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Filed pursuant to Rule 424(b)(1)
Registration No.333-79501
PROSPECTUS
3,750,000 Shares
[LOGO OF MISSION CRITICAL SOFTWARE APPEARS HERE]
Common Stock
This is an initial public offering of common stock by Mission Critical
Software, Inc. Of the 3,750,000 shares of common stock being sold in this
offering, 2,750,000 shares are being sold by Mission Critical Software and
1,000,000 shares are being sold by the selling stockholders. Mission Critical
Software will not receive any of the proceeds from the sale of shares by the
selling stockholders.
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Prior to this offering, there has been no public market for our common stock.
We have been approved to list our common stock for quotation on the Nasdaq
National Market under the symbol MCSW.
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Per
Share Total
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Initial public offering price............................... $16.00 $60,000,000
Underwriting discounts and commissions...................... $ 1.12 $ 4,200,000
Proceeds to Mission Critical Software, before expenses...... $14.88 $40,920,000
Proceeds to selling stockholders, before expenses........... $14.88 $14,880,000
</TABLE>
Mission Critical Software has granted the underwriters an option for a period
of 30 days to purchase up to 562,500 additional shares of common stock.
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Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 7.
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The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
SOUNDVIEW TECHNOLOGY GROUP
CHARLES SCHWAB & CO., INC.
August 4, 1999.
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[Graphical depiction of the extended enterprise.]
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TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 19
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 36
Management............................................................... 49
Certain Transactions..................................................... 60
Principal and Selling Stockholders....................................... 64
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 70
Underwriting............................................................. 72
Legal Matters............................................................ 74
Experts.................................................................. 74
Where You Can Find Additional Information................................ 74
Index to Financial Statements............................................ F-1
</TABLE>
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PROSPECTUS SUMMARY
You should read this summary together with the more detailed information, our
financial statements and the notes thereto and the risks of investing in our
common stock discussed under "Risk Factors" before making an investment
decision. Except as otherwise noted, all information in this prospectus assumes
the conversion of all outstanding shares of preferred stock and no exercise of
the underwriters' over-allotment option.
Mission Critical Software, Inc.
We provide systems administration and operations management software products
for corporate and Internet-based Windows NT networks. Our 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. Our products can be deployed quickly, are based
on an open and extensible architecture and are easy to use.
In today's corporate networks, organizations are installing Windows NT
servers in greater quantities and are using these servers to address a
broadening scope of business needs. For example, Windows NT servers are
increasingly being used to run web sites and web server farms--Internet-based
networks composed of hundreds of thousands of linked Windows NT servers--and to
support electronic commerce 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 year 2000.
The growing complexity of corporate and Internet-based Windows NT networks
has placed increasing pressure on systems administrators to maintain reliable
network operations. To improve both the efficiency and effectiveness of such
networks, businesses are increasingly using systems management software
solutions. International Data Corporation projects that the market for software
products that manage 32-bit Windows operating systems will grow from $1.8
billion in 1998 to $8.1 billion by 2003.
Our OnePoint product suite is designed to facilitate Internet systems
management--the centralized management of critical systems infrastructure and
applications for the extended enterprise. Customers can use our products to
monitor, manage, administer and secure a wide range of resources in the Windows
NT environment including web server farms, electronic commerce and corporate
servers, workstations and applications. OnePoint enables companies to automate
labor-intensive tasks, such as security monitoring and administration, and to
minimize the need for customization by incorporating rules into our software.
OnePoint is also designed to ease the transition from other operating systems,
such as Novell Netware, to Windows NT by providing systems administrators with
the ability to test implementations and convert systems incrementally.
Our primary strategic objective is to maintain and strengthen our position as
a leading provider of systems management software for corporate and Internet-
based Windows NT networks. Our product strategy focuses on expanding our
OnePoint suite and facilitating migration to and management of the Windows 2000
operating system. In addition, we intend to expand our operations management
capabilities and to increase our products' ability to administer and monitor
other operating systems. Our sales strategy focuses on selling new and existing
products to existing customers, large corporations and international
organizations. We intend to build on these selling efforts by targeting mid-
sized companies as well as online retailers, Internet service providers,
electronic commerce service providers and other companies for which Windows NT
systems management products are a growing operational necessity. To support
these strategic efforts, we intend to leverage and expand our extensive,
existing Microsoft relationship that includes the sharing of technology, joint
marketing and sales efforts. Microsoft also uses our OnePoint Event Manager
product for its global Internet and corporate datacenters. We believe we are
well positioned to anticipate Microsoft's evolving product strategy and to
capitalize on joint sales and marketing programs.
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As of June 30, 1999, our products had been installed by over 600 customers,
including more than 40 of the 1999 Fortune 100 companies and some of the
largest Internet data centers in the world. We market and sell our products
worldwide through a network of sales offices and distribution partners. Our
products have been adopted in a wide variety of industries, including banking
and finance, energy, healthcare, insurance and pharmaceuticals. Representative
customers include Bear, Stearns & Company, Dell Computer, Dow Chemical,
Ericsson, Johnson & Johnson, Kaiser Foundation Health Plan, Lockheed Martin,
Microsoft, Nortel and USAA.
Mission Critical Software was formed in Delaware in July 1996, and we began
operations in September 1996. Since our inception in 1996, we have incurred
substantial costs to develop our technology and products, to recruit and train
personnel for our engineering, sales and marketing and technical support
departments, and to establish an administrative organization. As a result, we
incurred net losses in fiscal 1997 and fiscal 1998 and only achieved marginal
profitability in fiscal 1999. As of June 30, 1999, we had an accumulated
deficit of $8.2 million.
We maintain a web site at www.missioncritical.com. Information contained on
our web site does not constitute part of this prospectus. Our principal
executive offices are located at 720 North Post Oak Road, Suite 505, Houston,
Texas 77024, and our telephone number is (713) 548-1700.
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The Offering
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Common Stock offered by Mission Critical
Software................................... 2,750,000 shares
Common Stock offered by the selling
stockholders............................... 1,000,000 shares
Common Stock to be outstanding after this
offering................................... 13,169,494 shares
Use of proceeds............................. For capital expenditures, working
capital and general corporate
purposes.
Nasdaq National Market symbol............... MCSW
</TABLE>
The number of shares of common stock outstanding after this offering is based
on 10,276,161 shares outstanding as of June 30, 1999. This number excludes
4,534,380 shares of common stock issuable upon exercise of stock options and
433,333 shares of common stock issuable upon exercise of warrants outstanding
as of June 30, 1999 with weighted average exercise prices of $4.77 and $1.38
respectively. This number also excludes 3,394,459 shares of common stock
available for future issuance under our 1997 Stock Option Plan, 250,000 shares
reserved for issuance under our 1999 Director Option Plan and 600,000 shares
reserved for sale under our 1999 Employee Stock Purchase Plan. The number of
shares outstanding after this offering includes 143,333 shares of our common
stock that will be issued upon the partial exercise of one of the warrants
immediately prior to the closing of this offering by a selling stockholder who
will sell the shares in this offering.
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Summary Financial Information
The following table sets forth summary financial data for our company. Our
total operating income (loss) reflects amortization of stock option
compensation of $532,000 and abandoned lease costs of $1.0 million for the
fiscal year ended June 30, 1999 and a write-off of acquired in-process research
and development of $1.5 million in the period ended June 30, 1997.
The information under "As Adjusted" reflects the application of the net
proceeds from the sale by us of 2,750,000 shares of common stock in this
offering at an initial public offering price of $16 per share and the deduction
of the underwriting discount and estimated offering expenses. The as adjusted
information also includes the issuance of 143,333 shares of our common stock
upon partial exercise of a warrant immediately prior to the closing of this
offering by a stockholder who intends to sell these shares in this offering.
Basic and diluted net loss per share applicable to common stockholders for each
year presented reflects the excess of consideration paid to redeem preferred
stock and dividends in arrears on our company's preferred stock. The
outstanding preferred stock will convert to our common stock on a one-for-one
basis in connection with the closing of this offering, and the dividends in
arrears will not be paid or converted into common stock. The pro forma earnings
per share for the year ended June 30, 1999 reflects the elimination of the
dividends in arrears upon conversion of the preferred stock.
