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NETIQ CORP
10-Q, 2000-11-14
PREPACKAGED SOFTWARE

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Delaware (State or other jurisdiction of incorporation or organization)

77-0405505 (I.R.S. Employer Identification No.)

3553 North First Street, San Jose CA (Address of principal executive offices)

95134 (Zip Code)

				Page
PART I		FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS		3
		CONDENSED CONSOLIDATED BALANCE SHEETS		3
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME AND (LOSS)		4
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS		5
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		6
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		9
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		20
PART II		OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS		21
ITEM 2.		CHANGES IN SECURITIES AND USE OF PROCEEDS		21
ITEM 3.		DEFAULT UPON SENIOR SECURITIES		22
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS		22
ITEM 5.		OTHER INFORMATION		22
ITEM 6.		EXHIBITS AND REPORTS ON FORM 8-K		22
		SIGNATURES		23

			Sept. 30,				June 30,
			2000				2000(1)
			(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	74,457			$	187,610
Short-term investments			244,794				145,916
Accounts receivable, net			18,689				10,744
Prepaid expenses			3,134				3,478
Total current assets			341,074				347,748
Property and equipment, net			36,365				7,181
Goodwill and other intangibles, net			1,244,173				1,365,891
Other assets			935				941
Total assets		$	1,622,547			$	1,721,76
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable		$	3,352			$	2,044
Accrued compensation and related benefits			7,453				5,023
Other liabilities			8,846				11,285
Deferred revenue			20,385				17,687
Total current liabilities			40,036				36,039
Stockholders' equity:
Common Stock – $0.001; 100,000,000 shares authorized 38,572,804 issued and outstanding           at September 30, 2000; 37,533,359 issued and outstanding at June 30, 2000			1,768,782				1,760,396
Deferred sock-based compensation			(1,109	)			(1,286	)
Accumulated deficit			(185,055	)			(73,271	)
Accumulated other comprehensive loss			(107	)			(117	)
Total stockholders' equity			1,582,511				1,685,722
Total liabilities and stockholders' equity		$	1,622,547			$	1,721,761

(1)	Derived from audited consolidated financial statements.

		Three Months Ended September 30,
		2000			1999
Software license revenue		$    23,066			$  6,221
Service revenue		7,463			1,365
Total revenue		30,529			7,586
Cost of software license revenue		345			156
Cost of service revenue		1,346			419
Total cost of revenue		1,691			575
Gross profit		28,838			7,011
Operating expenses:
Sales and marketing		15,156			4,124
Research and development		6,609			1,709
General and administrative		2,212			754
Stock-based compensation		170			178
Amortization of goodwill and intangibles		119,394			—
Total operating expenses		143,541			6,765
Income (loss) from operations		(114,703	)		246
Other income (expenses):
Interest income		5,804			382
Other income (expenses)		15			(34	)
Total other income		5,819			348
Income (loss) before income taxes		(108,884	)		594
Income taxes		2,900			122
Net income (loss)		(111,784	)		472
Other comprehensive income (expenses), net of income taxes:
Foreign currency translation adjustments		(120	)		(27	)
Unrealized loss on short-term investments		130			—
Comprehensive income (loss)		$(111,774	)		$    445
Basic net income (loss) per share		$      (3.00	)		$    0.04
Shares used to compute basic net income (loss) per share		37,286			11,696
Diluted net income (loss) per share		$      (3.00	)		$    0.03
Shares used to compute diluted net income (loss) per share		37,286			15,785

		Three Months Ended September 30,
		2000			1999
Cash flows from operating activities:
Net income (loss)		$(111,784	)		$    472
Adjustments to reconcile net income (loss) to net cash provided by operating                activities:
Depreciation and amortization		120,267			167
Stock-based compensation		170			178
Changes in:
Accounts receivable		(8,037	)		1,891
Prepaid expenses and other		533			(268	)
Accounts payable		1,319			1,134
Accrued compensation and related benefits		2,444			165
Other liabilities		197			25
Deferred revenue		2,956			658
Net cash provided by operating activities		8,065			4,422
Cash flows from investing activities:
Purchases of property and equipment		(30,042	)		(182	)
Cash used in acquisition, net of cash received		(729	)		—
Purchases of short-term investments		(123,784	)		—
Proceeds from maturities of short-term investments		25,000			—
Net cash used in investing activities		(129,555	)		(182	)
Cash flows from financing activities:
Repayments on short-term borrowings		—			(1,724	)
Repayments on long-term borrowings		—			(349	)
Proceeds from sale of common stock		8,393			40,515
Net cash provided by financing activities		8,393			38,442
Effect of exchange rate changes on cash		(56	)		(35	)
Net increase (decrease) in cash and cash equivalents		(113,153	)		42,647
Cash and cash equivalents, beginning of period		187,610			9,634
Cash and cash equivalents, end of period		$    74,457			$52,281
Supplemental disclosure of cash flow information-cash paid for:
Interest		$           12			$     125
Income taxes		$           85			$     101

NetIQ CORPORATION

Notes To Condensed Consolidated Financial Statements
Three Months Ended September 30, 2000 and 1999
(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 accounting principles generally accepted in the United States of America 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 in the Company's Annual Report on Form 10-K for the year ended June 30, 2000.

