation be required to expend in excess of
$500,000 in an annual premium for such coverage (or such coverage as is
available for such annual premium).
(c) This Section 5.13 will survive any termination of this Agreement and the
consummation of the Merger at the Effective Time and will be binding on all
successors and assigns of the Surviving Corporation.
5.15 Tax-Free Reorganization. NetIQ and MCS will each use its commercially
reasonable efforts to cause the Merger to be treated as a reorganization within
the meaning of Section 368 of the Code. NetIQ and MCS will each make available
to the other party and their respective legal counsel copies of all returns
requested by the other party.
5.16 Nasdaq Listing. NetIQ agrees to authorize for listing on Nasdaq the
shares of NetIQ Common Stock issuable, and those required to be reserved for
issuance, in connection with the Merger, upon official notice of issuance.
5.17 Action by Boards of Directors. Prior to the Effective Time, the board of
directors of each of NetIQ and MCS shall comply as applicable with the
provisions of the SEC's no-action letter dated January 12, 1999 addressed to
Skadden, Arps, Slate, Meagher and Flom LLP relating to Rule 16b of the Exchange
Act.
5.18 MCS Affiliate Agreement. Set forth on the MCS Schedules is a list of
those persons who may be deemed to be, in MCS's reasonable judgment, affiliates
of MCS within the meaning of Rule 145 promulgated under the Securities Act (an
"MCS Affiliate"). MCS will provide NetIQ with such information and documents as
NetIQ reasonably requests for purposes of reviewing such list. MCS will use its
best efforts to deliver or cause to be delivered to NetIQ as promptly as
practicable on or following the date hereof from each MCS Affiliate an executed
affiliate agreement in substantially the form attached hereto as Exhibit E (the
"MCS Affiliate Agreement"), each of which will be in full force and effect as
of the Effective Time. NetIQ will be entitled to place appropriate legends on
the certificates evidencing any NetIQ Common Stock to be received by a MCS
Affiliate pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the NetIQ Common Stock,
consistent with the terms of the MCS Affiliate Agreement.
5.19 Regulatory Filings; Reasonable Efforts. As soon as may be reasonably
practicable, MCS and NetIQ each shall file with the United States Federal Trade
Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice ("DOJ") Notification and Report Forms relating to the
transactions contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the merger notification or
control laws and regulations of any applicable jurisdiction, as agreed to by
the parties. MCS and NetIQ each shall promptly (a) supply the other with any
information which may be required in order to effectuate such filings and (b)
supply any additional information which reasonably may be required by the FTC,
the DOJ or the competition or merger control authorities of any other
jurisdiction and which the parties may reasonably deem appropriate.
5.20 Rights Under the LOI. MCS shall proceed to conclude definitive
agreements embodying the terms of the LOI, provided that NetIQ shall approve
(which approval shall not be unreasonably withheld) the form of such definitive
agreements. In addition, MCS will not enter into any material amendments or
waivers of the LOI or such definitive agreements without NetIQ's prior written
consent. If NetIQ and MCS determine, for tax planning or other reasons, that an
assignment to NetIQ of MCS's rights under the LOI or the definitive agreements
is appropriate, the parties shall effect such an assignment. If, after such an
assignment, NetIQ does not execute a Merger Agreement (as defined in the LOI)
by March 15, 2000 or if this Agreement shall be terminated pursuant to Article
VII, the assignment of MCS's rights under the LOI shall be terminated and such
rights shall revert to MCS.
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ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted, and the Merger shall have been duly approved, by the requisite vote
under applicable law by the stockholders of MCS, and the issuance of shares of
NetIQ Common Stock by virtue of the Merger shall have been duly approved by the
requisite vote under the rules of the National Association of Securities
Dealers, Inc. by the stockholders of NetIQ.
(b) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose, and no similar proceeding in respect
of the Proxy Statement shall have been initiated or threatened in writing by
the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger. All waiting
periods, if any, under the HSR Act relating to the transactions contemplated
hereby will have expired or terminated early.
(d) Tax Opinions. NetIQ and MCS shall each have received substantially
identical written opinions from their counsel, Wilson Sonsini Goodrich &
Rosati, Professional Corporation, and Davis Polk & Wardwell, respectively, in
form and substance reasonably satisfactory to them, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code, and such opinions shall not have been withdrawn. The parties to this
Agreement agree to make reasonable representations as requested by such counsel
for the purpose of rendering such opinions.
(e) Nasdaq Listing. The shares of NetIQ Common Stock issuable to stockholders
of MCS pursuant to this Agreement and such other shares required to be reserved
for issuance in connection with the Merger shall have been authorized for
listing on Nasdaq upon official notice of issuance.
6.2 Additional Conditions to Obligations of MCS. The obligation of MCS to
consummate and effect the Merger shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by MCS:
(a) Representations and Warranties. The representations and warranties of
NetIQ and Merger Sub contained in this Agreement shall have been true and
correct in all material respects as of the date of this Agreement, except where
the failure to be so true and correct would not, in the aggregate, have a
Material Adverse Effect on NetIQ. In addition, the representations and
warranties of NetIQ and Merger Sub contained in this Agreement shall be true
and correct in all material respects on and as of the Effective Time except for
changes contemplated by this Agreement and except for those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct as of such particular date), with the same force and
effect as if made on and as of the Effective Time, except in such cases (other
than the representations in Sections 3.2 and 3.3) where the failure to be so
true and correct would not, in the aggregate, have a Material Adverse Effect on
NetIQ. MCS shall have received a certificate with respect to the foregoing
signed on behalf of NetIQ by the Chief Executive Officer and the Chief
Financial Officer of NetIQ; and
(b) Agreements and Covenants. NetIQ and Merger Sub shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by
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them on or prior to the Effective Time, and MCS shall have received a
certificate to such effect signed on behalf of NetIQ by the Chief Executive
Officer and the Chief Financial Officer of NetIQ.
6.3 Additional Conditions to the Obligations of NetIQ and Merger Sub. The
obligations of NetIQ and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, exclusively by
NetIQ:
(a) Representations and Warranties. The representations and warranties of MCS
contained in this Agreement shall have been true and correct in all material
respects as of the date of this Agreement, except where the failure to be so
true and correct would not, in the aggregate, have a Material Adverse Effect on
MCS. In addition, the representations and warranties of MCS contained in this
Agreement shall be true and correct in all material respects on and as of the
Effective Time except for changes contemplated by this Agreement and except for
those representations and warranties which address matters only as of a
particular date (which shall remain true and correct as of such particular
date), with the same force and effect as if made on and as of the Effective
Time, except in such cases (other than the representations in Sections 2.2 and
2.3) where the failure to be so true and correct would not, in the aggregate,
have a Material Adverse Effect on MCS. NetIQ shall have received a certificate
with respect to the foregoing signed on behalf of MCS by the President and the
Chief Financial Officer of MCS; and
(b) Agreements and Covenants. MCS shall have performed or complied in all
material respects with all agreements and covenants required by this Agreement
to be performed or complied with by it on or prior to the Effective Time, and
the NetIQ shall have received a certificate to such effect signed on behalf of
MCS by the President and the Chief Financial Officer of MCS.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval of the Merger by
the stockholders of MCS or the approval of the issuance of NetIQ Common Stock
in connection with the Merger by the stockholders of NetIQ:
(a) by mutual written consent duly authorized by the Boards of Directors of
NetIQ and MCS;
(b) by either MCS or NetIQ if the Merger shall not have been consummated by
July 31, 2000; provided, however, that the right to terminate this Agreement
under this Section 7.1(b) shall not be available to any party whose action or
failure to act has been a principal cause of or resulted in the failure of the
Merger to occur on or before such date and such action or failure to act
constitutes a breach of this Agreement;
(c) by either MCS or NetIQ if a governmental entity shall have issued an
order, decree or ruling or taken any other action, in any case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, which order, decree or ruling is final and nonappealable;
(d) by either MCS or NetIQ if the required approvals of the stockholders of
MCS or the stockholders of NetIQ contemplated by this Agreement shall not have
been obtained by reason of the failure to obtain the required vote upon a vote
taken at a meeting of stockholders duly convened therefor or at any adjournment
thereof; provided, however, that the right to terminate this Agreement under
this Section 7.1(d) shall not be available to any party where the failure to
obtain stockholder approval of such party shall have been caused by the action
or failure to act of such party in breach of this Agreement;
(e) by MCS, upon a breach of any representation, warranty, covenant or
agreement on the part of NetIQ set forth in this Agreement, or if any
representation or warranty of NetIQ shall have become untrue, in either case
such that the conditions set forth in Section 6.2(a) or Section 6.2(b) would
not be satisfied as of the time
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of such breach or as of the time such representation or warranty shall have
become untrue, provided, that if such inaccuracy in NetIQ's representations and
warranties or breach by NetIQ is curable by NetIQ through the exercise of its
commercially reasonable efforts, then MCS may not terminate this Agreement
under this Section 7.1(e) for thirty (30) days after delivery of written notice
from MCS to NetIQ of such breach, provided NetIQ continues to exercise
commercially reasonable efforts to cure such breach (it being understood that
MCS may not terminate this Agreement pursuant to this paragraph (e) if such
breach by NetIQ is cured during such thirty (30)-day period);
(f) by NetIQ, upon a breach of any representation, warranty, covenant or
agreement on the part of MCS set forth in this Agreement, or if any
representation or warranty of MCS shall have become untrue, in either case such
that the conditions set forth in Section 6.3(a) or Section 6.3(b) would not be
satisfied as of the time of such breach or as of the time such representation
or warranty shall have become untrue, provided, that if such inaccuracy in
MCS's representations and warranties or breach by MCS is curable by MCS through
the exercise of its commercially reasonable efforts, then NetIQ may not
terminate this Agreement under this Section 7.1(f) for thirty (30) days after
delivery of written notice from NetIQ to MCS of such breach, provided MCS
continues to exercise commercially reasonable efforts to cure such breach (it
being understood that NetIQ may not terminate this Agreement pursuant to this
paragraph (f) if such breach by MCS is cured during such thirty (30)-day
period);
(g) by MCS if a MCS Triggering Event (as defined below) shall have occurred;
or
(h) by NetIQ if a NetIQ Triggering Event (as defined below) shall have
occurred.
For the purposes of this Agreement, a "MCS Triggering Event" shall be deemed
to have occurred if: (i) the Board of Directors of NetIQ or any committee
thereof shall for any reason have withdrawn or shall have amended or modified
in a manner adverse to MCS its unanimous recommendation in favor of, the
adoption and approval of the Agreement or the approval of the Merger; (ii)
NetIQ shall have failed to include in the Proxy Statement the unanimous
recommendation of the Board of Directors of NetIQ in favor of the adoption and
approval of the Agreement and the approval of the Merger; (iii) Board of
Directors of NetIQ fails to reaffirm its unanimous recommendation in favor of
the adoption and approval of the Agreement and the approval of the Merger
within ten (10) business days after MCS requests in writing that such
recommendation be reaffirmed at any time following the announcement of an
Acquisition Proposal; (iv) the Board of Directors of NetIQ or any committee
thereof shall have approved or recommended any NetIQ Acquisition Proposal; (v)
NetIQ shall have entered into any letter of intent or similar document or any
agreement, contract or commitment accepting any NetIQ Acquisition Proposal;
(vi) a tender or exchange offer relating to securities of NetIQ shall have been
commenced by a person unaffiliated with MCS and NetIQ shall not have sent to
its securityholders pursuant to Rule 14e-2 promulgated under the Securities
Act, within ten (10) business days after such tender or exchange offer is first
published sent or given, a statement disclosing that NetIQ recommends rejection
of such tender or exchange offer; or (vii) NetIQ shall have breached the
provisions of Section 5.4(b) of this Agreement.
For the purposes of this Agreement, a "NetIQ Triggering Event" shall be
deemed to have occurred if: (i) the Board of Directors of MCS or any committee
thereof shall for any reason have withdrawn or shall have amended or modified
in a manner adverse to NetIQ its unanimous recommendation in favor of, the
adoption and approval of the Agreement or the approval of the Merger; (ii) MCS
shall have failed to include in the Proxy Statement the unanimous
recommendation of the Board of Directors of MCS in favor of the adoption and
approval of the Agreement and the approval of the Merger; (iii) Board of
Directors of MCS fails to reaffirm its unanimous recommendation in favor of the
adoption and approval of the Agreement and the approval of the Merger within
ten (10) business days after NetIQ requests in writing that such recommendation
be reaffirmed at any time following the announcement of an Acquisition
Proposal; (iv) the Board of Directors of MCS or any committee thereof shall
have approved or recommended any MCS Acquisition Proposal; (v) MCS shall have
entered into any letter of intent or similar document or any agreement,
contract or commitment accepting any MCS Acquisition Proposal; (vi) a tender or
exchange offer relating to securities of MCS shall have been commenced by a
person unaffiliated with NetIQ and MCS shall not have sent to its
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securityholders pursuant to Rule 14e-2 promulgated under the Securities Act,
within ten (10) business days after such tender or exchange offer is first
published sent or given, a statement disclosing that MCS recommends rejection
of such tender or exchange offer; or (vii) MCS shall have breached the
provisions of Section 5.4(a) of this Agreement.
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties
hereto. In the event of the termination of this Agreement as provided in
Section 7.1, this Agreement shall be of no further force or effect, except (i)
as set forth in this Section 7.2, Section 7.3 and Article 8 (General
Provisions), each of which shall survive the termination of this Agreement, and
(ii) nothing herein shall relieve any party from liability for any breach of
this Agreement.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, whether or not the
Merger is consummated; provided, however, that NetIQ and MCS shall share
equally all fees and expenses, other than attorneys' and accountants' fees and
expenses, incurred (i) in relation to the printing and filing of the Proxy
Statement (including any preliminary materials related thereto) and the
Registration Statement (including financial statements and exhibits) and any
amendments or supplements thereto or (ii) for the pre-merger notification and
report forms under the HSR Act.
(b) MCS Payments.
(i) MCS shall pay to NetIQ in immediately available funds, within two (2)
business days after demand by NetIQ, an amount equal to $53,000,000 (the
"MCS Termination Fee") if this Agreement is terminated by NetIQ pursuant to
Section 7.1(h).
(ii) MCS shall pay NetIQ in immediately available funds, within two (2)
business days after demand by NetIQ, an amount equal to the MCS Termination
Fee, if this Agreement is terminated by NetIQ or MCS, as applicable,
pursuant to Section 7.1(b) or Section 7.1(d) as a result of MCS's failure
to obtain the required approvals of the stockholders of MCS and any of the
following shall occur:
(1) if following the date hereof and prior to the termination of this
Agreement, a third party has publicly announced a MCS Acquisition
Proposal and within twelve (12) months following the termination of
this Agreement a MCS Acquisition (as defined below) is consummated; or
(2) if following the date hereof and prior to the termination of this
Agreement, a third party has announced a MCS Acquisition Proposal and
within twelve (12) months following the termination of this Agreement
MCS enters into an agreement or letter of intent providing for a MCS
Acquisition.
(iii) MCS acknowledges that the agreements contained in this Section
7.3(b) are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, NetIQ would not enter into
this Agreement; accordingly, if MCS fails to pay in a timely manner the
amounts due pursuant to this Section 7.3(b) and, in order to obtain such
payment, NetIQ makes a claim that results in a judgment against MCS for the
amounts set forth in this Section 7.3(b), MCS shall pay to NetIQ its
reasonable costs and expenses (including reasonable attorneys' fees and
expenses) in connection with such suit, together with interest on the
amounts set forth in this Section 7.3(b) at the prime rate of The Chase
Manhattan Bank in effect on the date such payment was required to be made.
Payment of the fees described in this Section 7.3(b) shall not be in lieu
of damages incurred in the event of breach of this Agreement. For the
purposes of this Agreement, "MCS Acquisition" shall mean any of the
following transactions (other than the transactions contemplated by this
Agreement): (i) a merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
MCS pursuant to which the stockholders of MCS immediately preceding such
transaction hold less than 50% of the aggregate equity interests in the
surviving or resulting entity of such transaction, (ii) a sale or other
disposition by MCS of
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assets representing in excess of 50% of the aggregate fair market value of
MCS's business immediately prior to such sale or (iii) the acquisition by
any person or group (including by way of a tender offer or an exchange
offer or issuance by MCS), directly or indirectly, of beneficial ownership
or a right to acquire beneficial ownership of shares representing in excess
of 50% of the voting power of the then outstanding shares of capital stock
of MCS.
(c) NetIQ Payments.
(i) NetIQ shall pay to MCS in immediately available funds, within two (2)
business days after demand by MCS, an amount equal to $53,000,000 (the
"NetIQ Termination Fee") if this Agreement is terminated by MCS pursuant to
Section 7.1(g).