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July 19, 1996 Year Ended June 30,
(inception) to --------------------------
June 30, 1997 1998 1999
----------------------------- ------------
(in thousands, except per share data)
<S> <C> <C> <C>
Statement of Operations Data:
Revenue......................... $ 4,267 $ 14,376 $ 24,827
Operating income (loss)......... (3,500) (2,379) 43
Net income (loss)............... (3,323) (2,316) 342
Basic and diluted net loss per
share applicable to common
stockholders................... $ (1.44) $ (2.47) $ (0.25)
Pro forma basic net income per
share.......................... 0.04
Pro forma diluted net income per
share.......................... 0.03
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June 30, 1999
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Actual As Adjusted
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(in thousands)
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Balance Sheet Data:
Cash and cash equivalents................................ $11,031 $51,291
Working capital.......................................... 4,176 44,436
Total assets............................................. 17,786 58,046
Long-term debt, less current maturities.................. 81 81
Redeemable convertible preferred stock................... 13,179 --
Total stockholders' equity (deficit)..................... (7,224) 46,215
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RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider the risks described below carefully and all of the information
contained in this prospectus before deciding whether to purchase our common
stock. If any of the following risks actually occur, our business, financial
condition and results of operations would suffer. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment in our common stock.
Our business and prospects are difficult to evaluate because we have a limited
operating history
Our company was founded in July 1996. We have a limited operating history.
An investor in our common stock must consider the risks and difficulties we
may encounter as an early stage company in a new and rapidly evolving market.
These risks and difficulties include our:
. ability to develop competitive products;
. need to expand our sales and support organizations;
. reliance on our strategic relationship with Microsoft;
. competition;
. need to manage changing operations;
. dependence upon key personnel; and
. general economic conditions.
We cannot be certain that our business strategy will be successful or that
we will successfully manage these risks. If we fail to address adequately any
of these risks or difficulties, our business would likely suffer.
We have a history of losses and may experience losses in the future
Since our inception, we have incurred significant net losses and as of June
30, 1999 had an accumulated deficit of $8.2 million. We expect to continue to
incur significant sales and marketing, product development and administrative
expenses. As a result, we will need to generate significant revenue to
maintain profitability. We cannot be certain that we will achieve, sustain or
increase profitability in the future.
We anticipate that our expenses will increase substantially in the
foreseeable future as we:
. increase our direct sales and marketing activities, by expanding our
North American and international direct sales forces and extending our
telesales efforts;
. develop our technology, expand our OnePoint product suite and create and
market products that operate with the commercial release version of
Windows 2000;
. expand our indirect distribution channels; and
. pursue strategic relationships and acquisitions.
Any failure to significantly increase our revenue as we implement our
product and distribution strategies would materially adversely affect our
business, operating results and financial condition.
We may not be able to sustain our current revenue growth rates
Although our revenue has grown rapidly in recent years, we do not believe
that we will maintain 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 our inexperience in selling our
products to small organizations could also
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affect our revenue growth. Our efforts to expand our 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 we anticipate. As
a result, we cannot predict our future operating results with any degree of
certainty and our quarterly operating results may vary significantly from
quarter to quarter.
Our ability to accurately forecast our quarterly sales is limited and our costs
are relatively fixed in the short-term, so our quarterly operating results
and our stock price may fluctuate
Our ability to accurately forecast our quarterly sales is limited, which
makes it difficult to predict the quarterly revenue that we will recognize. As
a result, we believe that quarter to quarter comparisons of our financial
results are not necessarily meaningful, and investors should not rely on them
as an indication of our future performance.
Historically, a majority of our revenue has been attributable to the
licensing of our software products. Changes in the mix of our revenue,
including the mix between higher margin software products and somewhat lower
margin maintenance, could adversely affect our operating results for future
quarters.
As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. If we have a shortfall in revenue in
relation to our expenses, we may be unable to reduce our expenses quickly
enough to avoid lower quarterly operating results. Many of our costs are fixed
in the short-term. For example, we have signed a five year lease for 70,000
square feet of new office space in Houston, Texas that will begin in August
1999. We do not know whether our business will grow rapidly enough to absorb
the costs of this facility. In either case, lower quarterly results could
adversely affect the market price of our common stock.
We have relied and expect to continue to rely on sales of licenses for our
OnePoint Administrator products for our revenue and a decline in sales of
this product could cause our revenues to fall
Historically, we have derived the substantial majority of our license revenue
from the sale of our OnePoint Administrator products. During the period from
inception to June 30, 1997, and the fiscal years ended June 30, 1998 and 1999,
sales of OnePoint Administrator products accounted for approximately 100%, 88%
and 82% of our license revenue, respectively. We expect that this product will
continue to account for a large portion of our license revenue for the
foreseeable future. Our future operating results depend on the continued market
acceptance of our OnePoint Administrator products and future enhancements to
our OnePoint Administrator products. Any factors adversely affecting the
pricing of, demand for or market acceptance of our OnePoint Administrator
products, including competition or technological change, could cause our
revenue to decline and our business to suffer.
We introduced a new version of our OnePoint Event Manager product in June
1998. To date, this product has accounted for only a limited portion of our
revenue. However, our future growth and profitability will depend on our
ability to increase sales of our OnePoint Event Manager product.
Our revenue could decline substantially if our existing customers do not
continue to purchase additional licenses from us
We rely on sales of additional licenses for our products to our existing
customers. In the fiscal year ended June 30, 1999, additional sales to our
existing customers represented approximately 50% of our license revenue. If we
fail to sell additional licenses for our products and maintenance to our
existing customers, we would experience a material decline in total revenue.
Even if we are successful in selling our
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products to new customers, the rate of growth of our revenue could be
materially and adversely affected if our existing customers do not continue to
purchase a substantial number of additional product licenses from us.
Risks Related to Microsoft
Our business is dependent on the adoption of Windows NT and Windows 2000 to
run corporate and Internet-based computer networks and a decrease in their
rates of adoption could cause our revenues to decline
For the foreseeable future, we expect that substantially all of our revenue
to continue to come from sales of our Windows NT systems management products.
As a result, we depend on the growing use of Windows NT for corporate and
Internet-based networks. If the role of Windows NT does not increase as we
anticipate, or if it in any way decreases, our revenues would decline. In
addition, if users do not accept Windows 2000, or if there is a wide
acceptance of other existing or new operating systems that provide enhanced
capabilities, our business would likely suffer.
Windows 2000 may not gain market acceptance if its launch is delayed beyond
its expected release date. In addition, users of previous versions of Windows
NT may decide to migrate to another operating system due to the delays or to
improved functionality of some other vendor's operating system. Windows 2000
may address more of the needs of our customers for systems administration and
operations management, in which case our customers would not need to purchase
our products to perform those functions. In addition, we cannot be sure that
we will be able to successfully redevelop our products to work with Windows
2000 at the same or better levels of functionality than our products work with
the current version of Windows NT. Even if we successfully develop products
for Windows 2000, our customers may not choose our products for technical,
cost, support or other reasons. If users of large corporate and Internet-based
Windows 2000 networks do not widely adopt and purchase our products, our
revenues and business will suffer.
If our introduction of new systems management software products for Windows
2000 is not successful, our revenues could decline
We are currently expanding our OnePoint product suite to support the
commercial release version of the Windows 2000 operating system, which has
been announced by Microsoft but is not currently available. Our OnePoint
product suite currently supports the current pre-release version of Windows
2000 Server. If we do not successfully develop, market and sell products that
support the commercial release version of Windows 2000, our business and
future operating results would suffer. In addition, we must introduce new
versions of our products to support the commercial release version of Windows
2000 shortly after its release by Microsoft. If we fail to introduce our new
products within a short time after the commercial release of Windows 2000, the
delay may cause customers to forego purchases of our products and purchase
those of our competitors.
We 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 our strategic marketing, product development
and sales relationship with Microsoft. We believe our relationship with
Microsoft is important in order to validate our technology, facilitate broad
market acceptance of our products and enhance our sales, marketing and
distribution capabilities. If we are unable to maintain and enhance our
existing relationship with Microsoft or develop a similar relationship with
another major operating system vendor, we may have difficulty selling our
products.
We rely heavily on our relationship with Microsoft and attempt to coordinate
our product offerings with the future releases of Microsoft's operating
systems, particularly the commercial release version of Windows
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2000. Microsoft may not notify us of feature enhancements to its products prior
to new releases of its operating systems in the future. In that case, we may
not be able to introduce products on a timely basis that capitalize on new
operating system releases and feature enhancements.
We have entered into several agreements with Microsoft Corporation. For
example in June 1999, Microsoft indicated its intention to use our Windows NT
4.0 to Windows 2000 migration tools in its Windows 2000 offerings, and we also
will work with Microsoft to provide coordinated technical support to
Microsoft's enterprise customers. Federal and state regulatory authorities have
recently initiated broad antitrust actions against Microsoft. We cannot predict
to what extent these antitrust actions may affect our relationship with
Microsoft, although these actions may narrow the scope of Windows NT sites and
applications where Microsoft may incorporate our products designed to support
Windows 2000.
Risks Related to Our Sales Efforts
If we experience any increase in the length of our sales cycle, our quarterly
operating results could become more unpredictable and our stock price may
decline as a result
To date, our customers have taken an average of three months to evaluate our
products. Our customers tend to deploy our products by purchasing licenses for
one product at a time and for use with a small number of servers and clients.