2.

Business Combinations

Acquisition of Software Realization, Inc.:

     On July 17, 2000 the Company acquired all outstanding shares of Software Realization, Inc. (Software Realization) for cash of $745,000, assumed liabilities of approximately $528,000, plus approximately $150,000 of direct merger costs, for a total purchase price of approximately $1.4 million. Software Realization is a professional services company delivering training and consulting services to NetIQ partners and customers.

     The acquisition was accounted for as a purchase and, accordingly, the results of operations of the acquired company from the date of acquisition have been included in the Company's consolidated financial statements. In connection with the acquisition, goodwill of approximately $919,000 was acquired which is being amortized over three years.

     In connection with the acquisition, net assets acquired were as follows (in thousands):

Current assets	$	442
Property and equipment, net		62
Intangible assets		1,447
Liabilities assumed		(528	)
Net assets acquired	$	1,423

3.

Effects of Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. The Company adopted SFAS 133 effective July 1, 2000. As the Company has no derivative instruments the adoption of SFAS 133 did not have a material impact on our financial position or results of operations.

     In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation – an Interpretation of APB Opinion No. 25. FIN 44 clarifies certain elements of APB Opinion No. 25. Among other issues, this interpretation clarifies: the definition of employee for purposes of applying APB Opinion No. 25, the criteria for determining whether a plan qualifies as non-compensatory, the accounting consequences of various modifications to the terms of a previously fixed stock option award, and the accounting for an exchange of stock compensation in a business combination. The Company adopted FIN 44 effective July 1, 2000. The adoption of FIN 44 did not have a material impact on our financial position or results of operations.

4.

Property and Equipment

     In August 2000 the Company purchased a building for their corporate offices in San Jose, California for approximately $27.9 million. Additionally, approximately $1.1 million have been spent on improvements during the three months ended September 30, 2000, and the Company expects to spend approximately $2.0 million in additional improvements during the three months ending December 31, 2000

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 outstanding stock options and warrants 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-months ended September 30, 2000 and 1999 (in thousands):

	Three months ended September 30,
	2000			1999
Weighted average common shares outstanding	37,959			11,721
Weighted average common shares outstanding      subject to repurchase	(673	)		(25	)
Shares used in computing basic net income (loss) per share	37,286			11,696
Weighted average common shares outstanding	37,286			11,721
Weighted average preferred shares outstanding	—			2,333
Dilutive effect of options outstanding	—			1,722
Dilutive effect of average warrants outstanding	—			9
Shares used in computing diluted net income (loss) per share	37,286			15,785

     The Company had a net loss for the three-months ended September 30, 2000; therefore shares used in computing diluted net loss per share are equal to shares used for computing basic net loss per share.

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The statements contained in this Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, including statements about our plans, objectives, expectations and intentions. Forward-looking statements include: statements regarding future products or product development; statements regarding future research and development spending and our product development strategy; statements regarding the levels of international sales; statements regarding future expenditures; and statements regarding current or future acquisitions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could differ materially from those in such forward-looking statements. Some of the factors that could cause actual results to differ materially are set forth in "Factors That May Affect Future Results" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in, this report.

Overview

     We are a leading provider of software for managing eBusiness infrastructures. Our Administration, Operations and Network Performance Management product lines are designed to reduce the cost of operations and increase the security, performance and availability of eBusiness applications, directories, servers and networks.

     From our incorporation in June 1995 until the first sales of AppManager in February 1997, we were principally engaged in development-stage activities, including product development, sales and marketing efforts and recruiting qualified management and other personnel. Our total revenue has grown from $7.1 million in 1998 to $21.6 million in 1999 to $47.9 million in 2000 and $30.5 million in the three months ended September 30, 2000. This rapid revenue growth reflects our relatively early stage of development, and our merger with Mission Critical Software, Inc. (Mission Critical) during fiscal 2000, and we do not expect revenue to increase at the same rate in the future.

     Operating expenses grew from $9.6 million in 1998 to $19.4 million in 1999 to $39.6 million in 2000 and $24.0 million in the three months ended September 30, 2000, excluding stock-based compensation, write-off of acquired in-process research and development costs, and amortization of goodwill and intangible assets generated in the mergers. Our operating expenses increased as we expanded our operations, including growing our employee base from 14 at June 30, 1996 to 560 at September 30, 2000. Expenses associated with stock-based compensation, write-off of acquired in-process research and development costs, and amortization of goodwill and intangible assets generated in the merger and acquisitions have grown from $250,000 in fiscal 1998 to $75.6 million in fiscal 2000 and to $119.6 million in the three months ended September 30, 2000, mainly due to the write-off of acquired in-process research and development costs and amortization of goodwill and intangible assets generated in the merger and acquisitions. Our cumulative losses have resulted in an accumulated deficit of $185.1 million at September 30, 2000.