(ii) NetIQ shall pay MCS in immediately available funds, within two (2)
business days after demand by MCS, an amount equal to the NetIQ Termination
Fee, if this Agreement is terminated by MCS or NetIQ, as applicable,
pursuant to Section 7.1(b) or Section 7.1(d) as a result of NetIQ's failure
to obtain the required approvals of the stockholders of NetIQ and any of
the following shall occur:
(1) if following the date hereof and prior to the termination of this
Agreement, a third party has publicly announced a NetIQ Acquisition
Proposal and within twelve (12) months following the termination of
this Agreement a NetIQ Acquisition (as defined below) is consummated;
or
(2) if following the date hereof and prior to the termination of this
Agreement, a third party has announced a NetIQ Acquisition Proposal and
within twelve (12) months following the termination of this Agreement
NetIQ enters into an agreement or letter of intent providing for a
NetIQ Acquisition.
(iii) NetIQ acknowledges that the agreements contained in this Section
7.3(c) are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, MCS would not enter into
this Agreement; accordingly, if NetIQ fails to pay in a timely manner the
amounts due pursuant to this Section 7.3(c) and, in order to obtain such
payment, MCS makes a claim that results in a judgment against NetIQ for the
amounts set forth in this Section 7.3(c), NetIQ shall pay to MCS its
reasonable costs and expenses (including reasonable attorneys' fees and
expenses) in connection with such suit, together with interest on the
amounts set forth in this Section 7.3(c) at the prime rate of The Chase
Manhattan Bank in effect on the date such payment was required to be made.
Payment of the fees described in this Section 7.3(c) shall not be in lieu
of damages incurred in the event of breach of this Agreement. For the
purposes of this Agreement, "NetIQ Acquisition" shall mean any of the
following transactions (other than the transactions contemplated by this
Agreement): (i) a merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
NetIQ pursuant to which the stockholders of NetIQ immediately preceding
such transaction hold less than 50% of the aggregate equity interests in
the surviving or resulting entity of such transaction, (ii) a sale or other
disposition by NetIQ of assets representing in excess of 50% of the
aggregate fair market value of NetIQ's business immediately prior to such
sale or (iii) the acquisition by any person or group (including by way of a
tender offer or an exchange offer or issuance by NetIQ), directly or
indirectly, of beneficial ownership or a right to acquire beneficial
ownership of shares representing in excess of 50% of the voting power of
the then outstanding shares of capital stock of NetIQ.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of the parties hereto.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party. Delay in exercising any right under
this Agreement shall not constitute a waiver of such right.
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ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations and
warranties of MCS, NetIQ and Merger Sub contained in this Agreement shall
terminate at the Effective Time, and only the covenants that by their terms
survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via facsimile (receipt confirmed) to the parties at
the following addresses or facsimile numbers (or at such other address or
facsimile numbers for a party as shall be specified by like notice):
(a) if to NetIQ or Merger Sub, to:
NetIQ Corp.
5410 Betsy Ross Drive
Santa Clara, California 95054
Attention: Chief Executive Officer
Fax No.: (408) 330-0959
with copies to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
Thomas C. DeFilipps, Esq.
Fax No.: (650) 493-6811
and to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
Spear Street Tower
One Market
San Francisco, California 94105
Attention: Steve L. Camahort, Esq.
Fax No.: (415) 947-2099
(b) if to MCS, to:
Mission Critical Software Inc.
13939 Northwest Freeway
Houston, Texas 77040
Attention: Chief Financial Officer
Fax No.: (713) 548-1829
with a copy to:
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, California 94025
Attention: William M. Kelly, Esq.
Fax No.: (650) 752-2111
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8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. The words
"include," "includes" and "including" when used herein shall be deemed in each
case to be followed by the words "without limitation." The table of contents
and headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
When reference is made herein to "the business of" an entity, such reference
shall be deemed to include the business of all direct and indirect subsidiaries
of such entity. Reference to the subsidiaries of an entity shall be deemed to
include all direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement, the term "knowledge" means, with respect
to any matter in question, that the executive officers of MCS or NetIQ, as the
case may be, have actual knowledge of such matter.
(c) For purposes of this Agreement, the term "Material Adverse Effect" when
used in connection with an entity means any change, event, violation,
inaccuracy, circumstance or effect that is materially adverse to the business,
assets (including intangible assets), capitalization, financial condition or
results of operations of such entity and its subsidiaries taken as a whole;
provided, however, that in no event shall (A) a decrease in such entity's stock
price or the failure to meet or exceed Wall Street research analysts' or such
entity's internal earnings or other estimates or projections in and of itself
constitute a Material Adverse Effect or (B) any change, event, violation,
inaccuracy, circumstance or effect that results from (x) the public
announcement or pendency of the transactions contemplated hereby, (y) changes
affecting the software industry generally or (z) changes affecting the United
States economy generally, constitute a Material Adverse Effect.
8.4 Counterparts. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other party, it being understood that all parties need not
sign the same counterpart.
8.5 Entire Agreement. This Agreement and the documents and instruments and
other agreements among the parties hereto as contemplated by or referred to
herein, including the MCS Schedules and the NetIQ Schedules (a) constitute the
entire agreement among the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof, it being
understood that the Confidentiality Agreement shall continue in full force and
effect until the Closing and shall survive any termination of this Agreement;
and (b) are not intended to confer upon any other person any rights or remedies
hereunder, except as set forth herein.
8.6 Severability. In the event that any provision of this Agreement or
thereof, becomes or is declared by a court of competent jurisdiction to be
illegal, void or unenforceable, the remainder of this Agreement will continue
in full force and effect and the application of such provision to other persons
or circumstances will be interpreted so as reasonably to effect the intent of
the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions hereof
in any court of the United States or any state having jurisdiction, this being
in addition to any other remedy to which they are entitled at law or in equity.
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8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule
of construction providing that ambiguities in an agreement or other document
will be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the of the parties. Subject to the preceding sentence, this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.11 Waiver of Jury Trial. EACH OF NEPTUNE, MERCURY AND MERGER SUB HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF NEPTUNE, MERCURY OR MERGER SUB IN
THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
IN WITNESS WHEREOF, NetIQ, Merger Sub and MCS have caused this Agreement to
be executed by their duly authorized respective officers, as of the date first
written above.
NETIQ CORP.
/s/ Ching-Fa Hwang
By: _________________________________
Name: Ching-Fa Hwang
Title: President and CEO
MISSION CRITICAL SOFTWARE INC.
/s/ Michael S. Bennett
By: _________________________________
Name: Michael S. Bennett
Title: Chairman/CEO
PLANET ACQUISITION CORP.
By: _________________________________
Name: ____________________________
Title: ___________________________
****REORGANIZATION AGREEMENT****
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EXHIBIT A
NETIQ STOCK OPTION AGREEMENT
THIS NETIQ STOCK OPTION AGREEMENT (this "Agreement") is made and entered into
as of February 26, 2000, among Mission Critical Software Inc., a Delaware
corporation ("MCS"), and NetIQ Corp., a Delaware corporation ("NetIQ").
Capitalized terms used but not otherwise defined herein will have the meanings
ascribed to them in the Merger Agreement (as defined below).
RECITALS
A. MCS, Merger Sub (as defined below) and NetIQ have entered into an
Agreement and Plan of Reorganization (the "Merger Agreement") which provides
for the merger (the "Merger") of a wholly-owned subsidiary of NetIQ ("Merger
Sub") with and into MCS. Pursuant to the Merger, all outstanding capital stock
of MCS will be converted into the right to receive Common Stock of NetIQ.
B. As a condition to NetIQ's willingness to enter into the Merger Agreement,
NetIQ has requested that MCS agree, and MCS has so agreed, to grant to NetIQ an
option to acquire shares of MCS's Common Stock, par value $0.001 per share (the
"MCS Shares"), upon the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and agreements set forth herein and in the Merger Agreement and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. Grant of Option. NetIQ hereby grants to MCS an irrevocable option (the
"Option") to acquire up to 3,520,234 NetIQ Shares (the "Option Shares"), in the
manner set forth below by paying cash at a price of $73.50 per share (the
"Exercise Price").
2. Exercise of Option; Maximum Proceeds.
(a) The Option may be exercised by MCS in whole or in part, at any time or
from time to time (i) if the Merger Agreement is terminated pursuant to 7.1(g)
thereof and an event causing the NetIQ Termination Fee to become payable
pursuant to Section 7.3(c) of the Merger Agreement occurs or (ii) immediately
prior to the occurrence of any event causing the NetIQ Termination Fee to
become payable pursuant to Section 7.1(b) or 7.1(d) thereof (any of the events
being referred to herein as an "Exercise Event"). In the event MCS wishes to
exercise the Option, MCS will deliver to NetIQ a written notice (each an
"Exercise Notice") specifying the total number of Option Shares it wishes to
acquire. Each closing of a purchase of Option Shares (a "Closing") will occur
on a date and at a time prior to the termination of the Option designated by
MCS in an Exercise Notice delivered at least two (2) business days prior to the
date of such Closing, which Closing will be held at the principal offices of
NetIQ.
(b) The Option will terminate upon the earliest of (i) the Effective Time,
(ii) twelve (12) months following the date on which the Merger Agreement is
terminated pursuant to Section 7.1(b) or 7.1(d) thereof, if no event causing
the Termination Fee to become payable pursuant to Section 7.3(c)(ii) of the
Merger Agreement has occurred, (iii) twelve (12) months following the date on
which the Merger Agreement is terminated pursuant to Section 7.1(h) thereof,
(iv) in the event the Merger Agreement has been terminated pursuant to Section
7.1(b) or 7.1(d) thereof and the Termination Fee became payable pursuant to
Section 7.3(c)(ii) thereof, twelve (12) months after payment of the Termination
Fee; and (v) the date on which the Merger Agreement is terminated if neither a
Triggering Event nor the public announcement of a NetIQ Acquisition Proposal by
a third party occurred on or prior to the date of such termination; provided,
however, that if the Option cannot be exercised by reason of any applicable
government order or because the waiting period related to the issuance of the
Option Shares under the HSR Act will not have expired or been terminated, then
the Option will not terminate until the tenth (10th) business day after such
impediment to exercise will have been removed or will have become final and not
subject to appeal.
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(c) If MCS receives in the aggregate pursuant to Section 7.3(c) of the Merger
Agreement together with either (i) proceeds in connection with any sales or
other dispositions of Option Shares and any dividends received by MCS declared
on Option Shares or (ii) in the aggregate pursuant to Section 6 of this
Agreement, more than the sum of (x) $66,000,000 plus (y) the Exercise Price
multiplied by the number of NetIQ Shares purchased by MCS pursuant to the
Option, then all proceeds to MCS in excess of such sum will be remitted by MCS
to NetIQ.
3. Conditions to Closing. The obligation of NetIQ to issue Option Shares to
MCS hereunder is subject to the conditions that (A) any waiting period under
the HSR Act applicable to the issuance of the Option Shares hereunder will have
expired or been terminated; (B) all material consents, approvals, orders or
authorizations of, or registrations, declarations or filings with, any Federal,
state or local administrative agency or commission or other Federal state or
local governmental authority or instrumentality, if any, required in connection
with the issuance of the Option Shares hereunder will have been obtained or
made, as the case may be; and (C) no preliminary or permanent injunction or
other order by any court of competent jurisdiction prohibiting or otherwise
restraining such issuance will be in effect. It is understood and agreed that
at any time during which the Option is exercisable, the parties will use their
respective best efforts to satisfy all conditions to Closing, so that a Closing
may take place as promptly as practicable.
4. Closing. At any Closing, (A) NetIQ will deliver to MCS a single
certificate in definitive form representing the number of NetIQ Shares
designated by MCS in its Exercise Notice, such certificate to be registered in
the name of MCS and to bear the legend set forth in Section 9 hereof, against
delivery of (B) payment by MCS to NetIQ of the aggregate purchase price for the
NetIQ Shares so designated and being purchased by delivery of a certified check
or bank check.
5. Representations and Warranties of the NetIQ. NetIQ represents and warrants
to MCS that (A) NetIQ is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has the corporate
power and authority to enter into this Agreement and to carry out its
obligations hereunder; (B) the execution and delivery of this Agreement by
NetIQ and consummation by NetIQ of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of NetIQ and
no other corporate proceedings on the part of NetIQ are necessary to authorize
this Agreement or any of the transactions contemplated hereby; (C) this
Agreement has been duly executed and delivered by NetIQ and constitutes a
legal, valid and binding obligation of NetIQ and, assuming this Agreement
constitutes a legal, valid and binding obligation of MCS, is enforceable
against NetIQ in accordance with its terms; (D) except for any filings required
under the HSR Act, NetIQ has taken all necessary corporate and other action to
authorize and reserve for issuance and to permit it to issue upon exercise of
the Option, and at all times from the date hereof until the termination of the
Option will have reserved for issuance, a sufficient number of unissued NetIQ
Shares for MCS to exercise the Option in full and will take all necessary
corporate or other action to authorize and reserve for issuance all additional
NetIQ Shares or other securities which may be issuable pursuant to Section 8(a)
upon exercise of the Option, all of which, upon their issuance and delivery in
accordance with the terms of this Agreement, will be validly issued, fully paid
and nonassessable; (E) upon delivery of the NetIQ Shares and any other
securities to MCS upon exercise of the Option, MCS will acquire such NetIQ
Shares or other securities free and clear of all material claims, liens,
charges, encumbrances and security interests of any kind or nature whatsoever,
excluding those imposed by MCS; (F) the execution and delivery of this
Agreement by NetIQ do not, and the performance of this Agreement by NetIQ will
not, (i) conflict with or violate the Certificate of Incorporation or Bylaws or
equivalent organizational documents of NetIQ or any of its subsidiaries, (ii)
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to NetIQ or any of its subsidiaries or by which its or any of their
respective properties is bound or affected or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or impair NetIQ's or any of its subsidiaries'
rights or alter the rights or obligations of any third party under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien or encumbrance on any of the properties or
assets of NetIQ or any of its subsidiaries pursuant to, any material note,
bond, mortgage, indenture, contract, agreement, lease,
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license, permit, franchise or other instrument or obligation to which NetIQ or
any of its subsidiaries is a party or by which NetIQ or any of its subsidiaries
or its or any of their respective properties are bound or affected; and (G) the
execution and delivery of this Agreement by NetIQ does not, and the performance
of this Agreement by NetIQ will not, require any consent, approval,
authorization or permit of, or filing with, or notification to, any
Governmental Entity except pursuant to the HSR Act.
6. MCS Put. At the request of and upon notice by MCS (the "Put Notice"), at
any time during the period during which the Option is exercisable pursuant to
Section 2 (the "Purchase Period"), NetIQ (or any successor entity thereof) will
purchase from MCS the Option, to the extent not previously exercised, at the
price set forth in subparagraph (i) below (as limited by subparagraph (iii)
below), and the Option Shares, if any, acquired by MCS pursuant thereto, at the
price set forth in subparagraph (ii) below (as limited by subparagraph (iii)
below):
(a) The difference between the "Market/Tender Offer Price" for the NetIQ
Shares as of the date MCS gives notice of its intent to exercise its rights
under this Section 6(a) (defined as the higher of (A) the highest price per
share offered as of such date pursuant to any NetIQ Acquisition Proposal which
was made prior to such date and (B) the average closing sale price of NetIQ
Shares then on Nasdaq during the twenty (20) trading days ending on the trading
day immediately preceding such date) and the Exercise Price, multiplied by the
number of NetIQ Shares purchasable pursuant to the Option, but only if the
Market/Tender Offer Price is greater than the Exercise Price. For purposes of
determining the highest price offered pursuant to any NetIQ Acquisition
Proposal which involves consideration other than cash, the value of such
consideration will be equal to the higher of (x) if securities of the same
class of the proponent as such consideration are traded on any national
securities exchange or by any registered securities association, a value based
on the closing sale price or asked price for such securities on their principal
trading market on such date and (y) the value ascribed to such consideration by
the proponent of such NetIQ Acquisition Proposal, or if no such value is
ascribed, a value determined in good faith by the Board of Directors of NetIQ.
(b) The Exercise Price paid by MCS for NetIQ Shares acquired pursuant to the
Option plus the difference between the Market/Tender Offer Price and such
Exercise Price (but only if the Market/Tender Offer Price is greater than the
Exercise Price) multiplied by the number of NetIQ Shares so purchased.
7. Payment and Redelivery of Option or Shares. In the event MCS exercises its
rights under Section 6(a), NetIQ will, within five (5) business days after MCS
delivers notice pursuant to Section 6(a), pay the required amount to MCS in
immediately available funds and MCS will surrender to NetIQ the Option and the
certificates evidencing the NetIQ Shares purchased by MCS pursuant thereto.