We anticipate that the sales cycle for other OnePoint products will be similar
to the sales cycle we previously experienced for OnePoint Administrator
products and OnePoint Event Manager. If customers begin to evaluate our
products for an enterprise-wide initial deployment, our sales cycle could
lengthen and our license revenue and operating results might vary significantly
from period to period. In addition, enterprise-wide initial deployments could
also erode per-user license fees even though our average sales price might
increase.
If we are unable to expand our sales operations, we may not be able to expand
our business
In order to increase market awareness and sales of our products, we will need
to substantially expand our direct and indirect sales operations, both
domestically and internationally. To date, we have relied primarily on our
direct sales force to sell our products. Our products and maintenance require a
sophisticated sales effort targeted at several people within our prospective
customers' information technology departments. We have recently expanded our
direct sales force and plan to hire additional sales personnel. Competition for
qualified sales people is intense, and we might not be able to hire the kind
and number of sales people we are targeting.
We may not be able to expand our business if we do not successfully utilize
systems integrators or consulting service providers in our selling efforts
To date, we have not yet significantly utilized systems integrators or
consulting service providers in our selling efforts for our software products.
We intend to explore relationships with systems integrators but have little or
no experience negotiating agreements with systems integrators and consulting
service providers, engaging in joint selling activities with systems
integrators and consulting service providers or providing support to their end-
user customers. Our business and sales may suffer if we fail to enter into
agreements with systems integrators and/or consulting service providers or if
we fail to successfully and profitably perform our obligations under those
agreements. In addition, our revenue could decline if selling our products
through systems integrators or consulting service providers results in lower
margins per license and those sales replace a substantial portion of our direct
sales.
If we are unable to expand our customer service and support organization, we
may not be able to retain our customers and attract new customers
The complexity of distributed computing systems requires highly trained
customer service and support personnel to assist the customer with installation
and deployment. We currently have a small customer
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service and support organization and will need to increase our staff to
support new customers and the expanding needs of our existing customers.
Hiring customer service and support personnel is very competitive in our
industry due to the limited number of people available with the necessary
technical skills and understanding of the Windows NT and Windows 2000
operating environments.
Our expansion to international markets could reduce our operating margins due
to the higher costs of stationing employees abroad or commissions paid to
foreign distributors to make it profitable for them to sell our products
We must expand the number of distributors who sell our products or our
direct international sales presence to increase our international sales. We
may experience reduced operating margins if we incur the higher costs of
stationing employees overseas without realizing corresponding improvements in
international revenues. In addition, we cannot be certain that we will be able
to attract distributors that market our products effectively or provide timely
and cost-effective customer support and service. We cannot be certain that any
distributor will continue to represent our products or that our distributors
will devote a sufficient amount of effort and resources to selling our
products in their territories. We may also experience lower operating margins
due to the different cost structure of our direct sales model versus an
indirect commission or discount based model if international revenue increases
as a percentage of our total revenue.
To date, we have entered into agreements with only a small number of
distribution partners and have only recently begun to employ direct sales
staff outside North America. We are expanding our indirect distribution
channels outside of North America. If we are unable to generate increased
international sales through an indirect distribution model, we will incur
higher personnel costs by hiring direct sales staff. We may not realize
corresponding increases in revenue from a direct international sales staff,
and our operating margins may decline. If we elect to establish more direct
sales staff outside the United States, varying employment policies and
regulations among countries may reduce our flexibility in managing headcount
and, in turn, managing personnel-related expenses.
Even if we are able to successfully expand our direct and indirect
international selling efforts, we cannot be certain that we will be able to
create or increase international market demand for our products. We also
expect that if we increase our sales in Europe, our operating results may be
lower in our quarters ending September 30 due to the summer slowdown in
Europe.
Our business and prospects are difficult to evaluate, because we may close a
large number of transactions in a given quarter with the effect of reducing
selling opportunities in the following quarter or because there are fewer
selling opportunities in the summer months
In the quarter ended September 30, 1998, our revenue and operating results
were lower relative to the prior quarter. We believe this decline resulted
from the substantial number of transactions our sales staff closed in the
prior quarter, our fourth fiscal quarter, and because there were fewer selling
opportunities in the summer months. If this seasonality were to continue in
the future, our quarter to quarter operating results could be unpredictably
affected.
Our revenues may suffer if customers demand extensive consulting or other
support services with our software products because we do not have a
consulting staff as our products are designed to require little external
support or consulting to be installed and used successfully
Our products are designed to require little or no support from us to be
implemented quickly and effectively by our customers. Many of our competitors
offer extensive consulting services in addition to software products. If we
introduced a product that required extensive consulting services for
installation and use or if our customers wanted to purchase from a single
vendor a menu of items that includes extensive consulting services, we would
be required to change our business model. We 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, our revenue would likely suffer because customers would
choose another vendor or we would incur the added expense of hiring and
retaining consulting personnel.
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Risks Related to Competition Within Our Industry
If we fail to compete successfully in our highly competitive industry,
including against some of Microsoft's products, our revenues may decline
We face competition from different sources, and we must compete effectively
against other current and future competitors to retain and expand our customer
base. If we fail to retain and expand our customer base, our revenues could
decline substantially.
We believe the principal factors that will draw end-users to a systems
management software product include:
. depth of product functionality;
. ability to work natively with Windows NT and Windows 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. Any pricing
pressures or loss of market share resulting from our failure to compete
effectively could reduce our revenue.
We also believe that Microsoft, or systems management software vendors, each
of which are also currently competing with us, could enhance their products to
include the functionality that we currently provide in our products. If these
vendors include such functionality as standard features of their products, our
software solutions could become obsolete. Even if the functionality of the
standard features of these products is more limited than ours, we face a
substantial risk that a significant number of customers would elect to keep
this limited functionality rather than purchase additional software.
We may face competition in the future from established companies that have
not previously entered the Windows NT systems management software market or
from emerging software companies. Barriers to entry in the software market are
relatively low. Increased competition may negatively affect our business and
future operating results due to price reductions, higher selling expenses and
a reduction in our market share.
Our revenue could be reduced if our industry consolidates further or our
products are not competitive with larger suites
Microsoft and systems management software vendors may not only develop their
own systems management solutions, but they may also acquire or establish
cooperative relationships with our current competitors, including smaller
private companies. Because Microsoft and these vendors have significant
financial and organizational resources available, they may be able to quickly
penetrate the Windows NT systems management software market by leveraging the
technology and expertise of smaller companies and utilizing their extensive
distribution channels. We expect that the software industry and providers of
systems management solutions, in particular, will continue to consolidate. It
is possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
Our products may become obsolete if other vendors' products are no longer
compatible with ours or other vendors bundle their products with those of
our competitors
Our ability to sell our products also depends, in part, on the compatibility
of our products with other vendors' software and hardware products,
particularly those provided by Microsoft. Developers of these products may
change their products so that they will no longer be compatible with our
products. These other vendors may also decide to bundle their products with
other systems management products for promotional purposes. If that were to
happen, our business and future operating results may suffer as we may be
priced out of the market or no longer be able to offer commercially viable
products.
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We may not succeed in developing and marketing new products for our OnePoint
suite, and our operating margins may decline as a result
We are planning the release of additional products for our OnePoint suite
that function with Windows NT and the commercial release version of Windows
2000. Developing these capabilities and other required features for the
release of new products will require significant additional expenses and
development resources. For example, we cannot be certain that our entry into
the file administration segment of the systems management software market with
our OnePoint File Administrator product will be successful or that our
customers will widely accept and adopt this product.
Risks Related to Our Products' Dependence on Intellectual Property
Systems management software products are subject to rapid technological change
due to changing operating system software and network hardware and software
configurations, and our products could be rendered obsolete by new
technologies, such as Windows 2000
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. Our products could be rendered obsolete if products based
on new technologies are introduced or new industry standards emerge. For
example, our products will become obsolete if we do not develop and distribute
products that operate with Windows 2000 and provide functionality beyond the
native Windows 2000 functionality.
Client/server computing environments are inherently complex. As a result, we
cannot accurately estimate the life cycles of our software products. New
products and product enhancements can require long development and testing
periods, which depend significantly on our ability to hire and retain
increasingly scarce and technically competent personnel. Significant delays in
new product releases or significant problems in installing or implementing new
product releases could seriously damage our business. We have, on occasion,
experienced delays in the scheduled introduction of new and enhanced products
and cannot be certain that we will avoid similar delays in the future.
Our future success depends upon our ability to enhance existing products,
develop and introduce new products, satisfy customer requirements and achieve
market acceptance. We cannot be certain that we will successfully identify new
product opportunities and develop and bring new products to market in a timely
and cost-effective manner.