     We have derived the large majority of our revenue from software licenses. We also derive revenue from sales of annual maintenance service agreements and, to a lesser extent, consulting and training services. Service revenue has increased in recent periods as license revenue has increased and as the size of our installed base has grown. The pricing of our products is based on the number of systems and applications managed, although volume and enterprise pricing is also available. Our customers typically purchase one year of product software maintenance with their initial license of our products. Thereafter, customers are entitled to receive software updates, maintenance releases and technical support for an annual maintenance fee equal to a fixed percentage of the current list price of the licensed product.

     Cost of software license revenue has decreased from 4% in 1998 and 1999 to 2% in 2000 and the three months ended September 30, 2000. This decrease is the result of economies of scale, lower royalty expense as our new products including those from Mission Critical do not incorporate third-party technologies. Cost of service revenue, as a percentage of service revenue, has declined from 87% in 1998 to 40% in 1999 to 21% in 2000 and 18% in the three months ended September 30, 2000. Although service revenue has increased as a percentage of total revenue from 7% in 1998 to 15% in 1999 to 22% in 2000 and to 24% in the three months ended September 30, 2000, the declining cost of service revenue has resulted in a change in overall gross margin from 91% in 1998 to 90% in 1999 and to 94% in 2000 and in the three months ended September 30, 2000.

     We sell our products through both our direct sales force, which includes our field and inside sales personnel, as well as through indirect channels, such as distributors, value-added resellers and original equipment manufacturers. To date, the majority of our sales have resulted from the efforts of our field and inside sales personnel. However, revenue through our third-party channel partners represented approximately 22% of total revenue in the three months ended September 30, 2000, 25% of total revenue in fiscal 2000 and 30% of total revenue in fiscal 1999. Although, our strategy is to increase sales through third-party channel partners the decline is the result of including Mission Critical in our operating results commencing in May 2000. No single customer accounted for greater than 10% of total revenue during the three months ended September 30, 2000 or in fiscal 2000, 1999 or 1998. No single customer accounted for greater than 10% of accounts receivable at September 30, 2000 or June 30, 2000. Two customers accounted for 15% and 10% of accounts receivable at June 30, 1999. One customer accounted for 11% of accounts receivable at June 30, 1998. International sales accounted for 16%, 23%, 17% and 10% of total revenue in the three months ended September 30, 2000, fiscal 2000, 1999, and 1998, respectively. We anticipate that as we expand our international sales efforts, the percentage of revenue derived from international sources will increase.

     Generally, we sell perpetual licenses and recognize revenue in accordance with generally accepted accounting principles upon meeting each of the following criteria:

execution of a written purchase order, license agreement or contract; delivery of software and authorization keys; the license fee is fixed and determinable; collectibility of the proceeds within six months is assessed as being probable; and vendor-specific objective evidence exists to allocate the total fee to elements of the arrangement.

     Vendor-specific objective evidence is based on the price generally charged when an element is sold separately, or if not yet sold separately, is established by authorized management. All elements of each order are valued at the time of revenue recognition. For sales made through our distributors, resellers and original equipment manufacturers, we recognize revenue at the time these partners report to us that they have sold the software to the end user and after all revenue recognition criteria have been met.

     Licensing agreement with Microsoft Corporation.

     On September 25, 2000, we entered into a licensing agreement with Microsoft Corporation whereby Microsoft will license our Operations Manager product technology and source code for core operations management of Windows 2000 and Microsoft server applications. We will receive $175.0 million in license fees and up to $6.0 million in engineering co-development funds over a three-year period. Microsoft will also spend $5.0 million per year and pay us an additional $5.0 million per year to market the joint solutions. In addition, we became the Premier Independent Software Vendor (ISV) for Microsoft operations management solutions - the only vendor with such a designation - and became a Microsoft Global Technology Partner.

     Acquisition of Software Realization, Inc.

     On July 17, 2000 we acquired all outstanding shares of Software Realization, Inc. (Software Realization) for cash of $745,000, assumed liabilities of approximately $528,000, plus approximately $150,000 of direct merger costs, for a total purchase price of approximately $1.4 million. Software Realization is a professional services company delivering training and consulting services to NetIQ partners and customers. The merger has been accounted for using purchase accounting.

     Merger with Mission Critical Software, Inc.