8. Registration Rights.
(a) Following the termination of the Merger Agreement, MCS (sometimes
referred to herein as the "Holder") may by written notice (a "Registration
Notice") to NetIQ (the "Registrant") request the Registrant to register under
the Securities Act all or any part of the shares acquired by the Holder
pursuant to this Agreement (such shares requested to be registered, the
"Registrable Securities") in order to permit the sale or other disposition of
any or all shares of the Registrable Securities that have been acquired by or
are issuable to Holder upon exercise of the Option in accordance with the
intended method of sale or other disposition stated by Holder, including a
"shelf" registration statement under Rule 415 under the Securities Act or any
successor provision. Holder agrees to cause, and to cause any underwriters of
any sale or other disposition to cause, any sale or other disposition pursuant
to such registration statement to be effected on a widely distributed basis so
that upon consummation thereof no purchaser or transferee will own beneficially
more than 5.0% of the then-outstanding voting power of Registrant. Upon a
request for registration, the Registrant will have the option exercisable by
written notice delivered to the Holder within ten (10) business days after the
receipt of the Registration Notice, irrevocably to agree to purchase all or any
part of the Registrable Securities for cash at a price (the "Option Price"
equal to the product of (i) the number of Registrable Securities so purchased
and (ii) the per share average of the closing sale prices of the Registrant's
Common Stock on Nasdaq for the ten
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(10) trading days immediately preceding the date of the Registration Notice.
Any such purchase of Registrable Securities by the Registrant hereunder will
take place at a closing to be held at the principal executive offices of the
Registrant or its counsel at any reasonable date and time designated by the
Registrant in such notice within ten (10) business days after delivery of such
notice. The payment for the shares to be purchased will be made by delivery at
the time of such closing of the Option Price in immediately available funds.
(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 7(a) with respect to all Registrable Securities, the
Registrant will use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice
and to keep such registration statement effective for such period not in excess
of 120 calendar days from the day such registration statement first becomes
effective as may be reasonably necessary to effect such sale or other
disposition; provided, however, that the Holder will not be entitled to more
than an aggregate of three (3) effective registration statements hereunder. The
obligations of Registrant hereunder to file a registration statement and to
maintain its effectiveness may be suspended for up to 90 calendar days in the
aggregate if the Board of Directors of Registrant shall have determined that
the filing of such registration statement or the maintenance of its
effectiveness would require premature disclosure of material nonpublic
information that would materially and adversely affect Registrant or otherwise
interfere with or adversely affect any pending or proposed offering of
securities of Registrant or any other material transaction involving
Registrant. If consummation of the sale of any Registrable Securities pursuant
to a registration hereunder does not occur within 90 days after the filing with
the SEC of the initial registration statement therefor, the provisions of this
Section 7 will again be applicable to any proposed registration. The Registrant
will use all reasonable efforts to cause any Registrable Securities registered
pursuant to this Section 7 to be qualified for sale under the securities or
blue sky laws of such jurisdictions as the Holder may reasonably request and
will continue such registration or qualification in effect in such
jurisdictions; provided, however, that the Registrant will not be required to
qualify to do business in, or consent to general service of process in, any
jurisdiction by reason of this provision. If Registrant effects a registration
under the Securities Act of NetIQ Common Stock for its own account or for any
other stockholders of Registrant (other than on Form S-4 or Form S-8, or any
successor form), it will allow Holder the right to participate in such
registration by selling its Registrable Securities, and such participation will
not affect the obligation of Registrant to effect demand registration
statements for Holder under this Section 7; provided that, if the managing
underwriters of such offering advise Registrant in writing that in their
opinion the number of shares of NetIQ Common Stock requested to be included in
such registration exceeds the number which can be sold in such offering,
Registrant will include the shares requested to be included therein by Holder
pro rata with the shares intended to be included therein by Registrant.
(c) The registration rights set forth in this Section 7 are subject to the
condition that the Holder will provide the Registrant with such information
with respect to the Holder's Registrable Securities, the plan for distribution
thereof, and such other information with respect to the Holder as, in the
reasonable judgment of counsel for the Registrant, is necessary to enable the
Registrant to include in a registration statement all facts required to be
disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 7 will be effected at the
Registrant's expense, except for underwriting discounts and commissions and the
fees and expenses of counsel to the Holder, and the Registrant will provide to
the underwriters such documentation (including certificates, opinions of
counsel and "comfort" letters from auditors) as are customary in connection
with underwritten public offerings and as such underwriters may reasonably
require. In connection with any registration, the Holder and the Registrant
agree to enter into an underwriting agreement reasonably acceptable to each
such party, in form and substance customary for transactions of this type with
the underwriters participating in such offering.
(e) Indemnification.
(i) The Registrant will indemnify the Holder, each of its directors and
officers and each person who controls the Holder within the meaning of
Section 15 of the Securities Act, and each underwriter of the
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Registrant's securities, with respect to any registration, qualification or
compliance which has been effected pursuant to this Agreement, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or
any amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission)
to state therein a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which they
were made, not misleading, or any violation by the Registrant of any rule
or regulation promulgated under the Securities Act applicable to the
Registrant in connection with any such registration, qualification or
compliance, and the Registrant will reimburse the Holder and, each of its
directors and officers and each person who controls the Holder within the
meaning of Section 15 of the Securities Act, and each underwriter for any
legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage,
liability or action; provided, that the Registrant will not be liable in
any such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission or
alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Registrant by such
Holder or director or officer or controlling person or underwriter seeking
indemnification.
(ii) The Holder will indemnify the Registrant, each of its directors and
officers and each underwriter of the Registrant's securities covered by
such registration statement and each person who controls the Registrant
within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages and liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Holder of any rule or
regulation promulgated under the Securities Act applicable to the Holder in
connection with any such registration, qualification or compliance, and
will reimburse the Registrant, such directors, officers or control persons
or underwriters for any legal or any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Registrant by the
Holder for use therein; provided, that in no event will any indemnity under
this Section 7(e) exceed the net proceeds of the offering received by the
Holder.
(iii) Each party entitled to indemnification under this Section 7(e) (the
"Indemnified Party") will give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be
sought, and will permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided, that counsel
for the Indemnifying Party, who will conduct the defense of such claim or
litigation, will be approved by the Indemnified Party (whose approval will
not unreasonably be withheld), and the Indemnified Party may participate in
such defense at such party's expense; provided, however, that the
Indemnifying Party will pay such expense if representation of the
Indemnified Party by counsel retained by the Indemnifying Party would be
inappropriate due to actual or potential differing interests between the
Indemnified Party and any other party represented by such counsel in such
proceeding, and provided further, however, that the failure of any
Indemnified Party to give notice as provided herein will not relieve the
Indemnifying Party of its obligations under this Section 7(e) unless the
failure to give such notice is materially prejudicial to an Indemnifying
Party's ability to defend such action. No Indemnifying Party, in the
defense of any such claim or litigation will, except with the consent of
each Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not
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include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation. No Indemnifying Party will be required
to indemnify any Indemnified Party with respect to any settlement entered
into without such Indemnifying Party's prior consent (which will not be
unreasonably withheld).
9. Adjustment Upon Changes in Capitalization.
(a) In the event of any change in the NetIQ Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the Merger),
recapitalizations, combinations, exchanges of shares and the like, the type and
number of shares or securities subject to the Option, the Exercise Price will
be adjusted appropriately, and proper provision will be made in the agreements
governing such transaction so that MCS will receive, upon exercise of the
Option, the number and class of shares or other securities or property that MCS
would have received in respect of the NetIQ Shares if the Option had been
exercised immediately prior to such event or the record date therefor, as
applicable.
(b) Without limiting the parties' relative rights and obligations under the
Merger Agreement, if the number of outstanding shares of NetIQ Common Stock
increases or decreases after the date of this Agreement (other than pursuant to
an event described in Section 9(a)), the number of shares of NetIQ Common Stock
subject to the Option (including those Option Shares which may have already
been exercised) will be adjusted so that it equals 19.99% of the number of
shares of NetIQ Common Stock then issued and outstanding, without giving effect
to any Option Shares.
10. Restrictive Legends. Each certificate representing Option Shares issued
to MCS hereunder will include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF
FEBRUARY 26, 2000, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
It is understood and agreed that (i) the reference to restrictions arising
under the Securities Act in the above legend will be removed by delivery of
substitute certificate(s) without such reference if such Option Shares have
been registered pursuant to the Securities Act, such Option Shares have been
sold in reliance on and in accordance with Rule 144 under the Securities Act or
Holder has delivered to Registrant a copy of a letter from the staff of the
SEC, or an opinion of counsel in form and substance reasonably satisfactory to
Registrant and its counsel, to the effect that such legend is not required for
purposes of the Securities Act and (ii) the reference to restrictions pursuant
to this Agreement in the above legend will be removed by delivery of substitute
certificate(s) without such reference if the Option Shares evidenced by
certificate(s) containing such reference have been sold or transferred in
compliance with the provisions of this Agreement under circumstances that do
not require the retention of such reference.
11. Listing and HSR Filing. NetIQ, upon the request of MCS, will promptly
file an application to list the NetIQ Shares to be acquired upon exercise of
the Option for quotation on Nasdaq and will use its best efforts to obtain
approval of such listing as soon as practicable. Promptly after the date
hereof, each of the parties hereto will promptly file with the Federal Trade
Commission and the Antitrust Division of the United States Department of
Justice all required premerger notification and report forms and other
documents and exhibits required to be filed under the HSR Act to permit the
acquisition of the NetIQ Shares subject to the Option at the earliest possible
date.
12. Binding Effect. This Agreement will be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Nothing contained in this Agreement, express or implied, is intended
to confer upon any person other than the parties hereto and their respective
successors and
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permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions of
Section 7 will, upon consummation of such sale, be free of the restrictions
imposed with respect to such shares by this Agreement and any transferee of
such shares will not be entitled to the rights of such party. Certificates
representing shares sold in a registered public offering pursuant to Section 7
will not be required to bear the legend set forth in Section 9.
13. Specific Performance. The parties hereto recognize and agree that if for
any reason any of the provisions of this Agreement are not performed in
accordance with their specific terms or are otherwise breached, immediate and
irreparable harm or injury would be caused for which money damages would not be
an adequate remedy. Accordingly, each party hereto agrees that in addition to
other remedies the other party hereto will be entitled to an injunction
restraining any violation or threatened violation of the provisions of this
Agreement or the right to enforce any of the covenants or agreements set forth
herein by specific performance. In the event that any action will be brought in
equity to enforce the provisions of the Agreement, neither party hereto will
allege, and each party hereto hereby waives the defense, that there is an
adequate remedy at law.
14. Entire Agreement. This Agreement and the Merger Agreement (including the
appendices thereto) constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and supersede all other prior
agreements and understandings, both written and oral, between the parties
hereto with respect to the subject matter hereof.
15. Further Assurances. Each party hereto will execute and deliver all such
further documents and instruments and take all such further action as may be
necessary in order to consummate the transactions contemplated hereby.
16. Validity. The invalidity or unenforceability of any provision of this
Agreement will not affect the validity or enforceability of the other
provisions of this Agreement, which will remain in full force and effect. In
the event any Governmental Entity of competent jurisdiction holds any provision
of this Agreement to be null, void or unenforceable, the parties hereto will
negotiate in good faith and will execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
17. Notices. All notices and other communications hereunder will be in
writing and will be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at
the following addresses or telecopy numbers (or at such other address or
telecopy numbers for a party as will be specified by like notice):
(a) if to MCS, to:
Mission Critical Software Inc.
13939 Northwest Freeway
Houston, Texas 77040
Attention: Chief Financial Officer
Facsimile: (713) 548-1829
with a copy to:
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, California 94025
Attention: William M. Kelly, Esq.
Facsimile: (650) 752-2111
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(b) if to NetIQ, to:
NetIQ Corp.
5410 Betsy Ross Drive
Santa Clara, California 95054
Attention: Chief Executive Officer
Facsimile: (408) 330-0959
with copies to:
Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
Thomas C. DeFilipps, Esq.
Facsimile: (650) 493-6811
and to:
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
Spear Street Tower
One Market
San Francisco, California 94105
Attention: Steve L. Camahort, Esq.
Facsimile: (415) 947-2099
18. Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements made
and to be performed entirely within such State.
19. Expenses. Except as otherwise expressly provided herein or in the Merger
Agreement, all costs and expenses incurred in connection with the transactions
contemplated by this Agreement will be paid by the party incurring such
expenses.
20. Amendments; Waiver. This Agreement may be amended by the parties hereto
and the terms and conditions hereof may be waived only by an instrument in
writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
21. Assignment. Neither of the parties hereto may sell, transfer, assign or
otherwise dispose of any of its rights or obligations under this Agreement or
the Option created hereunder to any other person, without the express written
consent of the other party, except that the rights and obligations hereunder
will inure to the benefit of and be binding upon any successor of a party
hereto.
22. Counterparts. This Agreement may be executed in counterparts, each of
which will be deemed to be an original, but both of which, taken together, will
constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
MISSION CRITICAL SOFTWARE INC.
By: /s/ Michael S. Bennett
__________________________________
Name: Michael S. Bennett
Title: Chairman/CEO
NETIQ CORP.
By: /s/ Ching-Fa Hwang
__________________________________
Name: _______________________________
Title: ______________________________
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EXHIBIT B
MCS STOCK OPTION AGREEMENT
THIS MCS STOCK OPTION AGREEMENT (this "Agreement") is made and entered into
as of February 26, 2000, among NetIQ Corp., a Delaware corporation ("NetIQ"),
Mission Critical Software Inc., a Delaware corporation ("MCS"). Capitalized
terms used but not otherwise defined herein will have the meanings ascribed to
them in the Merger Agreement (as defined below).
RECITALS
A. MCS, Merger Sub (as defined below) and NetIQ have entered into an
Agreement and Plan of Reorganization (the "Merger Agreement") which provides
for the merger (the "Merger") of a wholly-owned subsidiary of NetIQ ("Merger
Sub") with and into the MCS. Pursuant to the Merger, all outstanding capital
stock of the MCS will be converted into the right to receive Common Stock of
NetIQ.
B. As a condition to NetIQ's willingness to enter into the Merger Agreement,
NetIQ has requested that MCS agree, and MCS has so agreed, to grant to NetIQ an
option to acquire shares of MCS's Common Stock, par value $0.001 per share
("MCS Shares"), upon the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and agreements set forth herein and in the Merger Agreement and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. Grant of Option. MCS hereby grants to NetIQ an irrevocable option (the
"Option") to acquire up to 3,416,052 MCS Shares (the "Option Shares"), in the
manner set forth below by paying cash at a price of $69,1855 per share (the
"Exercise Price").
2. Exercise of Option; Maximum Proceeds.
(a) The Option may be exercised by NetIQ, in whole or in part, at any time or
from time to time(i) if the Merger Agreement is terminated pursuant to 7.1(h)
thereof and an event causing the MCS Termination Fee to become payable pursuant
to Section 7.3(b) of the Merger Agreement occurs or (ii) immediately prior to
the occurrence of any event causing the MCS Termination Fee to become payable
pursuant to Section 7.1(b) or 7.1(d) thereof (any of the events being referred
to herein as an "Exercise Event"). In the event NetIQ wishes to exercise the
Option, NetIQ will deliver to the MCS a written notice (each an "Exercise
Notice") specifying the total number of Option Shares it wishes to acquire.
Each closing of a purchase of Option Shares (a "Closing") will occur on a date
and at a time prior to the termination of the Option designated by NetIQ in an
Exercise Notice delivered at least two (2) business days prior to the date of
such Closing, which Closing will be held at the principal offices of the MCS.
(b) The Option will terminate upon the earliest of (i) the Effective Time,
(ii) twelve (12) months following the date on which the Merger Agreement is
terminated pursuant to Section 7.1(b) or 7.1(d) thereof, if no event causing
the Termination Fee to become payable pursuant to Section 7.3(b)(ii) of the
Merger Agreement has occurred, (iii) twelve (12) months following the date on
which the Merger Agreement is terminated pursuant to Section 7.1(h) thereof,
(iv) in the event the Merger Agreement has been terminated pursuant to Section
7.1(b) or 7.1(d) thereof and the Termination Fee became payable pursuant to
Section 7.3(b)(ii) thereof, twelve (12) months after payment of the Termination
Fee; and (v) the date on which the Merger Agreement is terminated if neither a
Triggering Event nor the public announcement of a MCS Acquisition Proposal by a
third party occurred on or prior to the date of such termination; provided,
however, that if the Option cannot be exercised by reason of any applicable
government order or because the waiting period related to the issuance of the
Option Shares under the HSR Act will not have expired or been terminated, then
the Option will not terminate until the tenth (10/th/) business day after such
impediment to exercise will have been removed or will have become final and not
subject to appeal.