Our software products rely on our intellectual property, and any failure by us
to protect our intellectual property could enable our competitors to market
products with similar features that may reduce demand for our products
Our success and ability to compete are substantially dependent upon our
internally developed technology that is incorporated in the source code for
our products. We protect our intellectual property through a combination of
copyright, trade secret and trademark law. However, to date we have not
registered any of our trademarks under applicable law. We generally enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to our source code and other
intellectual property and the distribution of our software, documentation and
other proprietary information. We believe that such measures afford only
limited protection. Others may develop technologies that are similar or
superior to our technology or design around the copyrights and trade secrets
we own. We license our 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 our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Policing unauthorized use
of our products is difficult, and we cannot be certain that the steps we have
taken will prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as
those in the United States. Our means of protecting our proprietary rights may
be inadequate.
13
<PAGE>
Our products employ technology that may infringe the proprietary rights of
others, and we may be liable for significant damages
Substantial litigation regarding intellectual property rights exists in the
software industry. We expect that software products may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. We are not aware that our products employ technology that
infringes any proprietary rights of third parties. However, third parties may
claim that we infringe their intellectual property rights. Any claims, with or
without merit, could:
. be time-consuming to defend;
. result in costly litigation;
. divert our management's attention and resources;
. cause product shipment delays; or
. require us to enter into royalty or licensing agreements.
These royalty or licensing agreements may not be available on terms acceptable
to us, if at all. A successful claim of product infringement against us or our
failure or inability to license the infringed or similar technology could
adversely affect our business because we would not be able to sell the
impacted product without redeveloping it or incurring significant additional
expenses.
We have experienced significant growth and change in our business and our
failure to manage this growth and any future growth could harm our business
We continue to increase the scope of our operations and have grown our
headcount substantially. At June 30, 1998, we had a total of 92 employees, and
at June 30, 1999 we had a total of 163 employees. Our productivity and the
quality of our products may be adversely affected if we do not integrate and
train our new employees quickly and effectively. We also cannot be sure that
our revenues will continue to grow at a sufficient rate to absorb the costs
associated with a larger overall headcount, as well as recruiting-related
expenses.
We face risks from our international operations due to our limited
international experience
In the fiscal year ended June 30, 1999, customers outside North America
accounted for 22% of our license revenue. We plan to increase our
international sales activities, but we have no experience in developing
foreign language translations of our products and little experience marketing
and distributing our products internationally.
We conduct direct sales activities in England, France and Germany and
indirect activities in Europe, Australia and Brazil. Our international
operations are subject to other inherent risks, including:
. the impact of recessions in economies outside the United States;
. greater difficulty in accounts receivable collection and longer
collection periods;
. unexpected changes in regulatory requirements;
. difficulties and costs of staffing and managing foreign operations;
. reduced protection for intellectual property rights in some countries;
. potentially adverse tax consequences; and
. political and economic instability.
Our revenue may be exposed to exchange rate fluctuations, and our products may
not be competitive due to exchange rate instability
Our international sales are generally denominated in the United States
dollar. We do 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 our future
revenue from international sales. We may also be less competitive than a
vendor whose products are sold in the local
14
<PAGE>
currency during times of exchange rate instability. We expect that if our
international sales operations increase substantially, we will be required to
price our products and pay our expenses in foreign currencies and may be
subject to currency exchange risk.
We are in the final stages of assessing our Year 2000 readiness and any Year
2000 problems with our products or our internal systems and software could
result in third party claims
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
determine whether "00" means 1900 or 2000. This may result in software failures
or the creation of erroneous results.
We are in the final stages of assessing our Year 2000 readiness. We have
concluded a preliminary investigation and performed limited testing to
determine whether each component of our OnePoint product suite and our products
in development are Year 2000 compliant. Our software products operate in
complex system environments and directly and indirectly interact with a number
of other hardware and software systems. Despite the investigation and testing
by us and our partners, our software products and the underlying systems and
protocols running our products may contain errors or defects associated with
Year 2000 date functions. We are unable to predict to what extent our business
may be affected if our software or the systems that operate in conjunction with
our software experience a material Year 2000 failure. Known or unknown errors
or defects that affect the operation of our software could:
. result in delay or loss of revenue, cancellation of customer contracts;
. diversion of development resources;
. damage to our reputation;
. increased maintenance and warranty costs; and
. litigation costs,
any of which could adversely affect our business, financial condition and
results of operations.
Despite investigation and testing by us, our internal systems and/or software
may contain errors or defects associated with Year 2000 date functions. We are
unable to predict to what extent our core business functions may be affected if
our internal systems or software experience a material Year 2000 failure. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Year 2000 Readiness" for a description of our Year 2000 readiness
efforts.
We must continue to hire and retain sales and research and development staff to
sustain our revenue growth
We intend to hire a significant number of additional sales, support,
marketing and research and development personnel in calendar 1999 and 2000.
Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. Our future success and ability to sustain our revenue growth also
depend upon the continued service of our executive officers and other key
sales, marketing and support personnel, particularly since we have experienced
disruption from the turnover of senior management in the past. In addition, our
products and technologies are complex and we are substantially dependent upon
the continued service of our existing engineering personnel, and especially
Thomas P. Bernhardt, one of our founders and our Chief Technology Officer. The
loss of any of our key employees could adversely affect our business and slow
our product development processes particularly since neither our Chief
Executive Officer nor our Chief Financial Officer is bound by a noncompetition
or nonsolicitation agreement. We do not have key person life insurance policies
covering any of our employees.
15
<PAGE>
To achieve our business objectives, we 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 our ability to attract necessary qualified
personnel. This may have a negative effect on our business and future
operating results.
Errors in our products or the failure of our products to conform to
specifications could result in our customers demanding refunds from us or
asserting claims for damages against us
Because our software products are complex, they could contain errors or bugs
that can be detected at any point in a product's life cycle. While we
continually test our products for errors and work with customers through our
customer support services to identify and correct bugs in our software, we
expect that errors in our products will continue to be found in the future.
Although many of these errors may prove to be immaterial, any of these errors
could be significant. Detection of any significant errors may result in:
. the loss of or delay in market acceptance and sales of our products;
. diversion of development resources;
. injury to our reputation; or
. increased maintenance and warranty costs.
These problems could harm our business and future operating results. In the
past we have discovered errors in some of our products and have experienced
delays in the shipment of our products during the period required to correct
these errors. These delays have principally related to new versions and
product update releases. To date none of these delays has materially affected
our business. However, product errors or delays in the future could be
material, including any product errors or delays associated with the
introduction of our new products or the versions of our products that support
Windows 2000. Occasionally, we have warranted that our products will operate
in accordance with specified customer requirements. If our products fail to
conform to these specifications, customers could demand a refund for the
software license fee paid to us or assert claims for damages.
Moreover, because our products administer critical distributed computing
systems services, we may receive significant liability claims if our products
do not work properly. Our agreements with customers typically contain
provisions intended to limit our exposure to liability claims. However, these
limitations may not preclude all potential claims. Liability claims could
require us to spend significant time and money in litigation or to pay
significant damages. Any such claims, whether or not successful, could
seriously damage our reputation and our business.
We will face risks if we undertake acquisitions
We may make investments in complementary companies, products or
technologies. If we buy a company, we could have difficulty in assimilating
that company's personnel and operations. In addition, the key personnel of the
acquired company may decide not to work for us. If we make other types of
acquisitions, we could have difficulty in assimilating the acquired technology
or products into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses. We
also expect that we would incur substantial expenses if we acquired other
businesses or technologies. Furthermore, we may use the proceeds of this
offering, incur debt or issue equity securities to pay for any future
acquisitions. If we issue additional equity securities, our stockholders could
experience dilution. As of the date of this prospectus, we have no agreements
or understandings regarding any future acquisitions.
16
<PAGE>
Risks Related to this Offering
Our stock will likely be subject to substantial price and volume fluctuations
due to a number of factors, many of which will be beyond our control, that
may prevent our stockholders from reselling our common stock at a profit
The securities markets have experienced significant price and volume
fluctuations and the market prices of the securities of software companies
have been especially volatile. This market volatility, as well as general
economic, market or political conditions, could reduce the market price of our
common stock in spite of our operating performance. In addition, our operating
results could be below the expectations of public market analysts and
investors, and in response the market price of our common stock could decrease
significantly. Investors may be unable to resell their shares of our common
stock at or above the offering price. In the past, companies that have
experienced volatility in the market price of their stock have been the object
of securities class action litigation. If we were the object of securities
class action litigation, it could result in substantial costs and a diversion
of management's attention and resources.