     On February 26, 2000 we entered into a merger agreement with Mission Critical Software, Inc. and agreed to issue 0.9413 shares for each share of Mission Critical common stock. Mission Critical was a provider of systems administration and operations management software products for corporate and Internet-based Windows NT and Windows 2000 networks. Stockholders approved the merger in a special meeting on May 11, 2000 and on May 12, 2000 the merger was completed. We issued approximately 18.8 million shares valued at approximately $1.3 billion, assumed approximately 4.9 million options valued at approximately $285.0 million and incurred approximately $10.0 million of direct merger costs, for a total purchase price of approximately $1.6 billion. The merger has been accounted for using purchase accounting. In April 2000, prior to completing the merger with NetIQ, Mission Critical acquired all of the outstanding capital stock of Ganymede Software Inc. (Ganymede). Ganymede was a developer of network and application performance management solutions. The merger was accounted for using purchase accounting.

     Acquisition of Sirana Software, Inc.

     On March 10, 2000 we acquired all outstanding shares of Sirana Software, Inc. for approximately 27,000 shares of common stock and cash valued at approximately $2.5 million plus approximately $200,000 of direct merger costs, for a total purchase price of approximately $2.7 million. Sirana was a developer of web-based enterprise analysis and reporting solutions for Microsoft BackOffice. The merger has been accounted for using purchase accounting.

Comparison of Three Months Ended September 30, 2000 and 1999

     Revenue. Our total revenue increased to $30.5 million for the three months ended September 30, 2000 from $7.6 million for the three months ended September 30, 1999, representing growth of approximately 300%. During this same period, our software license revenue increased to $23.1 million from $6.2 million, representing growth of 271%. The increase is due primarily to increases in the number of software licenses sold, reflecting increased acceptance of our products, effects of the merger with Mission Critical and Ganymede, and expansion of our field and inside sales organizations and our third-party channel partners. Service revenue increased to $7.5 million for the three months ended September 30, 2000 from $1.4 million for the three months ended September 30, 1999, representing growth of approximately 400%. The increase was due primarily to maintenance fees associated with new software licenses. Service revenue increased as a percentage of total revenue due to the compounding effect of our base of installed licenses and due to a significant majority of our customers renewing their maintenance service agreements.

     Cost of Revenue

     Cost of Software License Revenue. Our cost of software license revenue includes the costs associated with software packaging, documentation, such as user manuals and CDs, and production, as well as non-employee commissions and royalties. Cost of software license revenue was $345,000 and $156,000 for the three months ended September 30, 2000 and 1999, respectively, representing 2% and 3% of related software license revenue. The percentage decrease is the result of economies of scale, and lower royalty expense as our new products, including those from Mission Critical, do not incorporate third-party technologies.

     Cost of Service Revenue. Cost of service revenue consists primarily of personnel costs and expenses incurred in providing telephonic and on-site maintenance 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 $1.3 million and $419,000 for the three months ended September 30, 2000 and 1999, respectively, representing 18% and 31% of related service revenue. The increase in dollar amount of cost of service revenue is primarily attributable to the growth in our installed customer base. Cost of service revenue as a percent of service revenue declined due primarily to economies of scale achieved as our revenue and installed base have grown.

     Operating Expenses

     Sales and Marketing. Our sales and marketing expenses consist primarily of personnel costs, including salaries and employee commissions, as well as expenses relating to travel, advertising, public relations, seminars, marketing programs, trade shows and lead generation activities. Sales and marketing expenses increased to $15.2 million for the three months ended September 30, 2000 from $4.1 million for the three months ended September 30, 1999. The increase in dollar amount was due primarily to the hiring of additional field sales, inside sales and marketing personnel, which increased to 274 people from 76 people at the end of the same quarter in the prior fiscal year, and expanding our sales infrastructure and third-party channel partners, as well as higher commissions. Sales and marketing expenses represented 50% and 54% of total revenue for the three months ended September 30, 2000 and 1999, respectively. The decline in sales and marketing expenses as a percentage of total revenue was principally the result of economies of scale resulting from the increased number of sales transactions, including follow-on sales to existing customers, as well as the allocation of marketing expenses over a substantially larger revenue base. We expect to continue hiring additional sales and marketing personnel and to increase promotion, advertising and other marketing expenditures in the future. Accordingly, we expect sales and marketing expenses will increase in absolute dollars in future periods.

     Research and Development. Our research and development expenses consist primarily of salaries and other personnel-related costs, as well as facilities costs, consulting fees and depreciation. These expenses increased to $6.6 million, or 22% of total revenue, for the three months ended September 30, 2000, from $1.7 million, or 23%, of total revenue for the three months ended September 30, 1999. This increase in dollar amount resulted principally from increases in engineering and technical writing personnel, which increased to 190 people from 43 people at the end of the same quarter in the prior fiscal year, together with the establishment of a new facility in Bellevue, Washington, and the inclusion of the Mission Critical, Ganymede and Sirana facilities in Houston, Texas, Raleigh, North Carolina, and Bellevue, Washington. The decrease in percentage is due to the growth in revenues. To date, all research and development costs have been expensed as incurred in accordance with Statement of Financial Accounting Standards No. 86 as our current software development process is essentially completed concurrent with the establishment of technological feasibility. We expect to continue to devote substantial resources to product development such that research and development expenses will increase in absolute dollars in future periods.