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(c) If NetIQ receives in the aggregate pursuant to Section 7.3(b) of the
Merger Agreement together with either (i) proceeds in connection with any sales
or other dispositions of Option Shares and any dividends received by NetIQ
declared on Option Shares or (ii) in the aggregate pursuant to Section 6 of
this Agreement, more than the sum of (x) $66,000,000 plus (y) the Exercise
Price multiplied by the number of MCS Shares purchased by NetIQ pursuant to the
Option, then all proceeds to NetIQ in excess of such sum will be remitted by
NetIQ to MCS.
3. Conditions to Closing. The obligation of MCS to issue Option Shares to
NetIQ hereunder is subject to the conditions that (A) any waiting period under
the HSR Act applicable to the issuance of the Option Shares hereunder will have
expired or been terminated; (B) all material consents, approvals, orders or
authorizations of, or registrations, declarations or filings with, any Federal,
state or local administrative agency or commission or other Federal state or
local governmental authority or instrumentality, if any, required in connection
with the issuance of the Option Shares hereunder will have been obtained or
made, as the case may be; and (C) no preliminary or permanent injunction or
other order by any court of competent jurisdiction prohibiting or otherwise
restraining such issuance will be in effect. It is understood and agreed that
at any time during which the Option is exercisable, the parties will use their
respective best efforts to satisfy all conditions to Closing, so that a Closing
may take place as promptly as practicable.
4. Closing. At any Closing, (A) the MCS will deliver to NetIQ a single
certificate in definitive form representing the number of MCS Shares designated
by NetIQ in its Exercise Notice, such certificate to be registered in the name
of NetIQ and to bear the legend set forth in Section 9 hereof, against delivery
of (B) payment by NetIQ to the MCS of the aggregate purchase price for the MCS
Shares so designated and being purchased by delivery of a certified check or
bank check.
5. Representations and Warranties of the MCS. MCS represents and warrants to
NetIQ that (A) MCS is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has the corporate
power and authority to enter into this Agreement and to carry out its
obligations hereunder; (B) the execution and delivery of this Agreement by the
MCS and consummation by the MCS of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of the MCS
and no other corporate proceedings on the part of the MCS are necessary to
authorize this Agreement or any of the transactions contemplated hereby; (C)
this Agreement has been duly executed and delivered by the MCS and constitutes
a legal, valid and binding obligation of the MCS and, assuming this Agreement
constitutes a legal, valid and binding obligation of NetIQ, is enforceable
against the MCS in accordance with its terms; (D) except for any filings
required under the HSR Act, the MCS has taken all necessary corporate and other
action to authorize and reserve for issuance and to permit it to issue upon
exercise of the Option, and at all times from the date hereof until the
termination of the Option will have reserved for issuance, a sufficient number
of unissued MCS Shares for NetIQ to exercise the Option in full and will take
all necessary corporate or other action to authorize and reserve for issuance
all additional MCS Shares or other securities which may be issuable pursuant to
Section 8(a) upon exercise of the Option, all of which, upon their issuance and
delivery in accordance with the terms of this Agreement, will be validly
issued, fully paid and nonassessable; (E) upon delivery of the MCS Shares and
any other securities to NetIQ upon exercise of the Option, NetIQ will acquire
such MCS Shares or other securities free and clear of all material claims,
liens, charges, encumbrances and security interests of any kind or nature
whatsoever, excluding those imposed by NetIQ; (F) the execution and delivery of
this Agreement by the MCS do not, and the performance of this Agreement by the
MCS will not, (i) conflict with or violate the Certificate of Incorporation or
Bylaws or equivalent organizational documents of the MCS or any of its
subsidiaries, (ii) conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to the MCS or any of its subsidiaries or by which
its or any of their respective properties is bound or affected or (iii) result
in any breach of or constitute a default (or an event that with notice or lapse
of time or both would become a default) under, or impair the MCS's or any of
its subsidiaries' rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of the MCS or any of its subsidiaries pursuant to, any
material note, bond, mortgage, indenture, contract,
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agreement, lease, license, permit, franchise or other instrument or obligation
to which the MCS or any of its subsidiaries is a party or by which the MCS or
any of its subsidiaries or its or any of their respective properties are bound
or affected; and (G) the execution and delivery of this Agreement by the MCS
does not, and the performance of this Agreement by the MCS will not, require
any consent, approval, authorization or permit of, or filing with, or
notification to, any Governmental Entity except pursuant to the HSR Act.
6. NetIQ Put. At the request of and upon notice by NetIQ (the "Put Notice"),
at any time during the period during which the Option is exercisable pursuant
to Section 2 (the "Purchase Period"), the MCS (or any successor entity thereof)
will purchase from NetIQ the Option, to the extent not previously exercised, at
the price set forth in subparagraph (i) below (as limited by subparagraph (iii)
below), and the Option Shares, if any, acquired by NetIQ pursuant thereto, at
the price set forth in subparagraph (ii) below (as limited by subparagraph
(iii) below):
(a) The difference between the "Market/Tender Offer Price" for the MCS Shares
as of the date NetIQ gives notice of its intent to exercise its rights under
this Section 6(a) (defined as the higher of (A) the highest price per share
offered as of such date pursuant to any MCS Acquisition Proposal which was made
prior to such date and (B) the average closing sale price of MCS Shares then on
the then Nasdaq National Market during the twenty (20) trading days ending on
the trading day immediately preceding such date) and the Exercise Price,
multiplied by the number of MCS Shares purchasable pursuant to the Option, but
only if the Market/Tender Offer Price is greater than the Exercise Price. For
purposes of determining the highest price offered pursuant to any MCS
Acquisition Proposal which involves consideration other than cash, the value of
such consideration will be equal to the higher of (x) if securities of the same
class of the proponent as such consideration are traded on any national
securities exchange or by any registered securities association, a value based
on the closing sale price or asked price for such securities on their principal
trading market on such date and (y) the value ascribed to such consideration by
the proponent of such MCS Acquisition Proposal, or if no such value is
ascribed, a value determined in good faith by the Board of Directors of the
MCS.
(b) The Exercise Price paid by NetIQ for MCS Shares acquired pursuant to the
Option plus the difference between the Market/Tender Offer Price and such
Exercise Price (but only if the Market/Tender Offer Price is greater than the
Exercise Price) multiplied by the number of MCS Shares so purchased.
7. Payment and Redelivery of Option or Shares. In the event NetIQ exercises
its rights under Section 6(a), the MCS will, within five (5) business days
after NetIQ delivers notice pursuant to Section 6(a), pay the required amount
to NetIQ in immediately available funds and NetIQ will surrender to the MCS the
Option and the certificates evidencing the MCS Shares purchased by NetIQ
pursuant thereto.
8. Registration Rights.
(a) Following the termination of the Merger Agreement, NetIQ (sometimes
referred to herein as the "Holder") may by written notice (a "Registration
Notice") to the MCS (the "Registrant") request the Registrant to register under
the Securities Act all or any part of the shares acquired by the Holder
pursuant to this Agreement (such shares requested to be registered, the
"Registrable Securities") in order to permit the sale or other disposition of
any or all shares of the Registrable Securities that have been acquired by or
are issuable to Holder upon exercise of the Option in accordance with the
intended method of sale or other disposition stated by Holder, including a
"shelf" registration statement under Rule 415 under the Securities Act or any
successor provision. Holder agrees to cause, and to cause any underwriters of
any sale or other disposition to cause, any sale or other disposition pursuant
to such registration statement to be effected on a widely distributed basis so
that upon consummation thereof no purchaser or transferee will own beneficially
more than 5.0% of the then-outstanding voting power of Registrant. Upon a
request for registration, the Registrant will have the option exercisable by
written notice delivered to the Holder within ten (10) business days after the
receipt of the Registration Notice, irrevocably to agree to purchase all or any
part of the Registrable Securities for cash at a price (the "Option Price"
equal to the product of (i) the number of Registrable Securities so purchased
and (ii) the per share average of the closing sale prices of the Registrant's
Common Stock on the
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Nasdaq National Market for the ten (10) trading days immediately preceding the
date of the Registration Notice. Any such purchase of Registrable Securities by
the Registrant hereunder will take place at a closing to be held at the
principal executive offices of the Registrant or its counsel at any reasonable
date and time designated by the Registrant in such notice within ten (10)
business days after delivery of such notice. The payment for the shares to be
purchased will be made by delivery at the time of such closing of the Option
Price in immediately available funds.
(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 7(a) with respect to all Registrable Securities, the
Registrant will use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice
and to keep such registration statement effective for such period not in excess
of 120 calendar days from the day such registration statement first becomes
effective as may be reasonably necessary to effect such sale or other
disposition; provided, however, that the Holder will not be entitled to more
than an aggregate of three (3) four effective registration statements
hereunder. The obligations of Registrant hereunder to file a registration
statement and to maintain its effectiveness may be suspended for up to 90
calendar days in the aggregate if the Board of Directors of Registrant shall
have determined that the filing of such registration statement or the
maintenance of its effectiveness would require premature disclosure of material
nonpublic information that would materially and adversely affect Registrant or
otherwise interfere with or adversely affect any pending or proposed offering
of securities of Registrant or any other material transaction involving
Registrant. If consummation of the sale of any Registrable Securities pursuant
to a registration hereunder does not occur within 90 days after the filing with
the SEC of the initial registration statement therefor, the provisions of this
Section 7 will again be applicable to any proposed registration. The Registrant
will use all reasonable efforts to cause any Registrable Securities registered
pursuant to this Section 7 to be qualified for sale under the securities or
blue sky laws of such jurisdictions as the Holder may reasonably request and
will continue such registration or qualification in effect in such
jurisdictions; provided, however, that the Registrant will not be required to
qualify to do business in, or consent to general service of process in, any
jurisdiction by reason of this provision. If Registrant effects a registration
under the Securities Act of MCS Common Stock for its own account or for any
other stockholders of Registrant (other than on Form S-4 or Form S-8, or any
successor form), it will allow Holder the right to participate in such
registration by selling its Registrable Securities, and such participation will
not affect the obligation of Registrant to effect demand registration
statements for Holder under this Section 7; provided that, if the managing
underwriters of such offering advise Registrant in writing that in their
opinion the number of shares of MCS Common Stock requested to be included in
such registration exceeds the number which can be sold in such offering,
Registrant will include the shares requested to be included therein by Holder
pro rata with the shares intended to be included therein by Registrant.
(c) The registration rights set forth in this Section 7 are subject to the
condition that the Holder will provide the Registrant with such information
with respect to the Holder's Registrable Securities, the plan for distribution
thereof, and such other information with respect to the Holder as, in the
reasonable judgment of counsel for the Registrant, is necessary to enable the
Registrant to include in a registration statement all material facts required
to be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 7 will be effected at the
Registrant's expense, except for underwriting discounts and commissions and the
fees and expenses of counsel to the Holder, and the Registrant will provide to
the underwriters such documentation (including certificates, opinions of
counsel and "comfort" letters from auditors) as are customary in connection
with underwritten public offerings and as such underwriters may reasonably
require. In connection with any registration, the Holder and the Registrant
agree to enter into an underwriting agreement reasonably acceptable to each
such party, in form and substance customary for transactions of this type with
the underwriters participating in such offering.
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(e) Indemnification.
(i) The Registrant will indemnify the Holder, each of its directors and
officers and each person who controls the Holder within the meaning of Section
15 of the Securities Act, and each underwriter of the Registrant's securities,
with respect to any registration, qualification or compliance which has been
effected pursuant to this Agreement, against all expenses, claims, losses,
damages or liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any registration statement, prospectus,
offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance, or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or any violation by the
Registrant of any rule or regulation promulgated under the Securities Act
applicable to the Registrant in connection with any such registration,
qualification or compliance, and the Registrant will reimburse the Holder and,
each of its directors and officers and each person who controls the Holder
within the meaning of Section 15 of the Securities Act, and each underwriter
for any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability
or action; provided, that the Registrant will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue statement
or omission, made in reliance upon and in conformity with written information
furnished to the Registrant by such Holder or director or officer or
controlling person or underwriter seeking indemnification.
(ii) The Holder will indemnify the Registrant, each of its directors and
officers and each underwriter of the Registrant's securities covered by such
registration statement and each person who controls the Registrant within the
meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages and liabilities (or actions in respect thereof), including any
of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by
the Holder of any rule or regulation promulgated under the Securities Act
applicable to the Holder in connection with any such registration,
qualification or compliance, and will reimburse the Registrant, such directors,
officers or control persons or underwriters for any legal or any other expenses
reasonably incurred in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Registrant by the
Holder for use therein; provided, that in no event will any indemnity under
this Section 7(e) exceed the net proceeds of the offering received by the
Holder.
(iii) Each party entitled to indemnification under this Section 7(e) (the
"Indemnified Party") will give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and will permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided, that counsel for the
Indemnifying Party, who will conduct the defense of such claim or litigation,
will be approved by the Indemnified Party (whose approval will not unreasonably
be withheld), and the Indemnified Party may participate in such defense at such
party's expense; provided, however, that the Indemnifying Party will pay such
expense if representation of the Indemnified Party by counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between the Indemnified Party and any other party represented by such
counsel in such proceeding, and provided further, however, that the failure of
any Indemnified Party to give notice as provided herein will not relieve the
Indemnifying Party of its obligations under this Section 7(e) unless the
failure to give such notice is materially prejudicial to an Indemnifying
Party's ability to defend such action. No Indemnifying Party, in the defense of
any such claim or litigation will, except
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with the consent of each Indemnified Party, consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation. No
Indemnifying Party will be required to indemnify any Indemnified Party with
respect to any settlement entered into without such Indemnifying Party's prior
consent (which will not be unreasonably withheld).
9. Adjustment Upon Changes in Capitalization; Rights Plans.
(a) In the event of any change in the MCS Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the Merger),
recapitalizations, combinations, exchanges of shares and the like, the type and
number of shares or securities subject to the Option, the Exercise Price will
be adjusted appropriately, and proper provision will be made in the agreements
governing such transaction so that NetIQ will receive, upon exercise of the
Option, the number and class of shares or other securities or property that
NetIQ would have received in respect of the MCS Shares if the Option had been
exercised immediately prior to such event or the record date therefor, as
applicable.
(b) Without limiting the parties' relative rights and obligations under the
Merger Agreement, if the number of outstanding shares of MCS Common Stock
increases or decreases after the date of this Agreement (other than pursuant to
an event described in Section 9(a)), the number of shares of MCS Common Stock
subject to the Option (including those Option Shares which may have already
been exercised) will be adjusted so that it equals 19.99% of the number of
shares of MCS Common Stock then issued and outstanding, without giving effect
to any Option Shares.
(c) At any time during which the Option is exercisable, and at any time after
the Option is exercised (in whole or in part, if at all), the Company will not
amend (nor permit the amendment of) the Company Rights Plan nor adopt (nor
permit the adoption of) a new stockholders rights plan, that contains
provisions for the distribution or exercise of rights thereunder as a result of
Parent or any affiliate or transferee being the beneficial owner of shares of
the Company by virtue of the Option being exercisable or having been exercised
(or as a result of beneficially owning shares issuable in respect of any Option
Shares).
10. Restrictive Legends. Each certificate representing Option Shares issued
to NetIQ hereunder will include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF
FEBRUARY 26, 2000, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
It is understood and agreed that (i) the reference to restrictions arising
under the Securities Act in the above legend will be removed by delivery of
substitute certificate(s) without such reference if such Option Shares have
been registered pursuant to the Securities Act, such Option Shares have been
sold in reliance on and in accordance with Rule 144 under the Securities Act or
Holder has delivered to Registrant a copy of a letter from the staff of the
SEC, or an opinion of counsel in form and substance reasonably satisfactory to
Registrant and its counsel, to the effect that such legend is not required for
purposes of the Securities Act and (ii) the reference to restrictions pursuant
to this Agreement in the above legend will be removed by delivery of substitute
certificate(s) without such reference if the Option Shares evidenced by
certificate(s) containing such reference have been sold or transferred in
compliance with the provisions of this Agreement under circumstances that do
not require the retention of such reference.
11. Listing and HSR Filing. The MCS, upon the request of NetIQ, will promptly
file an application to list the MCS Shares to be acquired upon exercise of the
Option for quotation on the Nasdaq National Market and will use its best
efforts to obtain approval of such listing as soon as practicable. Promptly
after the date
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hereof, each of the parties hereto will promptly file with the Federal Trade
Commission and the Antitrust Division of the United States Department of
Justice all required premerger notification and report forms and other
documents and exhibits required to be filed under the HSR Act to permit the
acquisition of the MCS Shares subject to the Option at the earliest possible
date.