We have broad discretion in how we use the proceeds of this offering, and we
may not use such proceeds effectively
Our management could spend most of the proceeds from this offering in ways
with which our stockholders may not agree. We cannot predict that the proceeds
will be invested to yield a favorable return. Our primary purpose in
conducting this offering is to create a public market for our common stock. As
of the date of this prospectus, we plan to use the proceeds from this offering
for working capital and general corporate purposes. We may also use the
proceeds in future strategic acquisitions but do not have any acquisitions
planned. Until we need to use the proceeds of this offering, we plan to invest
the net proceeds in investment grade, interest-bearing securities.
Our officers and persons affiliated with our directors influence our business
and hold a substantial portion of our stock and could reject mergers or
other business combinations that a stockholder may believe are desirable
We anticipate that our directors, officers and individuals or entities
affiliated with our directors will beneficially own approximately 45% of our
outstanding common stock as a group after this offering closes. Acting
together, these stockholders would be able to significantly influence all
matters that our stockholders vote upon, including the election of directors
and mergers or other business combinations.
The provisions of our charter documents may inhibit potential acquisition bids
that a stockholder may believe is desirable, and the market price of our
common stock may be lower as a result
Upon completion of this offering, our board of directors will have the
authority to issue up to 5,000,000 shares of preferred stock. The board of
directors can fix the price, rights, preferences, privileges and restrictions
of the preferred stock without any further vote or action by our stockholders.
The issuance of shares of preferred stock may delay or prevent a change in
control transaction. As a result, the market price of our common stock and the
voting and other rights of our stockholders may be adversely affected. The
issuance of preferred stock may result in the loss of voting control to other
stockholders. We have no current plans to issue any shares of preferred stock.
Our charter documents contain anti-takover devices including:
. only one of the three classes of directors is elected each year;
. the ability of our stockholders to remove directors without cause is
limited;
. the right of stockholders to act by written consent has been eliminated;
. the right of stockholders to call a special meeting of stockholders has
been eliminated; and
. a requirement of advance notice to nominate directors or submit proposals
for consideration at stockholder meetings.
17
<PAGE>
These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control transaction. They could also have the
effect of discouraging others from making tender offers for our common stock.
As a result, these provisions may prevent the market price of our common stock
from increasing substantially in response to actual or rumored takeover
attempts. These provisions may also prevent changes in our management.
Delaware law may inhibit potential acquisition bids; this may adversely affect
the market price of our common stock, discourage merger offers and prevent
changes in our management
Section 203 of the Delaware General Corporation Law may inhibit potential
acquisition bids for our company. Upon completion of this offering, we will be
subject to the antitakeover provisions of the Delaware General Corporation
Law, which regulate corporate acquisitions. Delaware law will prevent us from
engaging, under certain circumstances, in a "business combination" with any
"interested stockholder" for three years following the date that the
interested stockholder became an interested stockholder unless our board of
directors or a supermajority of our uninterested stockholders agree. For
purposes of Delaware law, a "business combination" includes a merger or
consolidation involving us and the interested stockholder and the sale of more
than 10% of our assets. In general, Delaware law defines an "interested
stockholder" as any holder beneficially owning 15% or more of the outstanding
voting stock of a corporation and any entity or person affiliated with or
controlling or controlled by the holder. Under Delaware law, a corporation may
opt out of the foregoing antitakeover provisions. We do not intend to opt out
of the antitakeover provisions of Delaware Law.
The substantial number of shares that will be eligible for sale in the near
future could cause our common stock price to fall
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock could cause our stock price
to fall. In addition, the sale of these shares could impair our ability to
raise capital through the sale of additional stock. See "Shares Eligible for
Future Sale" on page 70 for information regarding the number of shares that
may be sold in the future by our existing stockholders and optionees.
We may have contingent liability arising out of a possible violation of
Section 5 of the Securities Act of 1933 in connection with electronic mail
sent to employees and other potential participants in the proposed directed
share program
As part of the offering, Mission Critical and the underwriters initially
determined to make available up to 175,000 shares at the initial public
offering price for employees and other persons associated with our company. On
or after July 14, 1999, our executive officers sent electronic mail with
respect to this proposed directed share program to all of our employees and
those other persons. At most, we believe that 181 employees and approximately
250 other individuals might have received or had access to the electronic
mail. This electronic mail set forth certain procedural aspects of the
proposed directed share program and informed the recipients that they might
have an opportunity to participate in the proposed directed share program. We
did not deliver a preliminary prospectus to the individuals who received the
electronic mail prior to sending the electronic mail. Although we later
provided a preliminary prospectus to each of our employees who received the
electronic mail, we did not provide a preliminary prospectus to the other
persons who were invited to participate in the proposed directed shares
program. Our underwriters also did not deliver a preliminary prospectus to the
proposed directed shares program participants. Mission Critical may have a
contingent liability arising out of a possible violation of Section 5 of the
Securities Act of 1933 in connection with the electronic mail sent to other
potential participants in the proposed directed share program. In light of the
events discussed above, Mission Critical and the underwriters have terminated
the directed shares program, and have taken steps to prevent any potential
participants in the proposed directed share program from purchasing any shares
in the offering. Any liability would depend upon the number of shares
purchased by the recipients of such electronic mail. If any such liability is
asserted, we will contest the matter strenuously. We do not believe that any
such liability would be material to our financial condition.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors that may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward-
looking statements. These risks and other factors include those listed under
"Risk Factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus to conform our prior
statements to actual results.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 2,750,000 shares of
common stock that we are selling in this offering will be approximately
$40,045,000 ($48,415,000 if the underwriters exercise their over-allotment
option in full) based on a public offering price of $16 per share and after
deducting the underwriting discount and estimated offering expenses payable by
us. We will not receive any proceeds from the sale of the 1,000,000 shares
being sold by the selling stockholders.
The principal purposes of this offering are to create a public market for our
common stock and to attract and retain qualified employees by providing them
with equity incentives. We currently expect to use the net proceeds from this
offering primarily for working capital and general corporate purposes, as well
as estimated capital expenditures of $3.0 million over the next 12 months to
support our increased global sales and marketing headcount and increased
research and development headcount. In addition, we may use a portion of the
net proceeds for further development of our product lines through acquisitions
of products, technologies and businesses. However, we currently have no present
commitments or agreements with respect to any acquisitions. Pending these uses,
we intend to invest the net proceeds in interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. In July
1997, we repurchased 950,000 shares of our Series A preferred stock from one
holder for which the excess of the redemption price over the carrying value of
the related Series A preferred stock is classified as a dividend for financial
reporting purposes. The repurchase of Series A preferred occurred in connection
with our Series C preferred stock financing and was for the purpose of
allocating our stock among our classes of capital stock as the parties had
agreed. We currently expect to retain any future earnings for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future.
19
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of June 30, 1999. The pro
forma information reflects the conversion of all outstanding shares of our
preferred stock on a 1 to 1 basis into shares of our common stock. The as
adjusted information reflects the sale and issuance of 2,750,000 shares of our
common stock by us in this offering at a public offering price of $16 per share
and the deduction of the underwriting discount and estimated offering expenses.
The as adjusted information also includes the issuance of 143,333 shares of our
common stock upon partial exercise of a warrant immediately prior to the
closing of this offering by a stockholder who intends to sell those shares in
this offering. You should read the information presented below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" beginning on page 23 and the financial statements and the
related notes beginning on page F-1.
The outstanding share information excludes 8,795,000 shares of common stock
reserved for issuance under our 1997 stock option plan, of which 4,534,380
shares were subject to outstanding options as of June 30, 1999 at a weighted
average exercise price of $4.77 and 433,333 shares of common stock issuable
upon exercise of outstanding warrants at a weighted average exercise price of
$1.38. In addition, in connection with this offering, our board of directors
and stockholders have also approved:
. a reserve of 250,000 shares for our 1999 Director Option Plan; and
. a reserve of 600,000 shares for our 1999 Employee Stock Purchase Plan.