     General and Administrative. Our general and administrative expenses consist primarily of personnel costs for finance and administration, as well as directors and officers insurance, and professional services expenses such as legal and accounting. General and administrative expenses increased to $2.2 million for the three months ended September 30, 2000 from $754,000 for the three months ended September 30 1999, representing 7% and 10% of total revenues, respectively. The increase in dollar amount was due primarily to increased staffing necessary to manage and support our growth. General and administrative personnel increased to 51 people at September 30, 2000, from 19 people at September 30, 1999. The decrease in general and administrative expense as a percentage of total revenue was due primarily to the growth in total revenue. We believe that our general and administrative expenses will increase in absolute dollars as we expand our administrative staff, add new financial and accounting software systems and increase professional fees to manage our growth.

     Stock-Based Compensation. No deferred stock-based compensation was recorded during the three months ended September 30, 2000 or 1999. However, due to employee attrition $7,000 and $80,000 of deferred stock-based compensation was reversed during the three months ended September 30, 2000 and 1999, respectively. During the three months ended September 30, 2000 and 1999, we recognized stock-based compensation expense of $170,000 and $178,000, respectively. At September 30, 2000, total deferred stock-based compensation was $1.1 million. We expect to amortize up to approximately $170,000 of deferred stock-based compensation each quarter through June 30, 2003.

     Amortization of Goodwill and Intangibles. During the three months ended September 30, 2000 we amortized $119.4 million of the goodwill and intangibles recognized in the merger with Mission Critical and acquisitions of Sirana and Software Realization. We expect to amortize up to approximately $119.2 million of goodwill and intangibles each quarter through June 30, 2003.

     Total Other Income. Total other income principally represents interest income earned on our cash and cash equivalent balances and short-term investments. For the three months ended September 30, 2000 and 1999, total other income was $5.8 million and $348,000, respectively. The increase in total other income is the result primarily of increased cash and cash equivalents and short-term investment in fiscal 2000 from the proceeds of our public offerings and from cash obtained in the merger with Mission Critical.

     Income Taxes. We recorded income tax expense of $2.9 million for the three months ended September 30, 2000 mainly due to the non-deductibility of the goodwill amortization, for income tax purposes. We recorded income tax expense of $122,000 for the three months ended September 30, 1999.

 

Liquidity and Capital Resources

     We 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, we sold 3,000,000 shares of common stock in an underwritten initial 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.

     In December 1999, we 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 we issued 387,000 additional shares for net proceeds of approximately $19.6 million.

     In May 2000 we added cash and cash equivalents of $83.6 million and short-term investments of $83.2 million in the merger with Mission Critical.

     At September 30, 2000, we had $74.5 million in cash and cash equivalents and $244.8 million in short-term investments.

     Our operating activities resulted in net cash inflows of $8.0 million and $4.4 million for the three months ended September 30, 2000 and 1999, respectively. Sources of cash from operations during 2000 was primarily net income after excluding amortization of goodwill and intangibles. Use of cash for operations in 2000 was an increase in accounts receivable. Sources of cash during 1999 were principally from a decrease in accounts receivable and increases in accounts payable, deferred revenue, and accrued compensation.

     Our investing activities resulted in net cash outflows, related to the acquisition of capital assets, of $30.0 million, mainly for the purchase of our new headquarters building, $729,000 for the acquisition of Software Realization, and $123.8 million for the purchase of short-term investments in the quarter ended September 30, 2000. Maturities of short-term investments provided $25.0 million in cash inflows. Investing activities used cash of $182,000 for acquisition of capital assets in the quarter ended September 30, 1999.

     Financing activities provided cash of $8.4 million, and $40.5 million, in the quarters ended September 30, 2000 and 1999, respectively from the proceeds of the exercise of stock options and sales of common stock in our initial public offering. Financing activities also used cash of $2.0 million in the quarter ended September 30, 1999, for repayment of our debts.

     As of September 30, 2000, we do not have any significant debt commitments outstanding other than under operating leases.

     We believe that our cash balances and cash flows generated by operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for the next 12 months. A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of businesses, products or technologies. We have no current plans, agreements or commitments, and are not currently engaged in any negotiations with respect to any such transaction.

Factors That May Affect Future Results

We face several risks in connection with our license, development and marketing agreement with Microsoft.