12. Binding Effect. This Agreement will be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Nothing contained in this Agreement, express or implied, is intended
to confer upon any person other than the parties hereto and their respective
successors and permitted assigns any rights or remedies of any nature
whatsoever by reason of this Agreement. Any shares sold by a party in
compliance with the provisions of Section 7 will, upon consummation of such
sale, be free of the restrictions imposed with respect to such shares by this
Agreement and any transferee of such shares will not be entitled to the rights
of such party. Certificates representing shares sold in a registered public
offering pursuant to Section 7 will not be required to bear the legend set
forth in Section 9.
13. Specific Performance. The parties hereto recognize and agree that if for
any reason any of the provisions of this Agreement are not performed in
accordance with their specific terms or are otherwise breached, immediate and
irreparable harm or injury would be caused for which money damages would not be
an adequate remedy. Accordingly, each party hereto agrees that in addition to
other remedies the other party hereto will be entitled to an injunction
restraining any violation or threatened violation of the provisions of this
Agreement or the right to enforce any of the covenants or agreements set forth
herein by specific performance. In the event that any action will be brought in
equity to enforce the provisions of the Agreement, neither party hereto will
allege, and each party hereto hereby waives the defense, that there is an
adequate remedy at law.
14. Entire Agreement. This Agreement and the Merger Agreement (including the
appendices thereto) constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and supersede all other prior
agreements and understandings, both written and oral, between the parties
hereto with respect to the subject matter hereof.
15. Further Assurances. Each party hereto will execute and deliver all such
further documents and instruments and take all such further action as may be
necessary in order to consummate the transactions contemplated hereby.
16. Validity. The invalidity or unenforceability of any provision of this
Agreement will not affect the validity or enforceability of the other
provisions of this Agreement, which will remain in full force and effect. In
the event any Governmental Entity of competent jurisdiction holds any provision
of this Agreement to be null, void or unenforceable, the parties hereto will
negotiate in good faith and will execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
17. Notices. All notices and other communications hereunder will be in
writing and will be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at
the following addresses or telecopy numbers (or at such other address or
telecopy numbers for a party as will be specified by like notice):
(a) if to NetIQ, to:
NetIQ Corp.
5410 Betsy Ross Drive
Santa Clara, California 95054
Attention: Chief Executive Officer
Facsimile: (408) 330-7000
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with copies to:
Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
Thomas C. DeFilipps, Esq.
Facsimile: (650) 493-6811
and to:
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
Spear Street Tower
One Market
San Francisco, California 94105
Attention: Steve L. Camahort, Esq.
Facsimile: (415) 947-2099
(b) if to MCS to:
Mission Critical Software Inc.
13939 Northwest Freeway
Houston, Texas 77040
Attention: Chief Financial Officer
Facsimile: (713) 548-1829
with a copy to:
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, California 94025
Attention: William M. Kelly, Esq.
Facsimile: (650) 752-2111
18. Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements made
and to be performed entirely within such State.
19. Expenses. Except as otherwise expressly provided herein or in the Merger
Agreement, all costs and expenses incurred in connection with the transactions
contemplated by this Agreement will be paid by the party incurring such
expenses.
20. Amendments; Waiver. This Agreement may be amended by the parties hereto
and the terms and conditions hereof may be waived only by an instrument in
writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
21. Assignment. Neither of the parties hereto may sell, transfer, assign or
otherwise dispose of any of its rights or obligations under this Agreement or
the Option created hereunder to any other person, without the express written
consent of the other party, except that the rights and obligations hereunder
will inure to the benefit of and be binding upon any successor of a party
hereto.
22. Counterparts. This Agreement may be executed in counterparts, each of
which will be deemed to be an original, but both of which, taken together, will
constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
NETIQ CORP
/s/ Ching-Fa Hwang
By: ______________________________
Name: Ching-Fa Hwang
Title: President and CEO
MISSION CRITICAL SOFTWARE INC.
/s/ Michael S. Bennett
By: ______________________________
Name: Michael S. Bennett
Title: Chairman/CEO
[Signature Page to MCS Stock Option Agreement]
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EXHIBIT C
NETIQ VOTING AGREEMENT
THIS NETIQ VOTING AGREEMENT (this "Agreement") is made and entered into as of
February 26, 2000, among Mission Critical Software Inc., a Delaware corporation
("MCS"), and the undersigned stockholder (the "Stockholder") of NetIQ Corp., a
Delaware corporation ("NetIQ").
RECITALS
A. NetIQ, a subsidiary of NetIQ ("Merger Sub") and MCS have entered into an
Agreement and Plan of Reorganization (the "Merger Agreement"), which provides
for the merger (the "Merger") of Merger Sub with and into MCS. Pursuant to the
Merger, all outstanding capital stock of MCS shall be converted into the right
to receive NetIQ Common Stock, as set forth in the Merger Agreement (the "Share
Issuance");
B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such
number of shares of the outstanding capital stock of NetIQ and shares subject
to outstanding options and warrants as is indicated on the signature page of
this Agreement; and
C. In consideration of the execution of the Merger Agreement by MCS,
Stockholder (in his or her capacity as such) agrees to vote the Shares (as
defined below) and other such shares of capital stock of NetIQ over which
Stockholder has voting power so as to facilitate consummation of the Merger.
NOW, THEREFORE, intending to be legally bound, the parties hereto agree as
follows:
1. Certain Definitions. Capitalized terms not defined herein shall have the
meanings ascribed to them in the Merger Agreement. For purposes of this
Agreement:
(a) "Expiration Date" shall mean the earlier to occur of (i) such date and
time as the Merger Agreement shall have been terminated pursuant to Article VII
thereof, or (ii) such date and time as the Merger shall become effective in
accordance with the terms and provisions of the Merger Agreement.
(b) "Person" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity, or (iii) governmental
authority.
(c) "Shares" shall mean: (i) all securities of NetIQ (including all shares of
NetIQ Common Stock and all options, warrants and other rights to acquire shares
of NetIQ Common Stock) owned by Stockholder as of the date of this Agreement;
and (ii) all additional securities of NetIQ (including all additional shares of
NetIQ Common Stock and all additional options, warrants and other rights to
acquire shares of NetIQ Common Stock) of which Stockholder acquires ownership
during the period from the date of this Agreement through the Expiration Date.
(d) "Transfer." A Person shall be deemed to have effected a "Transfer" of a
security if such person directly or indirectly: (i) sells, pledges, encumbers,
grants an option with respect to, transfers or disposes of such security or any
interest in such security; or (ii) enters into an agreement or commitment
providing for the sale of, pledge of, encumbrance of, grant of an option with
respect to, transfer of or disposition of such security or any interest
therein.
2. Transfer of Shares.
(a) Transferee of Shares to be Bound by this Agreement. Stockholder agrees
that, during the period from the date of this Agreement through the Expiration
Date, Stockholder shall not cause or permit any Transfer of
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any of the Shares to be effected unless each Person to which any of such
Shares, or any interest in any of such Shares, is or may be transferred shall
have: (a) executed a counterpart of this Agreement and a proxy in the form
attached hereto as Exhibit A (with such modifications as MCS may reasonably
request); and (b) agreed in writing to hold such Shares (or interest in such
Shares) subject to all of the terms and provisions of this Agreement.
(b) Transfer of Voting Rights. Stockholder agrees that, during the period
from the date of this Agreement through the Expiration Date, Stockholder shall
not deposit (or permit the deposit of) any Shares in a voting trust or grant
any proxy or enter into any voting agreement or similar agreement in
contravention of the obligations of Stockholder under this Agreement with
respect to any of the Shares.
3. Agreement to Vote Shares. At every meeting of the stockholders of NetIQ
called, and at every adjournment thereof, and on every action or approval by
written consent of the stockholders of NetIQ, Stockholder (in his or her
capacity as such) shall cause the Shares to be voted (a) in favor of approval
of the Merger, the Merger Agreement and the Share Issuance (the "NetIQ Approval
Matters"), (b) in favor of any matter that could reasonably be expected to
facilitate the NetIQ Approval Matters, and (c) in such manner as MCS may direct
with respect to all other proposals submitted to the stockholders of NetIQ
which, directly or indirectly, in any way relates to the NetIQ Approval
Matters.
4. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Stockholder agrees to deliver to MCS a proxy in the form attached hereto as
Exhibit A (the "Proxy"), which shall be irrevocable to the fullest extent
permissible by law, with respect to the Shares.
5. Representations and Warranties of the Stockholder. Stockholder (i) is the
beneficial owner of the shares of NetIQ Common Stock indicated on the final
page of this Agreement, free and clear of any liens, claims, options, rights of
first refusal, co-sale rights, charges or other encumbrances; (ii) does not
beneficially own any securities of the NetIQ other than the shares of NetIQ
Common Stock and options and warrants to purchase shares of Common Stock of
NetIQ indicated on the final page of this Agreement; and (iii) has full power
and authority to make, enter into and carry out the terms of this Agreement and
the Proxy.
6. Additional Documents. Stockholder (in his or her capacity as such) hereby
covenants and agrees to execute and deliver any additional documents necessary
or desirable, in the reasonable opinion of MCS, to carry out the intent of this
Agreement.
7. Termination. This Agreement shall terminate and shall have no further
force or effect as of the Expiration Date.
8. Miscellaneous.
(a) Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
(b) Binding Effect and Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but, except as otherwise
specifically provided herein, neither this Agreement nor any of the rights,
interests or obligations of the parties hereto may be assigned by either of the
parties without prior written consent of the other.
(c) Amendments and Modification. This Agreement may not be modified, amended,
altered or supplemented except upon the execution and delivery of a written
agreement executed by the parties hereto.
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<PAGE>
(d) Specific Performance; Injunctive Relief. The parties hereto acknowledge
that MCS shall be irreparably harmed and that there shall be no adequate remedy
at law for a violation of any of the covenants or agreements of Stockholder set
forth herein. Therefore, it is agreed that, in addition to any other remedies
that may be available to MCS upon any such violation, MCS shall have the right
to enforce such covenants and agreements by specific performance, injunctive
relief or by any other means available to MCS at law or in equity.
(e) Notices. All notices and other communications pursuant to this Agreement
shall be in writing and deemed to be sufficient if contained in a written
instrument and shall be deemed given if delivered personally, telecopied, sent
by nationally-recognized overnight courier or mailed by registered or certified
mail (return receipt requested), postage prepaid, to the parties at the
following address (or at such other address for a party as shall be specified
by like notice):
If to MCS:
Mission Critical Software Inc.
13939 Northwest Freeway
Houston, Texas 77040
Attention: Chief Financial Officer
Facsimile: (713) 548-1829
With a copy to:
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, California
Attention: William M. Kelly, Esq.
Facsimile: (650) 752-2111
If to Stockholder:
To the address for notice set forth on the signature page hereof.
(f) Governing Law. This Agreement shall be governed by the laws of the State
of Delaware, without reference to rules of conflicts of law.
(g) Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
(h) Officers and Directors. To the extent that Stockholder is or becomes
(during the term hereof) a director or officer of NetIQ, he or she makes no
agreement or understanding herein in his or her capacity as such director or
officer, and nothing herein will limit or affect, or give rise to any liability
to Stockholder by virtue of, any actions taken by Stockholder in his or her
capacity as an officer or director of NetIQ in exercising its rights under the
Merger Agreement.
(i) Effect of Headings. The section headings are for convenience only and
shall not affect the construction or interpretation of this Agreement.
(j) Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
[The remainder of this page has been intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written. The undersigned is executing
this Agreement only in its capacity as a stockholder. Such signature in no way
affects its obligations as an officer or director of NetIQ.
MISSION CRITICAL SOFTWARE INC. STOCKHOLDER
By: _________________________________ By: _________________________________
Signature
Name: _______________________________ Name: _______________________________
Title: ______________________________ Title: ______________________________
_____________________________________
_____________________________________
Print Address
_____________________________________
Telephone
_____________________________________
Facsimile No.
Share beneficially owned:
NetIQ Common Shares
NetIQ Common Shares issuable upon
exercise of outstanding options or
warrants
[Signature Page to Voting Agreement]
4
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Exhibit A
IRREVOCABLE PROXY
The undersigned stockholder of NetIQ Corp., a Delaware corporation ("NetIQ"),
hereby irrevocably (to the fullest extent permitted by law) appoints Michael S.
Bennett and Stephen E. Odom and each of them, as the sole and exclusive
attorneys and proxies of the undersigned, with full power of substitution and
resubstitution, to vote and exercise all voting and related rights (to the full
extent that the undersigned is entitled to do so) with respect to all of the
shares of capital stock of NetIQ that now are or hereafter may be beneficially
owned by the undersigned, and any and all other shares or securities of NetIQ
issued or issuable in respect thereof on or after the date hereof
(collectively, the "Shares") in accordance with the terms of this Proxy. The
Shares beneficially owned by the undersigned stockholder of NetIQ as of the
date of this Proxy are listed on the final page of this Proxy. Upon the
undersigned's execution of this Proxy, any and all prior proxies given by the
undersigned with respect to any Shares are hereby revoked and the undersigned
agrees not to grant any subsequent proxies with respect to the Shares until
after the Expiration Date (as defined below).
This Proxy is irrevocable (to the fullest extent permitted by law), is
coupled with an interest and is granted pursuant to that certain Voting
Agreement of even date herewith by and among Mission Critical Software Inc., a
Delaware corporation ("MCS"), and the undersigned stockholder (the "Voting
Agreement"), and is granted in consideration of MCS entering into that certain
Agreement and Plan and Reorganization (the "Merger Agreement"), by and between
NetIQ, a subsidiary of NetIQ ("Merger Sub") and MCS. The Merger Agreement
provides for the merger of Merger Sub with and into MCS in accordance with its
terms (the "Merger"). Pursuant to the Merger, all outstanding capital stock of
MCS shall be converted into the right to receive NetIQ Common Stock, as set
forth in the Merger Agreement (the "Share Issuance"). As used herein, the term
"Expiration Date" shall mean the earlier to occur of (i) such date and time as
the Merger Agreement shall have been validly terminated pursuant to Article VII
thereof or (ii) such date and time as the Merger shall become effective in
accordance with the terms and provisions of the Merger Agreement.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration Date, to act as the undersigned's attorney and proxy to vote the
Shares, and to exercise all voting, consent and similar rights of the
undersigned with respect to the Shares (including, without limitation, the
power to execute and deliver written consents) at every annual, special or
adjourned meeting of stockholders of NetIQ and in every written consent in lieu
of such meeting (a) in favor of approval of the Merger, the Merger Agreement
and the Share Issuance (the "NetIQ Approval Matters"), (b) in favor of any
matter that could reasonably be expected to facilitate the NetIQ Approval
Matters, and (c) in such manner as MCS may direct with respect to all other
proposals submitted to the stockholders of NetIQ which, directly or indirectly,
in any way relates to the NetIQ Approval Matters.
The attorneys and proxies named above may not exercise this Proxy on any
other matter except as provided above. The undersigned stockholder may vote the
Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned. The undersigned is executing this
Proxy only in its capacity as a stockholder. Such signature in no way affects
its obligations as an officer or director of NetIQ.
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<PAGE>
This Proxy is irrevocable (to the fullest extent permitted by law). This
Proxy shall terminate, and be of no further force and effect, automatically
upon the Expiration Date.
Dated: _______________________ , 2000
Signature of Stockholder: ___________
Print Name of Stockholder: __________
Shares beneficially owned: __________
NetIQ Common Shares
NetIQ Common Shares issuable upon
exercise of outstanding options or
warrants
[Signature Page to Irrevocable Proxy]
6
<PAGE>
EXHIBIT D
MCS VOTING AGREEMENT
THIS MCS VOTING AGREEMENT (this "Agreement") is made and entered into as of
February 26, 2000, among NetIQ Corp., a Delaware corporation ("NetIQ"), and the
undersigned stockholder (the "Stockholder") of Mission Critical Software Inc.,
a Delaware corporation ("MCS").
RECITALS
A. MCS and NetIQ have entered into an Agreement and Plan of Reorganization
(the "Merger Agreement"), which provides for the merger (the "Merger") of a
subsidiary of NetIQ with and into MCS. Pursuant to the Merger, all outstanding
capital stock of MCS shall be converted into the right to receive NetIQ Common
Stock, as set forth in the Merger Agreement;
B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such
number of shares of the outstanding capital stock of MCS and shares subject to
outstanding options and warrants as is indicated on the signature page of this
Agreement; and
C. In consideration of the execution of the Merger Agreement by NetIQ,
Stockholder (in his or her capacity as such) agrees to vote the Shares (as
defined below) and other such shares of capital stock of MCS over which
Stockholder has voting power so as to facilitate consummation of the Merger.