<TABLE>
<CAPTION>
June 30, 1999
------------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term debt, less current portion........... $ 81 $ 81 $ 81
Redeemable convertible preferred stock, Series
A; $0.001 par value; 868,650 shares
authorized, issued and outstanding--actual;
no shares authorized, issued or
outstanding--pro forma and as adjusted...... 179 -- --
Redeemable convertible preferred stock, Series
B; $0.001 par value; 2,650,000 shares
authorized, issued and outstanding--actual;
no shares authorized, issued or
outstanding--pro forma and as adjusted...... 2,650 -- --
Redeemable convertible preferred stock, Series
C; $0.001 par value; 3,450,000 shares
authorized, issued and outstanding--actual;
no shares authorized, issued or
outstanding--pro forma and as adjusted...... 10,350 -- --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; no shares
authorized, issued and outstanding--actual;
5,000,000 shares authorized, no shares
issued or outstanding--pro forma and as
adjusted.................................... -- -- --
Common stock, $0.001 par value; 50,000,000
shares authorized, 3,307,511 issued and
outstanding--actual; 50,000,000 shares
authorized, 10,276,161; shares issued and
outstanding--pro forma; 50,000,000 shares
authorized, 13,169,494 shares issued and
outstanding--as adjusted.................... 3 10 13
Additional paid-in capital................... 3,290 16,462 56,719
Deferred stock compensation.................. (2,315) (2,315) (2,315)
Accumulated deficit.......................... (8,202) (8,202) (8,202)
------- ------- -------
Total stockholders' equity (deficit)....... (7,224) 5,955 46,215
------- ------- -------
Total capitalization..................... $ 6,036 $ 6,036 $46,296
======= ======= =======
</TABLE>
20
<PAGE>
DILUTION
Our net tangible book value as of June 30, 1999 was $5.3 million or
approximately $0.52 per share. Net tangible book value per share represents the
amount of our total tangible assets reduced by our total liabilities, divided
by the number of shares of common stock outstanding, assuming that all of our
outstanding preferred stock is converted. Dilution in net tangible book value
per share represents the difference between the amount per share paid by
investors in this offering and the net tangible book value per share of common
stock immediately after this offering is completed. After giving effect to the
receipt of the proceeds from our sale of 2,750,000 shares of common stock at a
public offering price of $16 per share, our net tangible book value at June 30,
1999 would have been $45.6 million or approximately $3.46 per share. This
represents an immediate increase in net tangible book value of $2.94 per share
to existing stockholders and an immediate dilution of $12.54 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.......................... $16.00
Net tangible book value per share as of June 30, 1999.......... $0.52
Increase per share attributable to new investors............... 2.94
-----
Net tangible book value per share after the offering............. 3.46
------
Dilution per share to new investors.............................. $12.54
======
</TABLE>
The following table sets forth as of June 30, 1999 the differences between
the amounts paid by existing stockholders and new investors, with respect to
the number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid by new investors, before deducting
the underwriting discount and estimated offering expenses payable by us, at a
public offering price of $16 per share.
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
--------------------- ---------------------- Per
Number Percentage Amount Percentage Share
---------- ---------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 10,419,494 79.1% $13,840,000 23.9% $ 1.33
New investors........... 2,750,000 20.9 44,000,000 76.1 16.00
---------- ----- ----------- -----
Total................... 13,169,494 100.0% $57,840,000 100.0%
========== ===== =========== =====
</TABLE>
Sales by the selling stockholders in this offering will reduce the number of
shares of common stock held by existing stockholders to 9,276,161 or
approximately 70.4%--approximately 67.6%, if the underwriters' over-allotment
option is exercised in full--of the total number of shares of common stock
outstanding upon the closing of this offering. The number of shares held by new
investors will be 3,750,000 or approximately 28.5%--approximately 31.4%, if the
underwriters' over-allotment option is exercised in full--of the total number
of shares of common stock outstanding after this offering. See "Principal and
Selling Stockholders" on page 64 for information regarding the number of shares
and percentage of our stock held by our largest stockholders, officers and
directors before and after this offering.
The above tables excludes 9,645,000 shares of common stock reserved for
issuance under our stock option and stock purchase plans, of which 4,534,380
shares were subject to outstanding options as of June 30, 1999, and 290,000
shares of common stock issuable upon exercise of outstanding warrants. New
investors will experience further dilution if any additional shares of our
common stock are issued upon the exercise of options or additional options are
granted or reserved for issuance under our stock plan.
21
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" beginning on page 23 and our financial statements and the notes
thereto beginning on page F-1 of this prospectus. The statement of operations
data set forth below for the period from July 19, 1996 (our inception) to June
30, 1997 and the fiscal years ended June 30, 1998 and 1999 are derived from our
audited financial statements included elsewhere in this prospectus. The balance
sheet data set forth below as of June 30, 1998 and 1999 are derived from our
audited financial statements included elsewhere in this prospectus. The balance
sheet data set forth below as of June 30, 1997 are derived from our audited
financial statements not included elsewhere in this prospectus. These
historical results are not necessarily indicative of results to be expected for
any future period.
<TABLE>
<CAPTION>
Year Ended
July 19, 1996 June 30,
(inception) to ----------------
June 30, 1997 1998 1999
-------------- ------- -------
(in thousands, except per
share data)
<S> <C> <C> <C>
Statement of Operations Data:
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 compensa-
tion..................................... -- -- 532
Abandoned lease costs..................... -- -- 1,034
Acquired in-process-research and develop-
ment..................................... 1,575 -- --
------- ------- -------
Total operating expenses................ 7,419 15,430 23,490
------- ------- -------
Operating income (loss)..................... (3,500) (2,379) 43
Other income, net........................... 2 63 299
------- ------- -------
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 redeem pre-
ferred stock and
dividends in arrears....................... (181) (3,714) (1,059)
------- ------- -------
Net loss applicable to common stockholders.. $(3,504) $(6,030) $ (717)
======= ======= =======
Basic and diluted net loss per share appli-
cable to common stockholders............... $ (1.44) $ (2.47) $ (0.25)
======= ======= =======
Pro forma basic net income per share (unau-
dited)..................................... $ 0.04
=======
Pro forma diluted net income per share (un-
audited)................................... $ 0.03
=======
</TABLE>
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1998 1999
------- ------- -------
Balance Sheet Data: (in thousands)
<S> <C> <C> <C>
Cash and cash equivalents.......................... $ 299 $ 4,575 $11,031
Working capital (deficit).......................... (2,523) 3,241 4,176
Total assets....................................... 4,595 10,958 17,786
Long-term debt, less current maturities............ 33 352 81
Redeemable convertible preferred stock............. 3,189 13,179 13,179
Total stockholders' deficit........................ (3,520) (8,516) (7,224)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the
our financial statements and the notes thereto beginning on page F-1 of this
prospectus and the Selected Financial Data above. Except for historical
information, the discussion in this prospectus contains forward-looking
statements that involve risks and uncertainties. Such forward-looking
statements include, among others, those statements including the words
"expects," "anticipates," "intends," "believes" and similar language. Our
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include the risks discussed
in the section titled "Risk Factors" beginning on page 7 of this prospectus.
Overview
We provide systems administration and operations management software products
for corporate and Internet-based Windows NT networks. Our 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. Our products can be deployed quickly, are based
on an open and extensible architecture and are easy to use.
We derive our revenue from the sale of software product licenses and
maintenance. Currently, all of our product license revenue is derived from our
OnePoint suite and principally our OnePoint Administrator products. In the
periods from July 19, 1996, our inception, to June 30, 1997 ("fiscal 1997"),
the fiscal year ended June 30, 1998 ("fiscal 1998") and the fiscal year ended
June 30, 1999 ("fiscal 1999"), sales of OnePoint Administrator products
accounted for approximately 100%, 88% and 82% of our license revenue,
respectively. We expect that these products will continue to account for a
large portion of our license revenue for the foreseeable future.
We recognize product license revenue when:
. persuasive evidence of an agreement exists;
. customer acceptance periods, if any, have been completed;
. the product and the permanent license key have been delivered;
. we have no remaining significant obligations;
. the license fee is fixed or determinable; and
. collection of the fee is probable.
Our products are generally priced based on the number of users and servers
managed. Our per seat licenses for our OnePoint product suite start at $27 per
managed user account, and our per server license fees begin at $1,000 per
server. Customization or extensive on-site implementation services are
generally not required for our customers to install and use our products. Sales
transactions generally include one year of maintenance. Our customers typically
purchase maintenance agreements annually, and we price maintenance agreements
based on a percentage of the product license fee. Customers purchasing
maintenance agreements receive unspecified product upgrades and electronic,
Internet-based technical support and telephone support. We recognize revenue
from maintenance agreements ratably over the term of the agreement, typically
one year. We record cash receipts from customers for renewal maintenance
agreements as deferred revenue. The timing and amount of cash receipts from
customers can vary significantly depending on specific contract terms and can
therefore have a significant impact on the amount of our deferred revenue in
any given period.
Any factors adversely affecting the pricing of, demand for or market
acceptance of our OnePoint product suite, such as competition or technological
change, could materially adversely affect our 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. We believe that Windows NT and Windows 2000 Server, once released,
will continue to be an integral part of the corporate and Internet-based
client/server environments.
23
<PAGE>
Cost of revenue consists of:
.amortization of acquired technology;
.costs to manufacture, package and ship our products;
.personnel; and
.other expenses related to providing maintenance.