     We have licensed a substantial portion of our operations manager technology to Microsoft in exchange for cash of $175.0 million, payable over three years. We have also agreed to provide limited engineering resources for a fee and to develop and market products that operate with the products that we expect Microsoft to offer based on our technology. We anticipate significant benefits from the agreement and recognize significant risks, including:

Potential cannibalization of revenue from existing operations management products until we establish revenue from products that operate with Microsoft’s new products

Difficulties associated with coordinating some of our new product offerings with future releases of products from Microsoft

The difficulty of creating new products that operate with operating systems other than Windows NT/2000 as well as operate efficiently with Microsoft’s new products

Customer acceptance of new product offerings

Potential competition from Microsoft and other systems management providers for any new products that we may create

Potential reduction of revenue or linearity of revenue from month to month as customers evaluate the resulting product strategies of Microsoft, other systems management companies and ourselves

     We may not realize the benefits we expect from our license agreement, which could have a material adverse effect on our business, financial condition and operating results.

We will continue to depend on our marketing, product development and sales relationship with Microsoft, and if this relationship suffers, our customers would likely purchase other vendors' systems management software products.

     We believe that our success in penetrating our target markets depends in part on our ability to maintain strong strategic marketing, product development and sales relationships with Microsoft. The relationship with Microsoft will be important in order to validate our technology, facilitate broad market acceptance of our products and enhance our sales, marketing and distribution capabilities.

We face several risks in connection with our merger with Mission Critical.

     We may not achieve the benefits we expect from the merger with Mission Critical, which may have a material adverse effect on our business, financial condition and operating results and/or could result in loss of key personnel. We 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 and opportunities, including:

Sales of existing products of each company to the other company's customers

Developing new products that utilize the assets and resources of both companies

Creation of uniform standards, controls, procedures, policies and information systems.

     The execution of these post-merger events will continue to involve considerable risk and may not be successful. These risks include:

The potential disruption of our ongoing business and distraction of our management

Unanticipated expenses related to technology integration and development of information systems

The impairment of relationships with employees and customers as a result of any integration of new management personnel

     We may not succeed in addressing these risks or any other problems encountered in connection with the merger.

The merger with Mission Critical could adversely affect the combined financial results.

     The acquisition has been accounted for using the purchase method of accounting. The purchase price was allocated to assets and liabilities of Mission Critical and Ganymede and such assets and liabilities were recorded at their respective fair values upon completion of the valuation study. Approximately $10.0 million of the purchase price was identified as acquired in-process research and development costs and was charged to our operations in the fourth quarter of fiscal 2000. The remaining purchase price was recorded as goodwill and other intangible assets and will be amortized to expense over three years, resulting in an annual charge to our operations of approximately $476.8 million.

We may not be able to sustain the revenue growth rates previously experienced.

     Although our revenues have grown rapidly in recent years, it is not anticipated that on a combined basis we 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 our relatively small sales organizations could also affect our revenue growth. If our revenue does not increase at or above the rate analysts expect, the trading price for our common stock may decline.

     Additionally, our efforts to expand our software product suites, sales and marketing resources, 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 we anticipate or produce unanticipated fluctuations in our quarterly operating results. As a result, we cannot predict the company's future operating results with any degree of certainty.

We have a history of losses and we may experience losses in the future.

     Since inception we have incurred significant net losses. It is expected that we will continue to incur significant sales and marketing, product development and administrative expenses, as well as amortization of goodwill and intangible assets created in the merger, and it is unlikely that

we will generate profits after inclusion of the goodwill amortization until the goodwill is fully amortized.

New competitors could emerge and this could impair our ability to grow our business and sell our products.

     We believe the principal factors that will draw end-users to a systems management software product include: the 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, we must respond promptly and effectively to the challenges of technological change, evolving standards and our competitors' innovations by continuing to enhance our products and sales channels.

     We may face competition in the future from established companies who have not previously entered the market for systems 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 systems management solutions, but they may also acquire or establish cooperative relationships with our competitors. It is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. If those future competitors are successful, we are likely to lose market share and our revenue would likely decline.

New product introductions and pricing strategies by our competitors could adversely affect our ability to sell our products or could result in pressure to price our products in a manner that reduces our margins.

     The market for systems management software for Windows NT/2000-based systems and new products for this market are frequently introduced and existing products are continually enhanced. Competition may also result in changes in pricing policies by us or our competitors that could hurt our ability to sell our products and could adversely affect our profits. Many of our anticipated competitors have greater financial, technical, marketing, professional services and other resources than us. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the development, promotion and sale of their products than we can. Many of these companies have an extensive customer base and broad customer relationships, including relationships with many of our current and potential customers. If we are unable to respond as quickly or effectively to changes in customer requirements as our competition, our ability to grow our business and sell our products will be negatively affected.

If the markets for Windows NT/2000 and applications management software for these systems and applications do not continue to develop as we anticipate, our ability to grow our business and sell our products will be adversely affected.

     Windows NT/2000. The majority of our products are designed to support Windows NT/2000-based systems and applications and it is anticipated that our 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 we currently anticipate, this would materially and adversely affect our ability to grow our business, sell our products, and maintain profitability. 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 our customers would not need to purchase our 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, our business would likely suffer.