NOW, THEREFORE, intending to be legally bound, the parties hereto agree as
follows:
1. Certain Definitions. Capitalized terms not defined herein shall have the
meanings ascribed to them in the Merger Agreement. For purposes of this
Agreement:
(a) "Expiration Date" shall mean the earlier to occur of (i) such date and
time as the Merger Agreement shall have been terminated pursuant to Article VII
thereof, or (ii) such date and time as the Merger shall become effective in
accordance with the terms and provisions of the Merger Agreement.
(b) "Person" shall mean any (i) individual, (ii) corporation, limited
liability MCS, partnership or other entity, or (iii) governmental authority.
(c) "Shares" shall mean: (i) all securities of MCS (including all shares of
MCS Common Stock and all options, warrants and other rights to acquire shares
of MCS Common Stock) owned by Stockholder as of the date of this Agreement; and
(ii) all additional securities of MCS (including all additional shares of MCS
Common Stock and all additional options, warrants and other rights to acquire
shares of MCS Common Stock) of which Stockholder acquires ownership during the
period from the date of this Agreement through the Expiration Date.
(d) "Transfer." A Person shall be deemed to have effected a "Transfer" of a
security if such person directly or indirectly: (i) sells, pledges, encumbers,
grants an option with respect to, transfers or disposes of such security or any
interest in such security; or (ii) enters into an agreement or commitment
providing for the sale of, pledge of, encumbrance of, grant of an option with
respect to, transfer of or disposition of such security or any interest
therein.
2. Transfer of Shares.
(a) Transferee of Shares to be Bound by this Agreement. Stockholder agrees
that, during the period from the date of this Agreement through the Expiration
Date, Stockholder shall not cause or permit any Transfer of
1
<PAGE>
any of the Shares to be effected unless each Person to which any of such
Shares, or any interest in any of such Shares, is or may be transferred shall
have: (a) executed a counterpart of this Agreement and a proxy in the form
attached hereto as Exhibit A (with such modifications as NetIQ may reasonably
request); and (b) agreed in writing to hold such Shares (or interest in such
Shares) subject to all of the terms and provisions of this Agreement.
(b) Transfer of Voting Rights. Stockholder agrees that, during the period
from the date of this Agreement through the Expiration Date, Stockholder shall
not deposit (or permit the deposit of) any Shares in a voting trust or grant
any proxy or enter into any voting agreement or similar agreement in
contravention of the obligations of Stockholder under this Agreement with
respect to any of the Shares.
3. Agreement to Vote Shares. At every meeting of the stockholders of MCS
called, and at every adjournment thereof, and on every action or approval by
written consent of the stockholders of MCS, Stockholder (in his or her capacity
as such) shall cause the Shares to be voted (a) in favor of the Merger and the
Merger Agreement (the "MCS Approval Matters"), (b) in favor of any matter that
could reasonably be expected to facilitate the MCS Approval Matters and (c) in
such manner as NetIQ may direct with respect to all other proposals submitted
to the stockholders of NetIQ which, directly or indirectly, in any way relates
to the MCS Approval Matters.
4. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Stockholder agrees to deliver to NetIQ a proxy in the form attached hereto as
Exhibit A (the "Proxy"), which shall be irrevocable to the fullest extent
permissible by law, with respect to the Shares.
5. Representations and Warranties of the Stockholder. Stockholder (i) is the
beneficial owner of the shares of MCS Common Stock indicated on the final page
of this Agreement, free and clear of any liens, claims, options, rights of
first refusal, co-sale rights, charges or other encumbrances; (ii) does not
beneficially own any securities of MCS other than the shares of MCS Common
Stock and options and warrants to purchase shares of Common Stock of MCS
indicated on the final page of this Agreement; and (iii) has full power and
authority to make, enter into and carry out the terms of this Agreement and the
Proxy.
6. Additional Documents. Stockholder (in his or her capacity as such) hereby
covenants and agrees to execute and deliver any additional documents necessary
or desirable, in the reasonable opinion of NetIQ, to carry out the intent of
this Agreement.
7. Termination. This Agreement shall terminate and shall have no further
force or effect as of the Expiration Date.
8. Miscellaneous.
(a) Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
(b) Binding Effect and Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but, except as otherwise
specifically provided herein, neither this Agreement nor any of the rights,
interests or obligations of the parties hereto may be assigned by either of the
parties without prior written consent of the other.
(c) Amendments and Modification. This Agreement may not be modified, amended,
altered or supplemented except upon the execution and delivery of a written
agreement executed by the parties hereto.
2
<PAGE>
(d) Specific Performance; Injunctive Relief. The parties hereto acknowledge
that NetIQ shall be irreparably harmed and that there shall be no adequate
remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to NetIQ upon any such violation, NetIQ
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to NetIQ at law
or in equity.
(e) Notices. All notices and other communications pursuant to this Agreement
shall be in writing and deemed to be sufficient if contained in a written
instrument and shall be deemed given if delivered personally, telecopied, sent
by nationally-recognized overnight courier or mailed by registered or certified
mail (return receipt requested), postage prepaid, to the parties at the
following address (or at such other address for a party as shall be specified
by like notice):
If to NetIQ:
NetIQ Corp.
5410 Betsy Ross Drive
Santa Clara, California 95054
Facsimile: (408) 330-0959
Attention: Chief Executive Officer
With copies to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
Thomas C. DeFilipps, Esq.
Facsimile: (650) 493-6811
and to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
Spear Street Tower
One Market
San Francisco, California 94105
Attention: Steve L. Camahort, Esq.
Facsimile: (415) 947-2099
If to Stockholder:
To the address for notice set forth on the
signature page hereof.
(f) Governing Law. This Agreement shall be governed by the laws of the State
of Delaware, without reference to rules of conflicts of law.
(g) Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
(h) Officers and Directors. To the extent that Stockholder is or becomes
(during the term hereof) a director or officer of MCS, he or she makes no
agreement or understanding herein in his or her capacity as such director or
officer, and nothing herein will limit or affect, or give rise to any liability
to Stockholder by
3
<PAGE>
virtue of, any actions taken by Stockholder in his or her capacity as an
officer or director of MCS in exercising its rights under the Merger Agreement.
(i) Effect of Headings. The section headings are for convenience only and
shall not affect the construction or interpretation of this Agreement.
(j) Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
[The remainder of this page has been intentionally left blank]
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written. The undersigned is executing
this Agreement only in its capacity as a stockholder. Such signature in no way
affects its obligations as an officer or director of MCS.
NETIQ CORP. STOCKHOLDER
By: _________________________________ By: _________________________________
Signature
Name: _______________________________ Name: _______________________________
Title: ______________________________ Title: ______________________________
_____________________________________
_____________________________________
Print Address
_____________________________________
Telephone
_____________________________________
Facsimile No.
Share beneficially owned:
shares of MCS Common Stock
shares of MCS Common Stock
issuable upon exercise of
outstanding options or warrants
[Signature Page to Voting Agreement]
5
<PAGE>
Exhibit A
IRREVOCABLE PROXY
The undersigned stockholder of Mission Critical Software Inc., a Delaware
corporation ("MCS"), hereby irrevocably (to the fullest extent permitted by
law) appoints Ching-Fa Hwang and James A. Barth and each of them, as the sole
and exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of MCS that now are or hereafter
may be beneficially owned by the undersigned, and any and all other shares or
securities of MCS issued or issuable in respect thereof on or after the date
hereof (collectively, the "Shares") in accordance with the terms of this Proxy.
The Shares beneficially owned by the undersigned stockholder of MCS as of the
date of this Proxy are listed on the final page of this Proxy. Upon the
undersigned's execution of this Proxy, any and all prior proxies given by the
undersigned with respect to any Shares are hereby revoked and the undersigned
agrees not to grant any subsequent proxies with respect to the Shares until
after the Expiration Date (as defined below).
This Proxy is irrevocable (to the fullest extent permitted by law), is
coupled with an interest and is granted pursuant to that certain Voting
Agreement of even date herewith by and among NetIQ Corp., a Delaware
corporation ("NetIQ"), and the undersigned stockholder (the "Voting
Agreement"), and is granted in consideration of NetIQ entering into that
certain Agreement and Plan of Merger (the "Merger Agreement"), by and between
NetIQ, a subsidiary of NetIQ ("Merger Sub") and MCS. The Merger Agreement
provides for the merger of Merger Sub with and into MCS in accordance with its
terms (the "Merger"). As used herein, the term "Expiration Date" shall mean the
earlier to occur of (i) such date and time as the Merger Agreement shall have
been validly terminated pursuant to Article VII thereof or (ii) such date and
time as the Merger shall become effective in accordance with the terms and
provisions of the Merger Agreement.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration Date, to act as the undersigned's attorney and proxy to vote the
Shares, and to exercise all voting, consent and similar rights of the
undersigned with respect to the Shares (including, without limitation, the
power to execute and deliver written consents) at every annual, special or
adjourned meeting of stockholders of MCS and in every written consent in lieu
of such meeting (a) in favor of the Merger and the Merger Agreement (the "MCS
Approval Matters"), (b) in favor of any matter that could reasonably be
expected to facilitate the MCS Approval Matters and (c) in such manner as MCS
may direct with respect to all other proposals submitted to the stockholders of
MCS which, directly or indirectly, in any way relates to the MCS Approval
Matters.
The attorneys and proxies named above may not exercise this Proxy on any
other matter except as provided above. The undersigned stockholder may vote the
Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned. The undersigned is executing this
Proxy only in its capacity as a stockholder. Such signature in no way affects
its obligations as an officer or director of MCS.
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<PAGE>
This Proxy is irrevocable (to the fullest extent permitted by law). This
Proxy shall terminate, and be of no further force and effect, automatically
upon the Expiration Date.
Dated: ________________________, 2000
Signature of
Stockholder:________________________
Print Name of
Stockholder:_______________________
Shares beneficially owned:
shares of MCS Common Stock
shares of MCS Common Stock
issuable
upon exercise of outstanding options
or warrants
[Signature Page to Irrevocable Proxy]
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EXHIBIT E
MCS AFFILIATE AGREEMENT
THIS MCS AFFILIATE AGREEMENT (this "Agreement") is made and entered into as
of February 26, 2000, by and between NetIQ Corp., a corporation organized under
the laws of the State of Delaware ("Net IQ"), and the undersigned shareholder
who may be deemed an affiliate ("Affiliate") of Mission Critical Software Inc.,
a Delaware corporation ("MCS"). Capitalized terms used but not otherwise
defined herein shall have the meanings ascribed to them in the Merger Agreement
(as defined below).
RECITALS
A. MCS, Merger Sub (as defined below) and Net IQ have entered into an
Agreement and Plan of Reorganization (the "Merger Agreement") which provides
for the merger (the "Merger") of a wholly-owned subsidiary of Net IQ ("Merger
Sub") with and into MCS. Pursuant to the Merger, all outstanding capital stock
of MCS (the "MCS Capital Stock") shall be converted into the right to receive
Common Stock of Net IQ (the "Net IQ Common Stock");
B. Affiliate has been advised that Affiliate may be deemed to be an
"affiliate" of MCS, as the term "affiliate" is used for purposes of Rule 145 of
the Rules and Regulations of the Securities and Exchange Commission; and
C. The execution and delivery of this Agreement by Affiliate is a material
inducement to Net IQ to enter into the Merger Agreement.
NOW, THEREFORE, intending to be legally bound, the parties hereto agree as
follows:
1. Acknowledgments by Affiliate. Affiliate acknowledges and understands that
the representations, warranties and covenants by Affiliate set forth herein
shall be relied upon by Net IQ, MCS and their respective affiliates, counsel
and accounting firms, and that substantial losses and damages may be incurred
by these persons if Affiliate's representations, warranties or covenants are
breached. Affiliate has carefully read this Agreement and the Merger Agreement
and has discussed the requirements of this Agreement with Affiliate's
professional advisors, who are qualified to advise Affiliate with regard to
such matters.
2. Beneficial Ownership of MCS Capital Stock. The Affiliate is the sole
record and beneficial owner of the number of shares of MCS Capital Stock set
forth next to its name on the signature page hereto (the "Shares"). The Shares
are not subject to any claim, lien, pledge, charge, security interest or other
encumbrance or to any rights of first refusal of any kind. There are no
options, warrants, calls, rights, commitments or agreements of any character,
written or oral, to which the Affiliate is party or by which it is bound
obligating the Affiliate to issue, deliver, sell, repurchase or redeem, or
cause to be issued, delivered, sold, repurchased or redeemed, any Shares or
obligating the Affiliate to grant or enter into any such option, warrant, call,
right, commitment or agreement. The Affiliate has the sole right to transfer
such Shares. The Shares constitute all shares of MCS Capital Stock owned,
beneficially or of record, by the Affiliate. The Shares are not subject to
preemptive rights created by any agreement to which the Affiliate is party. The
Affiliate has not engaged in any sale or other transfer of the Shares in
contemplation of the Merger. All shares of MCS Capital Stock and Net IQ Common
Stock acquired by Affiliate subsequent to the date hereof (including shares of
Net IQ Common Stock acquired in the Merger) shall be subject to the provisions
of this Agreement as if held by Affiliate as of the date hereof.
3. Compliance with Rule 145 and the Securities Act.
(a) Affiliate has been advised that (i) the issuance of shares of Net IQ
Common Stock in connection with the Merger is expected to be effected pursuant
to a registration statement on Form S-4 promulgated under the Securities Act of
1933, as amended (the "Securities Act"), and the resale of such shares shall be
subject to
1
<PAGE>
restrictions set forth in Rule 145 under the Securities Act, and (ii) Affiliate
may be deemed to be an affiliate of MCS. Affiliate accordingly agrees not to
sell, transfer or otherwise dispose of any Net IQ Common Stock issued to
Affiliate in the Merger unless (i) such sale, transfer or other disposition is
made in conformity with the requirements of Rule 145(d) promulgated under the
Securities Act, or (ii) such sale, transfer or other disposition is made
pursuant to an effective registration statement under the Securities Act or an
appropriate exemption from registration, or (iii) Affiliate delivers to Net IQ
a written opinion of counsel, reasonably acceptable to Net IQ in form and
substance, that such sale, transfer or other disposition is otherwise exempt
from registration under the Securities Act.
(b) Net IQ shall give stop transfer instructions to its transfer agent with
respect to any Net IQ Common Stock received by Affiliate pursuant to the Merger
and there shall be placed on the certificates representing such Common Stock,
or any substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO
WHICH RULE 145 APPLIES AND MAY ONLY BE TRANSFERRED IN CONFORMITY WITH
RULE 145(d) OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR IN ACCORDANCE WITH A WRITTEN OPINION
OF COUNSEL, REASONABLY ACCEPTABLE TO THE ISSUER IN FORM AND SUBSTANCE, THAT
SUCH TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED."
The legend set forth above shall be removed (by delivery of a substitute
certificate without such legend) and Net IQ shall so instruct its transfer
agent, if Affiliate delivers to Net IQ (i) satisfactory written evidence that
the shares have been sold in compliance with Rule 145 (in which case, the
substitute certificate shall be issued in the name of the transferee), or (ii)
an opinion of counsel, in form and substance reasonably satisfactory to Net IQ,
to the effect that public sale of the shares by the holder thereof is no longer
subject to Rule 145.
4. Termination. This Agreement shall be terminated and shall be of no further
force and effect in the event of the termination of the Merger Agreement
pursuant to Article VII of the Merger Agreement.
5. Miscellaneous.
(a) Waiver; Severability. No waiver by any party hereto of any condition or
of any breach of any provision of this Agreement shall be effective unless in
writing and signed by each party hereto. In the event that any provision of
this Agreement, or the application of any such provision to any person, entity
or set of circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons, entities or circumstances other than
those as to which it is determined to be invalid, unlawful, void or
unenforceable, shall not be impaired or otherwise affected and shall continue
to be valid and enforceable to the fullest extent permitted by law.
(b) Binding Effect and Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but, except as otherwise
specifically provided herein, neither this Agreement nor any of the rights,
interests or obligations of the parties hereto may be assigned by either of the
parties without prior written consent of the other party hereto.
(c) Amendments and Modification. This Agreement may not be modified, amended,
altered or supplemented except upon the execution and delivery of a written
agreement executed by the parties hereto.