Since our inception in 1996, we have incurred substantial costs to develop
our technology and products, to recruit and train personnel for our
engineering, sales and marketing and technical support departments, and to
establish an administrative organization. As a result, we had an accumulated
deficit of $8.2 million at June 30, 1999. We anticipate that our operating
expenses will increase substantially in the future as we increase our sales and
marketing operations, develop new distribution channels, fund greater levels of
research and development, broaden our technical support and improve our
operational and financial systems. Accordingly, we will need to generate
significant quarterly revenues to maintain profitability. In addition, our
limited operating history makes it difficult for us to predict future operating
results and, accordingly, there can be no assurance in future quarters that we
will achieve or sustain revenue growth or profitability.
We apply Statement of Financial Accounting Standards No. 86 ("SFAS 86"),
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed" to software technologies we develop internally. We include internal
development costs in research and development, and we expense those costs as
they are incurred. SFAS 86 requires the capitalization of certain internal
development costs once technological feasiblity is established, which, based
upon our development process, generally occurs upon the completion of a working
model. As the time period between the completion of a working model and the
general availability of our products has not been significant, we have not
capitalized any software development costs to date.
We have grown rapidly, and our total revenue has increased from $4.3 million
in fiscal 1997 to $14.4 million in fiscal 1998 and $24.8 million in fiscal
1999. Historically, our revenue has been attributable primarily to sales in
North America. In fiscal 1997, fiscal 1998 and fiscal 1999, license revenue
attributable to sales outside of North America accounted for approximately 16%,
17% and 22% of our total license revenue, respectively. We plan to expand our
international operations significantly as we believe international markets
represent a significant growth opportunity. Consequently, we anticipate 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, we 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 our operating results. Our sales are
generally denominated in United States dollars and as a result our current
exposure to foreign exchange fluctuations is minimal. As our international
sales and operations expand, we anticipate that our exposure to foreign
currency fluctuations will increase.
In fiscal 1997, fiscal 1998 and fiscal 1999, maintenance revenue comprised
4.2%, 11.2% and 15.1% of our total revenue, respectively. We expect maintenance
revenue to continue to increase as a percentage of total revenue if our number
of customers increases and if the number of customers entering into annual
maintenance agreements increases. If maintenance revenue increases as a
percentage of total revenue, our gross margin as a percentage of total revenue
will decrease because of lower margins on maintenance revenue due to
incremental maintenance support costs.
In fiscal 1999, approximately 50% of our license revenue was derived from
additional purchases by existing customers. If we fail to sell additional
licenses to our existing customers, we could experience a material decline in
total revenue.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period to period comparisons of our revenue
and operating results are not necessarily meaningful and should not be relied
upon as indications of our future performance. Additionally, despite our
revenue growth for all
24
<PAGE>
but one quarter since inception, we do not believe that historical growth rates
are necessarily sustainable or indicative of future growth.
In June 1997, we acquired in-process research and development from our United
Kingdom distributor, Serverware, Ltd. The total consideration paid in
connection with the acquisition was $2.6 million. We capitalized $1.1 million
as acquired technology and recorded a one time charge of $1.5 million for the
write-off of in-process research and development. Since the acquisition, we
have amortized $52,500 of the acquired technology per quarter as a cost of
revenue. The remaining $578,000 will be amortized quarterly until 2002.
During fiscal 1999, we recorded deferred stock compensation of $2.8 million
in connection with certain stock option grants. We amortize deferred stock
compensation over the vesting period of the related award. We record this
amortization as a noncash expense in accordance with Accounting Principles
Board Opinion No. 25.
We had 163 employees at June 30, 1999, a substantial increase from 92 and 50
at June 30, 1998 and 1997, respectively. This rapid growth has placed
significant demands on our management and operational resources. In order to
manage our growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. In addition, we expect that
future expansion will continue to challenge our ability to hire, train,
motivate and manage our employees. Competition is intense for highly qualified
technical, sales and marketing and management personnel. If our total revenue
does not increase relative to our operating expenses, our management systems do
not expand to meet increasing demands, we fail to attract, assimilate and
retain qualified personnel or our management otherwise fails to manage our
expansion effectively, we would experience a decline in our revenue and
operating results.
Historical Results of Operations
The following table sets forth the results of our operations expressed as a
percentage of total revenues. Our historical operating results are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
Percentage of Revenue
----------------------------
Year Ended
July 19, 1996 June 30,
(inception) to -------------
June 30, 1997 1998 1999
-------------- ----- -----
<S> <C> <C> <C>
Revenue:
License......................................... 95.8% 88.8% 84.9%
Maintenance..................................... 4.2 11.2 15.1
----- ----- -----
Total revenue............................... 100.0 100.0 100.0
Cost of revenue:
Cost of license................................. 4.8 2.7 1.5
Cost of maintenance............................. 3.3 6.5 3.7
----- ----- -----
Total cost of revenue....................... 8.1 9.2 5.2
----- ----- -----
Gross margin................................ 91.9 90.8 94.8
Operating expenses:
Sales and marketing............................. 83.3 66.7 54.3
Research and development........................ 30.9 25.1 24.1
General and administrative...................... 22.8 15.5 9.9
Amortization of deferred stock compensation..... -- -- 2.1
Abandoned lease costs........................... -- -- 4.2
Acquired in-process research and development.... 36.9 -- --
----- ----- -----
Total operating expenses.................... 173.9 107.3 94.6
----- ----- -----
Operating income (loss)........................... (82.0) (16.5) 0.2
Other income, net................................. -- 0.4 1.2
----- ----- -----
Income (loss) before income taxes................. (82.0) (16.1) 1.4
Income tax benefit................................ 4.1 -- --
----- ----- -----
Net income (loss)................................. (77.9)% (16.1)% 1.4%
===== ===== =====
</TABLE>
25
<PAGE>
Comparison of Fiscal Years Ended June 30, 1997, 1998 and 1999
Revenue
Our 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 our 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 95.8%,
88.8% and 84.9% 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 our 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
4.2%, 11.2% and 15.1% 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 consist of the amortization of acquired technology and
of the expenses we incurred to manufacture, package and ship our products.
License costs were $206,000, $392,000 and $380,000 in fiscal 1997, 1998 and
1999, respectively. License costs represented 5.0%, 3.1% and 1.8% 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 90.3% 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. We expect license costs to
increase in the future due to the expected increase in license revenue.
Maintenance. Maintenance costs include salary expense and other related costs
for our technical support. Maintenance costs were $142,000, $933,000 and
$914,000 in fiscal 1997, 1998 and 1999, respectively. Maintenance costs
represented 78.9%, 58.0% and 24.3% 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 our 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. We expect maintenance costs to increase in the future
as we continue to add infrastructure.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries, commissions, payroll taxes and employee benefits as well as
travel, entertainment and discretionary 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 83.3%, 66.7%
and 54.3% 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
26
<PAGE>
June 30, 1997 to 42 at June 30, 1998 and 72 at June 30, 1999, and commission
expense as a result of our 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 1999 as compared to our 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 our sales
force. We expect sales and marketing expenses to increase as we continue to
hire additional sales and marketing personnel.
Research and Development Expenses. Research and development expenses consist
primarily of salaries, bonuses, payroll taxes, employee benefits and other
costs attributable to research and development activities. 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 30.9%, 25.1% and 24.1% of total revenue in fiscal 1997, 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,
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 129.1% from fiscal 1997 to 1998
and 70.3% from fiscal 1998 to 1999 compared to an overall increase in research
and development expense of 174% and 65.7% 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. We expect research and development expenses
to increase as we continue to hire additional research and development
personnel to develop new OnePoint products and to develop products for Windows
2000 Server.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries, bonuses, payroll taxes, employee benefits and
certain non-allocable administrative costs. 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 22.8%, 15.5% and
9.9% of total revenue in fiscal 1997, 1998 and 1999, respectively. The absolute
dollar increases were primarily related to costs associated with the expansion
of our facilities and related infrastructure and the recruiting costs, salaries
and benefits associated with the hiring of additional administrative personnel
to support our 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. Our facility rent cost increased 317%
from fiscal 1997 to 1998 and 31.3% 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. We expect
general and administrative expenses to increase as we expand our infrastructure
and incur additional costs as a result of being a public company.
Amortization of Deferred Stock Compensation. We amortized approximately
$532,000 of deferred stock compensation in fiscal 1999. We did not have any
deferred stock compensation amortization in fiscal 1997 or 1998. We expect to
amortize the remaining $2.3 million of deferred stock compensation through
fiscal 2003.
Other Income, Net
Other income, net is generated primarily from the interest earned on cash and
cash equivalents. 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, we recorded an income tax benefit of $175,000 related to the
purchase of our OnePoint Administrator product line. We did not record a
provision for federal or state income taxes in either fiscal
27
<PAGE>
1998 or 1999, because we have generated net operating loss carryforwards of
approximately $2.4 million from inception through June 30, 1999. Our net
operating loss carryforwards begin to expire in 2012. In the future, our
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 we are able to use them. As of June
30, 1998 and 1999, we 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, we 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 our 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.