The lengthy sales cycle for our products makes our revenues susceptible to fluctuations.

     The delay or failure to complete sales, especially large, enterprise-wide sales, in a particular quarter or calendar year could reduce our quarterly and annual revenue. We have traditionally focused sales of our products to workgroups and divisions of a customer, resulting in a sales cycle ranging between 90 and 180 days. The sales cycle associated with the purchase of our products is subject to a number of significant risks over which we have little or no control, including:

Customers' budgetary constraints and internal acceptance procedures

Concerns about the introduction or announcement of our or our competitors' new products, including product announcements by Microsoft relating to Windows NT/2000

Customer requests for product enhancements

      It is expected that we will offer a broader range of products that may require increased selling effort for the customer's entire enterprise than has historically been true. The sales cycle for these enterprise-wide sales typically can be significantly longer than the sales cycle for smaller-sized departmental sales and require an extensive sales effort throughout a customer's organization.

We have experienced significant growth in our businesses in recent periods and our ability to manage future growth will affect our ability to maintain operating profitability.

    Our ability to maintain operating profitability will depend in part on our ability to implement and expand operational, customer support and financial control systems and to train and manage our employees. We may not be able to augment or improve existing systems and controls or implement new systems and controls in response to future growth, if any. Any failure to manage growth could divert management attention from executing our business plan and hurt our ability to successfully expand our business. Our historical growth has placed, and any further growth is likely to continue to place, a significant strain on our resources. Our productivity and the quality of our products may be adversely affected if we do not retain, integrate and train our new employees quickly and effectively. We plan to implement new operating, financial and accounting systems and to be successful, we will need to expand our other infrastructure programs, including implementing additional management information systems, improving our operating and administrative systems and controls, training new employees and maintaining close coordination among our executive, engineering, accounting, finance, marketing, sales, operations and customer support organizations. In addition, our future growth will result in increased responsibilities for management personnel. Managing this growth will require substantial resources that we may not have.

We will need to recruit and retain additional qualified personnel to successfully manage our business.

     Our future success will likely depend in large part on our 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 our products, which in turn requires significant resources and management attention. If we do not attract and retain such personnel, this could materially and adversely affect our ability to grow our business.

We may acquire technologies or companies in the future which could cause disruption of our business or other risks.

     We may acquire technologies or companies or make investments in complementary companies, products or technologies. Such acquisitions entail many risks, any of which could materially harm our business. These risks include:

Difficulty in assimilating the acquired company's personnel and operations

Diversion of management's attention

Loss of our or the acquired business's key personnel

Dilution to our stockholders as a result of issuing equity securities

Assumption of liabilities of the acquired company and

Increased expenses as a result of the transaction.

If we fail to protect our intellectual property rights, competitors may be able to use our technology or trademarks and this could weaken our competitive position, reduce our revenue and increase costs.

     Our success is heavily dependent upon proprietary technology. We expect to rely primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights and prevent competitors from using our technology in their products. These laws and procedures provide only limited protection. We have few patents and they may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers. Our ability to sell our products and prevent competitors from misappropriating our proprietary technologies, trademarks and trade names is dependent upon protecting our intellectual property. Despite precautions that we take, it may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as proprietary. In particular, we may provide our licensees with access to proprietary information underlying our licensed applications. Additionally, our competitors may independently develop similar or superior technology or design around the copyrights and trade secrets we own. 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 our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others.

Third parties could assert that our products infringe their intellectual property rights. Such claims could injure our reputation and adversely affect our ability to sell our products.

     Third parties may claim that our current or future products infringe their proprietary rights, and these claims, whether they have merit or not, could harm our business by increasing our costs or reducing our revenue. We have previously litigated a claim with Compuware alleging that we had infringed a third party's intellectual property rights, and although this claim has been settled and no other claims of this nature are currently pending, any future claims could affect our relationships with existing customers and may prevent future customers from licensing our products. The intensely competitive nature of our industry and the important nature of technology to our competitors' businesses may contribute to the likelihood of being subject to third party claims of this nature. Any such claims, with or without merit, could be time consuming, result in potentially significant litigation costs, including costs related to any damages we may owe resulting from such litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or license agreements may not be available on acceptable terms or at all. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the software industry grows and the functionality of products in different industry segments overlaps.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, short-term investments, trade accounts, and accounts payable. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. Our exposure to market risk for changes in interest rates relates primarily to our short-term investments; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities.

     Principally our business is transacted in United States dollars. In the three months ended September 30, 2000, 10% of our invoices were in currencies other than the United States dollar. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to local currency denominated revenues and operating expenses in Australia, Denmark, France, Germany, Japan, New Zealand, Singapore and the United Kingdom. We believe that a natural hedge exists in local currencies, as local currency denominated revenues will substantially offset the local currency denominated operating expenses. We assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis. However, as of September 30, 2000, we had no hedging contracts outstanding.