(d) Injunctive Relief. Each of the parties acknowledge that (i) the covenants
and the restrictions contained in this Agreement are necessary, fundamental and
required for the protection of Net IQ and MCS and to preserve for Net IQ the
benefits of the Merger; (ii) such covenants relate to matters which are of a
special, unique, and extraordinary character that gives each of such covenants
a special, unique, and extraordinary value; and (iii) a breach of any such
covenants or any other provision of this Agreement shall result in
2
<PAGE>
irreparable harm and damages to Net IQ and MCS which cannot be adequately
compensated by a monetary award. Accordingly, it is expressly agreed that in
addition to all other remedies available at law or in equity, Net IQ and MCS
shall be entitled to the immediate remedy of a temporary restraining order,
preliminary injunction, or such other form of injunctive or equitable relief as
may be used by any court of competent jurisdiction to restrain or enjoin any of
the parties hereto from breaching any such covenant or provision or to
specifically enforce the provisions hereof.
(e) Governing Law. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with the internal laws of the State of
Delaware without giving effect to any choice or conflict of law provision or
rule (whether of the State of Delaware or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State of
Delaware.
(f) Entire Agreement. This Agreement, the Merger Agreement and any other
agreements referred to in the Merger Agreement set forth the entire
understanding of Affiliate and Net IQ relating to the subject matter hereof and
thereof and supersede all prior agreements and understandings between Affiliate
and Net IQ relating to the subject matter hereof and thereof.
(g) Attorneys' Fees. In the event of any legal actions or proceeding to
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results
in a final judgment.
(h) Further Assurances. Affiliate shall execute and/or cause to be delivered
to Net IQ such instruments and other documents and shall take such other
actions as Net IQ may reasonably request to effectuate the intent and purposes
of this Agreement.
(i) Third Party Reliance. Counsel to and independent auditors for Net IQ and
MCS shall be entitled to rely upon this Affiliate Agreement.
(j) Survival. The representations, warranties, covenants and other provisions
contained in this Agreement shall survive the Merger.
(k) Notices. All notices and other communications pursuant to this Agreement
shall be in writing and deemed to be sufficient if contained in a written
instrument and shall be deemed given if delivered personally, telecopied, sent
by nationally-recognized overnight courier or mailed by registered or certified
mail (return receipt requested), postage prepaid, to the parties at the
following address (or at such other address for a party as shall be specified
by like notice):
If to Net IQ:
Net IQ Corp.
5410 Betsy Ross Drive
Santa Clara, CA 95054
Attention: Chief Executive Officer
Facsimile: (408) 330-0959
With copies to:
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Larry W. Sonsini, Esq.
Thomas C. DeFilipps, Esq.
Facsimile: (650) 493-6811
3
<PAGE>
and to:
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
Spear Street Tower
One Market
San Francisco, California 94105
Attention: Steve L. Camahort, Esq.
Facsimile: (415) 947-2099
If to Affiliate:
To the address for notice set forth on the signature page hereof.
(l) Counterparts. This Agreement shall be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Affiliate Agreement to be
duly executed on the day and year first above written.
NET IQ CORP. AFFILIATE
By: _________________________________ By: _________________________________
Name: _______________________________ Affiliate's Address for Notice:
Title: ______________________________ _____________________________________
_____________________________________
_____________________________________
Shares beneficially owned:
shares of MCS Common Stock
shares of MCS Common Stock issuable
upon exercise of outstanding options
and warrants
shares of Net IQ Common Stock
[Signature Page to Affiliate Agreement]
5
<PAGE>
ANNEX B
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
February 26, 2000
NetIQ Corporation
5410 Betsy Ross Drive
Santa Clara, California 95054
Members of the Board:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to the holders of common stock of NetIQ Corporation
("NetIQ") of the Exchange Ratio (as defined below) set forth in the Agreement
and Plan of Reorganization, dated as of February 26, 2000 (the "Agreement"), by
and among NetIQ, Planet Acquisition Corp., a wholly owned subsidiary of NetIQ
("Merger Sub"), and Mission Critical Software, Inc. ("Mission Critical"). The
Agreement provides for, among other things, the merger of Merger Sub with and
into Mission Critical (the "Merger") pursuant to which each outstanding share
of the common stock, par value $0.001 per share, of Mission Critical ("Mission
Critical Common Stock") will be converted into the right to receive 0.9413 (the
"Exchange Ratio") of a share of the common stock, par value $0.001 per share,
of NetIQ (the "NetIQ Common Stock").
In arriving at our opinion, we have reviewed the Agreement and certain
related documents, and certain publicly available business and financial
information relating to NetIQ and Mission Critical. We have also reviewed
certain other information relating to NetIQ and Mission Critical, including
financial forecasts, provided to or discussed with us by NetIQ and Mission
Critical, and have met with the managements of NetIQ and Mission Critical to
discuss the businesses and prospects of NetIQ and Mission Critical, including
the ability to integrate the businesses of NetIQ and Mission Critical. We have
also considered certain financial and stock market data of NetIQ and Mission
Critical, and we have compared those data with similar data for other publicly
held companies in businesses similar to NetIQ and Mission Critical, and we have
considered, to the extent publicly available, the financial terms of certain
other business combinations and other transactions which have recently been
effected. We also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria which
we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
such information being complete and accurate in all material respects. With
respect to the financial forecasts, we have been advised, and have assumed,
that the managements of NetIQ and Mission Critical has reviewed publicly
available financial forecasts for NetIQ and Mission Critical and that such
publicly available forecasts represent reasonable estimates and judgments as to
the future financial performance of NetIQ and Mission Critical and the
strategic benefits anticipated to result from the merger. In addition, we have
relied upon, without independent verification, the assessment of the
managements of NetIQ and Mission Critical as to Mission Critical's existing
technology and products, the validity of, and risks associated with, Mission
Critical's future technology and products, and the ability to integrate the
businesses of NetIQ and Mission Critical. We also have assumed, with your
consent, that the merger will be treated as a tax-free reorganization for
federal income tax purposes. We have not been requested to make, and have not
made, an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of NetIQ or Mission Critical, nor have we been
furnished with any such evaluations or appraisals. Our opinion is necessarily
based upon information available to us, and financial, economic, market and
other conditions as they exist and can be evaluated, on the date hereof. In
addition, our opinion does not relate to any other transaction contemplated by
Mission Critical or the effect of such transaction on NetIQ or the merger. We
are not expressing any opinion as to what the value of the NetIQ Common Stock
actually will be when issued pursuant to the merger or the prices at which the
NetIQ Common Stock will trade subsequent to the merger.
B-1
<PAGE>
We have acted as financial advisor to NetIQ in connection with the merger
and will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the merger. We will also receive a fee upon
delivery of this opinion. We have in the past provided financial services to
NetIQ unrelated to the proposed merger, for which services we have received
compensation. In the ordinary course of business, Credit Suisse First Boston
and its affiliates may actively trade the securities of NetIQ and Mission
Critical for their own accounts and for the accounts of customers and,
accordingly, may at any time hold long or short positions in such securities.
It is understood that this letter is for the information of the Board of
Directors of NetIQ in connection with its evaluation of the merger, does not
constitute a recommendation to any stockholder as to how such stockholder
should vote with respect to any matter relating to the merger, and is not to be
quoted or referred to, in whole or in part, in any registration statement,
prospectus or proxy statement, or in any other document used in connection with
the offering or sale of securities, nor shall this letter be used for any other
purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair, from a financial point of view, to the
holders of NetIQ Common Stock.
Very truly yours,
Credit Suisse First Boston
Corporation
B-2
<PAGE>
[LOGO OF CHASE H&Q]
A Division of Chase Securities Inc.
One Bush Street
San Francisco, CA 94104
Tel 415-371-3000
February 26, 2000
Confidential
The Board of Directors
Mission Critical Software, Inc.
13939 Northwest Freeway
Houston, TX 77040
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of common stock (the "Common
Stock") of Mission Critical Software, Inc. ("Mission Critical" or the
"Company") of the exchange ratio to be used in connection with the proposed
merger of a merger subsidiary ("Merger Sub"), a wholly owned subsidiary of
NetIQ Corporation ("NetIQ"), with and into Mission Critical (the "Proposed
Transaction") pursuant to the Agreement and Plan of Merger dated as of February
26, 2000, among NetIQ, Merger Sub, and Mission Critical (the "Agreement").
We understand that the terms of the Agreement provide, among other things, that
each issued and outstanding share of Common Stock shall be converted into the
right to receive 0.9413 shares of common stock of NetIQ (the "Exchange Ratio"),
as more fully set forth in the Agreement. For purposes of this opinion, we have
also assumed that the Proposed Transaction will qualify as a tax-free
reorganization under the United States Internal Revenue Code for the
shareholders of the Company and that the Proposed Transaction will be accounted
for as a purchase.
Chase Securities Inc. ("Chase H&Q"), as part of its investment banking
services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of Mission Critical in connection with the Proposed Transaction, and
we will receive a fee for our services, which include the rendering of this
opinion.
In the past, we have provided investment banking and other financial advisory
services to NetIQ and to Mission Critical and have received fees for rendering
these services. In the ordinary course of business, Chase H&Q acts as a market
maker and broker in the publicly traded securities of NetIQ and Mission
Critical and receives customary compensation in connection therewith, and also
provides research coverage for NetIQ and Mission Critical. In the ordinary
course of business, Chase H&Q actively trades in the equity and derivative
securities of NetIQ and Mission Critical for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities. Chase H&Q may in the future provide
additional investment banking or other financial advisory services to NetIQ and
Mission Critical.
<PAGE>
In connection with our review of the Proposed Transaction, and in arriving at
our opinion, we have, among other things:
(i) reviewed the publicly available financial statements of Mission
Critical for recent years and interim periods to date and certain
other relevant financial and operating data of Mission Critical made
available to us from published sources;
(ii) reviewed certain internal financial and operating information
relating to Mission Critical prepared by the senior management of
Mission Critical;
(iii) discussed the business, financial condition and prospects of Mission
Critical with certain members of senior management;
(iv) reviewed the publicly available financial statements of NetIQ for
recent years and interim periods to date and certain other relevant
financial and operating data of NetIQ made available to us from
published sources;
(v) discussed the business, financial condition and prospects of NetIQ
with certain members of senior management;
(vi) reviewed the recent reported prices and trading activity for the
common stocks of NetIQ and Mission Critical and compared such
information and certain financial information for NetIQ and Mission
Critical with similar information for certain other companies engaged
in businesses we consider comparable;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(viii) reviewed the Agreement; and
(ix) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning NetIQ or Mission Critical
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification of such
information. We have not prepared any independent valuation or appraisal of any
of the assets or liabilities of NetIQ or Mission Critical; nor have we
conducted a physical inspection of the properties and facilities of either
company. With respect to the financial forecasts and projections made available
to us and used in our analysis, we have assumed that they reflect the best
currently available estimates and judgments of the expected future financial
performance of NetIQ and Mission Critical. For purposes of this opinion, we
have assumed that neither NetIQ nor Mission Critical is a party to any pending
transactions, including external financings, recapitalizations or material
merger discussions, other than the Proposed Transaction, the potential
acquisition by Mission Critical of Ganymede Software, Inc. as described to us,
and those activities undertaken in the ordinary course of conducting their
respective businesses. Our opinion is necessarily based upon market, economic,
financial and other conditions as they exist and can be evaluated as of the
date of this letter and any change in such conditions would require a
reevaluation of this opinion. We express no opinion as to the price at which
NetIQ common stock will trade subsequent to the Effective Time (as defined in
the Agreement). In rendering this opinion, we have assumed that the proposed
merger will be consummated substantially on the terms discussed in the
Agreement, without any waiver of any material terms or conditions by any party
thereto.
It is understood that this letter is for the information of the Board of
Directors only and may not be used for any other purpose without our prior
written consent; provided, however, that this letter may be reproduced in full
in the proxy statement relating to the Proposed Transaction. This letter does
not constitute a recommendation to any stockholder as to how such stockholder
should vote on the Proposed Transaction.
<PAGE>
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the Exchange Ratio in the Proposed Transaction is fair to the holders of Common
Stock from a financial point of view. We express no opinion, however, as to the
adequacy of any consideration received in the Proposed Transaction by NetIQ or
any of its affiliates.
Very truly yours,
Chase Securities Inc.
By /s/ Chase Securities,
Inc.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. The
Registrant's Bylaws provide for the mandatory indemnification of its directors,
officers, employees and other agents to the maximum extent permitted by
Delaware General Corporation Law, and the Company has entered into agreements
with its officers, directors and certain key employees implementing such
indemnification.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- ---------------------------------------------------------------------
<C> <S>
2.1*(a) Agreement and Plan of Reorganization by and among NetIQ Corporation,
Planet Acquisition Corporation and MCS dated as of February 26, 2000,
and the related Stock Option Agreements
3.1(b) Restated Certificate of Incorporation of NetIQ currently in effect
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
4.3*(a) Stock Option Agreement, dated February 26, 2000, between NetIQ and
MCS
4.4*(a) Stock Option Agreement, dated February 26, 2000, between MCS and
NetIQ
5.1(a) Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding the legality of the securities being issued
8.1(a) Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding certain tax issues
8.2(a) Form of Opinion of Davis Polk & Wardwell regarding certain tax issues
9.1*(a) Form of Voting Agreement, dated February 26, 2000, between NetIQ and
certain stockholders of MCS
9.2*(a) Form of Voting Agreement, dated February 26, 2000, between MCS and
certain stockholders of NetIQ
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 of NetIQ
10.3B(b) Form of Stock Option Agreement under the Amended and Restated Stock
Plan of NetIQ
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -------------------------------------------------------------------
<C> <S>
10.3C(b) Form of Director Option Agreement under the 1995 Amended and
Restated Stock Plan of NetIQ
10.4A(b) 1999 Employee Stock Purchase Plan
10.4B(b) Form of Subscription Agreement under the 1999 Employee Stock
Purchase Plan of NetIQ
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(a) Subsidiaries of NetIQ
23.1(a) Consent of Deloitte & Touche, LLP
23.2(a) Consent of Ernst & Young LLP
23.3(a) Consent of PricewaterhouseCoopers LLP
23.4(a) Consent of Davis Polk & Wardwell (included in Exhibit 8.2)
23.5(a) Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1 and Exhibit 8.1)
23.6(a) Consent of Michael S. Bennett
23.7(a) Consent of Thomas P. Bernhardt
23.8(a) Consent of Michael J. Maples
23.9(a) Consent of Scott D. Sandell
24.1(a) Power of Attorney (see page II-4).
99.2(a) Form of MCS proxy card
99.3(a) Form of NetIQ proxy card
99.4(a) Consent of Credit Suisse First Boston Corporation
99.5(a) Consent of Chase H&Q
</TABLE>
- --------
* Filed as an appendix to the Proxy Statement/Prospectus constituting part of
this registration statement and incorporated herein by reference.
+ Confidential treatment has previously been requested for portions of these
documents
(a) Filed herewith.
(b) Incorporated by reference to the exhibit bearing the same number filed with
NetIQ's Registration Statement on Form S-1 (Registration No. 333-79373),
which the Securities and Exchange Commission declared effective on July 29,
1999.
(b) Financial Statement Schedules
(1) Schedule II--Valuation and Qualifying Accounts.
II-2
<PAGE>
(c) Reports, Opinions or Appraisals
Item 22. Undertakings
(1) The undersigned Registrant hereby undertakes as follows: that prior to
any public offering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment 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.
(3) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to be granted directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 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 such director, officer or controlling person in
connection with the securities being registered, the Registrant 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 Act and
will be governed by the final adjudication of such issue.
(4) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, NetIQ Corporation has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on the 23rd day of March, 2000.
NETIQ Corporation
/s/ Ching-Fa Hwang
By: _________________________________
Ching-Fa Hwang, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ching-Fa Hwang and James A. Barth and each of
them, his attorneys-in-fact, each with the power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ching-Fa Hwang President, Chief Executive March 23, 2000
______________________________________ Officer and Director
(Ching-Fa Hwang) (Principal Executive
Officer)
/s/ James A. Barth Vice President, Finance March 23, 2000
______________________________________ and Chief Financial
(James A. Barth) Officer (Principal
Financial and Accounting
Officer)
/s/ Herbert Chang Director March 23, 2000
______________________________________
(Herbert Chang)
/s/ Her-Daw Che Vice President, March 23, 2000
______________________________________ Engineering and Director
(Her-Daw Che)
/s/ Louis Cole Director March 23, 2000
______________________________________
(Louis Cole)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Alan Kaufman Director March 23, 2000
______________________________________
(Alan Kaufman)
/s/ Ying-Hon Wong Director March 23, 2000
______________________________________
(Ying-Hon Wong)
</TABLE>
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 21(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>
NETIQ CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Deductions/ Balance at
Beginning Cost and End of End of
of Period Expenses 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 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
March 23 , 2000
NetIQ Corporation
5410 Betsy Ross Drive
Santa Clara, CA 95054
Re: REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 filed by you with
the Securities and Exchange Commission (the "Commission") on March 23, 2000
(the "Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of 20,119,591 shares of your Common Stock
(the "Shares"). As your counsel in connection with this transaction, we have
examined the proceedings taken and are familiar with the proceedings proposed
to be taken by you in connection with the sale and issuance of the Shares.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares, when issued and sold in the
manner described in the Registration Statement, will be legally and validly
issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the joint proxy statement/prospectus
constituting a part thereof, and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich &
Rosati, P.C.