     At September 30, 2000 we had $74.5 million in cash and cash equivalents, and $244.8 million in short-term investments. Based on our cash, cash equivalents and short-term investments at September 30, 2000, a hypothetical 10% increase/decrease in interest rates would increase/decrease our annual interest income and cash flows by approximately $2.0 million.

PART II OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

     We currently have no material legal proceedings.

ITEM 2.

CHANGES IN SECURITIES AND USE OF PROCEEDS

Use of Proceeds

     In July 1999, we completed the sale of 3,000,000 shares of our common stock at a per share price of $13.00 in a firm commitment underwritten public offering pursuant to a registration statement (Commission File Number 333-79373) effective on July 30, 1999. Credit Suisse First Boston, BancBoston Robertson Stephens and Hambrecht & Quist LLC underwrote the offering. In August 1999, the underwriters exercised an over-allotment option granted by us to the underwriters for the purchase of up to 450,000 additional shares of the Company’s common stock in full. The aggregate number of shares registered and sold was 3,450,000 and the aggregate gross proceeds were $44.8 million. Of such aggregate proceeds, approximately $3.1 million was paid to the underwriters in connection with underwriting discounts, and approximately $1.3 million was paid in connection with offering expenses, including legal, accounting, printing, filing and other fees. Our net proceeds after deduction of such commissions and expenses were approximately $40.4 million. There were no direct or indirect payments to officers or directors of the Company or any other person or entity.

     Cash of approximately $1.8 million was paid to Compuware Corporation in partial repayment of our indebtedness to Compuware in connection with $5.0 million loan from Compuware for the settlement of a lawsuit filed by Compuware against the Company. The remaining portion of the our indebtedness to Compuware, in the amount of approximately $3.3 million, was cancelled in exchange for the issuance of 280,025 shares of the Company’s common stock to Compuware upon the exercise of a warrant issued to Compuware in March 1999.

     Approximately $349,000 of the proceeds were paid to a bank in full repayment of the Company’s long-term debt for equipment purchases.

     Approximately $400,000 of the proceeds were used in March 2000 in the acquisition of Sirana Software, Inc.

       Approximately $2.3 million of the proceeds were used for capital expenditures.

     Approximately $750,000 of the proceeds were used in July 2000 in the acquisition of Software Realization, Inc.

     Approximately $29.0 million of the proceeds were used in August 2000 for the purchase of an office building for our corporate offices in San Jose, California. Additionally, approximately $1.0 million of the proceeds were used for capital expenditures in the quarter ended September 30, 2000.

     In August 1999, Mission Critical completed the sale of 2,750,000 shares of our common stock at a per share price of $16.00 in a firm commitment underwritten public offering pursuant to a registration statement (Commission File Number 333-79501) effective on August 4, 1999. Hambrecht & Quist LLC, BancBoston Robertson Stephens, SoundView Technology Group and Charles Schwab & Co., Inc. underwrote the offering. In August 1999, the underwriters exercised an over-allotment option granted by Mission Critical to the underwriters for the purchase of up to 562,500 additional shares of Mission Critical common stock in full. The aggregate number of shares registered and sold was 3,312,500 and the aggregate gross proceeds were $53.0 million. Of such aggregate proceeds, a total of approximately $5.5 million were paid in underwriting discounts and other offering expenses, including legal, accounting, printing, filing and other fees. Mission Critical’s net proceeds after deduction of such commissions and expenses were approximately $47.5 million. There were no direct or indirect payments to officers or directors of Mission Critical or any other person or entity.

     Approximately $81,000 of the proceeds were paid to a bank in full repayment of Mission Critical’s long-term debt.

       Approximately $1.5 million of the proceeds were used for capital expenditures.

     Currently we are investing the remaining net offering proceeds for future use as additional working capital. Such remaining net proceeds may be used for potential strategic investments or acquisitions that complement our products, services, technologies or distribution channels.

ITEM 3.

DEFAULT UPON SENIOR SECURITIES

     Not applicable.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

ITEM 5.

OTHER INFORMATION

     Not applicable.

ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibit Number		Description
10.9		Purchase and Sale Agreement, dated July 24, 2000, between NetIQ and TMG North First Associates, L.P.
10.10*		License, Development and Marketing Agreement, dated September 25, 2000, between NetIQ and Microsoft Corporation
27.1	(a)	Financial Data Schedule
*	Subject to Confidential Treatment

(b)

Reports on Form 8-K: On July 19, 2000, we filed a current report on Form 8-K related to the merger with Mission Critical Software, Inc.

SIGNATURES

Pursuant to the requirements of the Securities Act, NetIQ Corporation has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 14^th day of November, 2000.

	NETIQ CORPORATION
	By:	/s/ Ching-Fa Hwang
	Ching-Fa Hwang, President and Chief Executive Officer
	By:	/s/ James A. Barth
	James A. Barth, Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

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