<PAGE>
Exhibit 8.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
March , 2000
NetIQ Corporation
5410 Betsy Ross Drive
Santa Clara, California 95054
Re: Merger of Planet Acquisition Corp. into Mission Critical Software
Inc.
Ladies and Gentlemen:
We have acted as counsel to NetIQ Corporation, a Delaware corporation,
("NetIQ") in connection with the proposed merger (the "Merger") of Planet
Acquisition Corp., a Delaware corporation that is a wholly-owned subsidiary of
NetIQ ("Merger Sub"), into Mission Critical Software Inc., a Delaware
corporation, ("MCS") pursuant to an Agreement and Plan of Reorganization dated
as of February 26, 2000 (the "Merger Agreement"). A Registration Statement on
Form S-4 (the "Registration Statement") describes the Merger and certain
transactions incident to the Merger. The Registration Statement includes the
Proxy Statement/Prospectus of MCS and NetIQ (the "Proxy Statement/Prospectus").
We are providing this opinion pursuant to the requirements of Item 21(a) of
Form S-4 under the Securities Act of 1933.
In preparing to provide this opinion, we examined the Merger Agreement, the
Registration Statement, and other documents, records, and matters of law that
we deemed appropriate. We have assumed that the Merger will occur as described
in the Proxy Statement/Prospectus and in accordance with the Merger Agreement.
We have also assumed that the representations and warranties made by NetIQ and
MCS in the Merger Agreement and the representations made in certificates
provided to us by NetIQ, Merger Sub, and MCS are true and accurate.
Based on the foregoing, in our opinion, the information in the Registration
Statement under the heading "Material United States federal income tax
considerations of the merger" sets forth the material U.S. federal income tax
considerations generally applicable to the Merger. Because we are delivering
this opinion before the Effective Time of the Merger, the opinion depends on
future events. Future changes in the law or positions taken by the Internal
Revenue Service may affect the U.S. federal income tax consequences of the
Merger.
We are furnishing this opinion to you solely for use in connection with the
Registration Statement. We consent to the filing of this opinion as Exhibit
8.1(a) to the Registration Statement. We also consent to the references to our
firm in the Registration Statement, including the Proxy Statement/Prospectus
and any amendments to these documents, as part of the description of the
material federal income tax consequences of the Merger. In giving this consent,
we do not admit that we are in the category of persons whose consent is
required under section 7 of the Securities Act of 1933 or the rules and
regulations of the Securities and Exchange Commission under that Act. In
addition, we do not admit that we are experts, for purposes of that Act or the
accompanying regulations, regarding any part of the Registration Statement.
Sincerely,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
Exhibit 8.2
[LETTERHEAD OF DAVIS POLK & WARDWELL]
[Effective Time]
Re: Registration Statement on Form
S-4
Mission Critical Software, Inc.
13939 Northwest Freeway
Houston, TX 77040
Ladies and Gentlemen:
We have acted as counsel for Mission Critical Software, Inc. ("MCS"), a
Delaware corporation, in connection with (i) the Merger (the "Merger"), as
defined and described in the Agreement and Plan of Merger dated as of February
26, 2000 (the "Merger Agreement") among NetIQ Corporation ("NetIQ"), a Delaware
corporation, Planet Acquisition Corporation ("MergerSub"), a Delaware
corporation and a wholly-owned subsidiary of NetIQ, and MCS and (ii) the
preparation and filing of the related Registration Statement on Form S-4, which
includes the Proxy Statement/Prospectus (the "Proxy Statement/ Prospectus"),
filed with the Securities and Exchange Commission (the "Commission"). You have
requested our opinion regarding the United States federal income tax
consequences of the Merger. Unless otherwise indicated, each capitalized term
used herein has the meaning ascribed to it in the Merger Agreement.
In connection with this opinion, we have examined the Merger Agreement, the
Proxy Statement/Prospectus and such other documents as we have deemed necessary
or appropriate in order to enable us to render our opinion. For purposes of
this opinion, we have assumed (i) the validity and accuracy of the documents
that we have examined, (ii) that the Merger will be consummated in the manner
described in Merger Agreement and the Proxy Statement/Prospectus, and (iii)
that the representations made and the representations to be made by NetIQ
(together with Merger Subsidiary) and MCS pursuant to Section 6.1(d) of the
Merger Agreement are accurate and complete. In rendering our opinion, we have
considered the applicable provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Department regulations promulgated thereunder,
pertinent judicial authorities, interpretive rulings of the IRS and such other
authorities as we have considered relevant. It should be noted that statutes,
regulations, judicial decisions and administrative interpretations are subject
to change at any time (possibly with retroactive effect). A change in the
authorities or the inaccuracy of any of the documents or assumptions on which
our opinion is based could affect our conclusions.
Based upon the foregoing, in our opinion, the Merger will be treated for
United States federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, and NetIQ, MCS and MergerSub will each
be a party to that reorganization within the meaning of Section 368(b) of the
Code. Other than as expressly set forth above, we express no opinion as to the
United States federal, state, local, foreign or other tax consequences of the
Merger.
We hereby consent to the discussion of this opinion in the Proxy
Statement/Prospectus, to the filing of this opinion as an exhibit to the Proxy
Statement/Prospectus and to the reference to our firm under the headings "THE
MERGER-Material United States federal income tax considerations of the merger"
and "LEGAL MATTERS" in the Proxy Statement/Prospectus. In giving such consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Commission thereunder.
Very truly yours,
Davis Polk & Wardwell
<PAGE>
EXHIBIT 21.1
Subsidiaries of NetIQ
Subsidiary Jurisdiction
---------- of Incorporation
----------------
NetIQ Limited United Kingdom
NetIQ K.K. Japan
NetIQ Pty. Ltd. Australia
Sirana Software, Inc. Washington
<PAGE>
Exhibit 23.1
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the use in this Registration Statement of NetIQ Corporation
on Form S-4 of our report dated July 9, 1999 (August 4, 1999 as to Note 13),
appearing in the proxy statement/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
proxy statement/prospectus.
/s/ Deloitte & Touche LLP
San Jose, California
March 22, 2000
<PAGE>
Exhibit 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated July 7, 1999, except for Note 14, as to which the
date is August 4, 1999, with respect to the financial statements of Mission
Critical Software, Inc. included in the Registration Statement (Form S-4) and
related Prospectus of NetIQ Corporation for the registration of shares of its
common stock.
/s/ Ernst & Young LLP
Austin, Texas
March 20, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
NetIQ Corporation of our reports dated May 12, 1999, except as to Note 10,
which is as of March 9, 2000, relating to the financial statements of Ganymede
Software Inc., which appear in such Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
March 23, 2000
<PAGE>
EXHIBIT 23.6
CONSENT OF MICHAEL S. BENNETT
The undersigned hereby consents to be named in this Registration Statement
on Form S-4 as a person designated to become a director of Newco Corporation
upon the consummation of the merger of Mission Critical Software, Inc. and
NetIQ Corporation.
/s/ Michael S. Bennett
_____________________________________
Michael S. Bennett
Date: March 21, 2000
<PAGE>
EXHIBIT 23.7
CONSENT OF THOMAS P. BERNHARDT
The undersigned hereby consents to be named in this Registration Statement
on Form S-4 as a person designated to become a director of Newco Corporation
upon the consummation of the merger of Mission Critical Software, Inc. and
NetIQ Corporation.
/s/ Thomas P. Bernhardt
_____________________________________
Thomas P. Bernhardt
Date: March 21, 2000
<PAGE>
EXHIBIT 23.8
CONSENT OF MICHAEL J. MAPLES
The undersigned hereby consents to be named in this Registration Statement
on Form S-4 as a person designated to become a director of Newco Corporation
upon the consummation of the merger of Mission Critical Software, Inc. and
NetIQ Corporation.
/s/ Michael J. Maples
_____________________________________
Michael J. Maples
Date: March 21, 2000
<PAGE>
EXHIBIT 23.9
CONSENT OF SCOTT D. SANDELL
The undersigned hereby consents to be named in this Registration Statement
on Form S-4 as a person designated to become a director of Newco Corporation
upon the consummation of the merger of Mission Critical Software, Inc. and
NetIQ Corporation.
/s/ Scott D. Sandell
_____________________________________
Scott D. Sandell
Date: March 21, 2000
<PAGE>
Exhibit 99.2
MISSION CRITICAL SOFTWARE, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Michael S. Bennett and Stephen E. Odom and
either of them, as attorneys of the undersigned with full power of
substitution, to vote all shares of stock which the undersigned is entitled to
vote at the Special Meeting of Stockholders of Mission Critical Software,
Inc., to be held at the headquarters of Mission Critical Software, Inc. at
13939 Northwest Freeway, Houston, Texas 77040, on , 2000 at 10:00 a.m.,
local time, and at any adjournment or postponement thereof, with all the
powers which the undersigned might have if personally present at the meeting.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting and Proxy Statement, each dated March , 2000, and hereby expressly
revokes any and all proxies heretofore given or executed by the undersigned
with respect to the shares of stock represented by this Proxy and by filing
this Proxy with the Secretary of the corporation, gives notice of such
revocation.
THIS PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE TIME IT IS VOTED.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN PROMPTLY IN THE
ENCLOSED ENVELOPE.
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL:
1. Proposal to adopt the Agreement and Plan of Reorganization, dated as of
February 26, 2000 among NetIQ Corporation, Planet Acquisition Corporation, a
wholly-owned subsidiary of NetIQ, and Mission Critical Software Inc., and to
approve the merger of NetIQ and MissionCritical.
[_] FOR[_] AGAINST[_] ABSTAIN
In their discretion, the proxies are authorized to vote upon such other
matter(s) as may properly come before the meeting (including any motion to
adjourn to a later date to permit further solicitation of proxies if necessary
to establish a quorum or to obtain additional votes in favor of the proposal)
or any postponements or adjournments thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW [_]
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS INDICATED, WILL
BE VOTED FOR THE ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER.
Please date and sign exactly as your name or names appear hereon. Corporate
or partnership proxies should be signed in full corporate or partnership name
by an authorized person. Persons signing in a fiduciary capacity should
indicate their full titles in such capacity. If shares are held by joint
tenants or as community property, both parties should sign.
Signature: __________________________ Date: ________________________________
Signature: __________________________
Date: ________________________________
<PAGE>
Exhibit 99.3
NETIQ CORPORATION
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Ching-Fa Hwang and James A. Barth and
either of them, as attorneys of the undersigned with full power or
substitution, to vote all shares of stock which the undersigned is entitled to
vote at the Special Meeting of Stockholders of NetIQ Corporation, to be held
at 5410 Betsy Ross Drive, Santa Clara, California 95054, on , 2000
at 10:00 a.m., local time, and at adjournment or postponement thereof, with
all the powers which the undersigned might have if personally present at the
meeting.
The undersigned hereby acknowledges receipt of Notice of Special Meeting
and Proxy Statement, each dated March , 2000, and hereby expressly revokes
any and all proxies heretofore given or executed by the undersigned with
respect to the shares of stock represented by this Proxy and by filing this
Proxy with the Secretary of the corporation, gives notice of such revocation.
THIS PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE TIME IT IS VOTED.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN PROMPTLY IN THE
ENCLOSED ENVELOPE.
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSALS:
1. To approve the issuance of shares of NetIQ common stock pursuant to an
Agreement and Plan of Reorganization, dated as of February 26, 2000, among
NetIQ Corporation, Planet Acquisition Corporation, a wholly-owned subsidiary
of NetIQ Corporation, and Mission Critical Software, Inc. pursuant to which
Mission Critical Software, Inc. will become a wholly-owned subsidiary of NetIQ
Corporation.
<TABLE>
<S> <C> <C>
[_] FOR [_] AGAINST [_] ABSTAIN
</TABLE>
2. To approve an amendment of NetIQ's certificate of incorporation to
change the name of NetIQ Corporation to Newco Corporation.
<TABLE>
<S> <C> <C>
[_] FOR [_] AGAINST [_] ABSTAIN
</TABLE>
3. To approve the amendment of NetIQ's 1995 Stock plan to increase the
number of shares of common stock reserved for issuance under the plan from
5,333,332 shares to 8,000,000 shares, and to provide for an annual increase in
the number of shares reserved for issuance in the amount that is the lowest of
(i) 2,600,000 shares, (ii) 5% of the number of shares of NetIQ outstanding on
the first day of the fiscal year and (iii) an amount determined by the board
of directors.
<TABLE>
<S> <C> <C>
[_] FOR [_] AGAINST [_] ABSTAIN
</TABLE>
4. To approve the amendment of NetIQ's 1999 Employee Stock Purchase Plan to
increase the number of shares reserved under the plan from 500,000 to
1,000,000 shares, and to provide for an annual increase in the number of
shares reserved for issuance in the amount that is the lowest of (i) 800,000
shares, (ii) 2% of the outstanding shares on the first day of NetIQ's fiscal
year, and an amount determined by the board of directors.
<TABLE>
<S> <C> <C>
[_] FOR [_] AGAINST [_] ABSTAIN
</TABLE>
<PAGE>
In their discretion, the proxies are authorized to vote upon such other
matter(s) which may properly come before the meeting (including any motion to
adjourn to a later date to permit further solicitation of proxies if necessary
to establish a quorum or to obtain additional votes in favor of the proposal)
or any postponements or adjournments thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW [_]
THIS PROXY WILL BE VOTED AS DIRECTED, OR, IF NO DIRECTION IS INDICATED WILL
BE VOTED FOR THE APPROVAL OF THE ISSUANCE OF SHARES OF NETIQ COMMON STOCK
NECESSARY TO COMPLETE THE MERGER WITH MISSION CRITICAL SOFTWARE, INC.
Please date and sign exactly as your name or names appear hereon. Corporate
or partnership proxies should be signed in full corporate or partnership name
by an authorized person. Persons signing in a fiduciary capacity should
indicate their full titles in such capacity. If shares are held by joint
tenants or as community property, both parties should sign.
<TABLE>
<S> <C>
Signature: _________________________________ Date: ______________________________________
Signature: _________________________________ Date: ______________________________________
Address Change: ____________________________
___________________________________________
___________________________________________
</TABLE>
<PAGE>
Exhibit 99.4
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
Board of Directors
NetIQ Corporation
5410 Betsy Ross Drive
Santa Clara, California 95054
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of NetIQ Corporation ("NetIQ") as Annex B to the Proxy
Statement/Prospectus of NetIQ and Mission Critical Software, Inc. ("Mission
Critical") relating to the proposed merger transaction involving NetIQ and
Mission Critical, and references thereto in such Proxy Statement/Prospectus
under the captions "SUMMARY OF THE PROXY STATEMENT/PROSPECTUS--Summary of the
Merger--Opinions of MCS's and NetIQ's financial advisors" and "THE MERGER--
Opinion of NetIQ's financial advisor." In giving such consent, we do not admit
that we come within the category of persons whose consent is required under,
and we do not admit that we are "experts" for purposes of, the Securities Act
of 1933, as amended, and the rules and regulations promulgated thereunder.
/s/ Credit Suisse First Boston
Corporation
By: ____________________________________
Credit Suisse First Boston
Corporation
Palo Alto, California
March 23, 2000
<PAGE>
Exhibit 99.5
Board of Directors
Mission Critical Software Inc.
13939 Northwest Freeway
Houston, TX 77040
Members of the Board:
We hereby consent to the inclusion of our opinion letter dated February 26,
2000 to the Board of Directors of Mission Critical Software Inc. as Annex C to
the Joint Proxy Statement/Prospectus which forms a part of the Registration
Statement on Form S-4 relating to the proposed merger transaction involving Net
IQ Corporation and Mission Critical Software Inc. and to the references to such
opinion in the Joint Proxy Statement/Prospectus under the captions "SUMMARY OF
THE PROXY STATEMENT/PROSPECTUS--Summary of the Merger", "THE MERGER--
"Background of the merger", and "THE MERGER--Opinion of MCS's financial
advisor." In giving such consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations issued by the Securities
and Exchange Commission thereunder (collectively, the "Securities Act") nor do
we admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "expert" as used in the Securities
Act.
By:/s/ Chase Securities, Inc.
Chase Securities, Inc.
San Francisco, California
March 22, 2000