We intended to utilize the acquired in-process research and development to
develop an event management product for Windows NT that we did not possess at
the time. Our 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, our 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, we expended approximately 80 person months, or approximately $800,000, to
complete and enhance the in-process research and development. In June 1998 we
completed SeNTry, which represented the first completed and enhanced version of
the acquired technology. We 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 our 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 our first
attempt to develop event management technology. We were uncertain of our
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.
We 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.
We 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. We expected revenue derived from the
completed in-process research and development to commence after we completed
development of the SeNTry product. We expected revenue from the in-process
research and development to continue until the release of OnePoint Event
Manager, which we expect to release in fiscal 2000. We 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. We estimated operating expenses as a percentage of revenue
and based our estimates primarily on projections we prepared.
The cash flow projections attributable to the core technology included 50% of
the net income before tax expense we expected to generate from the completed
in-process technology and 15% from the net income before tax expense we
expected to generate from OnePoint Event Manager, an entirely new and
internally developed product. We estimated that we would derive revenue from
OnePoint Event Manager through 2004. We deducted estimated operating expenses
and income taxes from estimated revenue to arrive at
28
<PAGE>
estimated after-tax cash flows. Projected operating expenses included: cost of
revenue and general and administrative, customer support and sales and
marketing expenses. We estimated operating expenses as a percentage of revenue
and based such estimates primarily on projections we prepared.
We used a rate to discount the net cash flows to present value based on the
weighted average cost of capital. We 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.
Quarterly Results of Operations
The following table presents our operating results for each of the eight
quarters in the period ending June 30, 1999. The information for each of these
quarters is unaudited and has been prepared on the same basis as the audited
financial statements appearing elsewhere in this prospectus. In our opinion,
all necessary adjustments, consisting only of normal recurring adjustments,
have been included to present fairly the unaudited quarterly results when read
in conjunction with our audited financial statements and the notes thereto
appearing beginning on page F-1 of this prospectus. These operating results are
not necessarily indicative of the results of any future period.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1997 1997 1998 1998 1998 1998 1999 1999
--------- -------- -------- -------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License................ $ 2,040 $2,795 $3,324 $4,608 $4,052 $4,744 $5,645 $6,626
Maintenance............ 235 339 501 534 613 760 1,087 1,300
------- ------ ------ ------ ------ ------ ------ ------
Total revenue.......... 2,275 3,134 3,825 5,142 4,665 5,504 6,732 7,926
Cost of revenue:
Cost of license........ 98 98 98 98 96 96 99 89
Cost of maintenance.... 155 280 245 253 226 215 240 233
------- ------ ------ ------ ------ ------ ------ ------
Total cost of revenue.. 253 378 343 351 322 311 339 322
------- ------ ------ ------ ------ ------ ------ ------
Gross margin........... 2,022 2,756 3,482 4,791 4,343 5,193 6,393 7,604
Operating expenses:
Sales and marketing.... 2,015 2,282 2,294 2,999 2,479 2,912 3,561 4,528
Research and
development........... 822 932 716 1,142 1,223 1,418 1,633 1,712
General and
administrative........ 598 504 493 633 576 621 664 597
Amortization of
deferred stock
compensation.......... -- -- -- -- 32 46 158 296
Abandoned lease costs.. -- -- -- -- -- -- 1,034 --
------- ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 3,435 3,718 3,503 4,774 4,310 4,997 7,050 7,133
------- ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)................. (1,413) (962) (21) 17 33 196 (657) 471
Other income (expense),
net.................... 17 38 7 1 43 80 83 93
------- ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... (1,396) (924) (14) 18 76 276 (574) 564
Provision (benefit) for
income taxes........... -- -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $(1,396) $ (924) $ (14) $ 18 $ 76 $ 276 $ (574) $ 564
======= ====== ====== ====== ====== ====== ====== ======
</TABLE>
Our revenue has grown in each quarter, other than the quarter ended September
30, 1998, as demand for our products increased. The increases in each quarter
were primarily due to the increased unit sales of licenses for our products.
Revenue declined in the quarter ended September 30, 1998 because our sales
staff closed a substantial number of transactions in the prior quarter, the
last quarter of fiscal 1998, and selling opportunities decreased in the summer
months.
29
<PAGE>
Our cost of revenue increased in the quarters ended September 30, 1997 and
December 31, 1997 in conjunction with our increases in total revenue; however,
starting in the quarter ended March 31, 1998 we began to experience improved
productivity on the developed infrastructure which resulted in a leveling off
of our cost of maintenance. Our operating expenses have generally increased in
absolute dollars each quarter as we have increased staffing in sales and
marketing, research and development and general and administrative functions.
Sales and marketing expenses increased in the quarter ended June 30, 1998
primarily due to the sales staff achieving sales quotas for fiscal 1998, which
resulted in sales commissions and incentives being paid in the fourth quarter
and increased levels of discretionary marketing expense. Research and
development expenses increased during the quarter ended December 31, 1997 due
to contract development costs in conjunction with the purchase of in-process
research and development in fiscal 1997 and decreased in the quarter ended
March 31, 1998 due to a reduction in development activity as we conducted a
search for new corporate management. We hired new management during the
quarter ended June 30, 1998 and implemented a new business plan. As a result,
all costs increased in the quarter ended June 30, 1998 due to increases in
headcount and increased sales and marketing expenditures. Sales and marketing
costs decreased in the quarter ended September 30, 1998 due to a reduction in
planned marketing activities and lower commission expense as a result of fewer
sales. We recorded total deferred stock compensation of $2.4 million in
connection with stock options granted during the year ended June 30, 1999. We
are amortizing these amounts over the vesting periods of the applicable
options, which resulted in amortization expense of $32,000, $46,000, $158,000
and $257,000 and in the quarters ended September 30, 1998, December 31, 1998,
March 31, 1999 and June 30, 1999, respectively.
We recorded deferred stock compensation of $475,000 in connection with
options granted to three former directors who became consultants when they
resigned from our board of directors in the quarter ended June 30, 1999. We
are amortizing this amount over the applicable vesting period of one to two
years, and amortization expense for the period ended June 30, 1999 was
approximately $39,000. This charge will be re-measured at each respective
period end.
As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Accordingly, we base our expenses in
part on future revenue projections. Most of our expenses are fixed in nature,
and we may not be able to quickly reduce spending if revenue is lower than we
have projected. Our ability to forecast our quarterly sales accurately is
limited which makes it difficult to predict the quarterly revenue that we will
recognize. We expect that our business, operating results and financial
condition would be harmed if revenues do not meet projections and our
operating results are less than expected.
We expect that our revenue and operating results may vary significantly from
quarter to quarter, and we anticipate that our expenses will increase
substantially in the foreseeable future as we:
. increase our direct sales and marketing activities, including expanding
our North American and international direct sales forces and extending
our telesales efforts;
. develop our technology, expand our OnePoint product suite and create and
market products that operate with the commercial release version of
Windows 2000;
. expand our indirect distribution channels; and
. pursue strategic relationships and acquisitions.
Accordingly, we believe that quarter to quarter comparisons of our operating
results are not necessarily meaningful. Investors should not rely on the
results of one quarter as an indication of future performance.
Liquidity and Capital Resources
We have funded our operations primarily from license revenue received from
inception to June 30, 1999 and the proceeds of approximately $13.2 million
from the sale of common stock, preferred stock and warrants. At June 30, 1999,
we had cash and cash equivalents of $11.0 million. As of June 30, 1999, we had
an accumulated deficit of $8.2 million and working capital of $8.5 million,
net of a short-term component of deferred revenue of $4.3 million.
Our 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.
Net cash used by operating activities in fiscal 1997 and fiscal
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1998 was due primarily to net operating losses and increases in accounts
receivable. Our operations generated net cash in fiscal 1999 primarily due to
increased revenue, improved accounts receivable collection efforts and
increased liabilities. The increase in liabilities was the result of an accrual
for abandoned lease costs and expansion of our operations, including increased
commissions, marketing programs, recruiting fees, benefit costs and other
infrastructure costs.
Our investing activities used net cash of $1.2 million, $492,000 and $1.4
million in fiscal 1997, 1998 and 1999, respectively. Our investing activities
consisted primarily of net purchases of property and equipment.
Our financing activities provided $3.1 million and $5.2 million in fiscal
1997 and fiscal 1998, 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, we used $124,000 of net cash for financing activities as the
repayments on our debt facilities exceeded the generation of cash from the
sales of our common stock to employees in connection with the exercise of stock
options.
We anticipate spending at least $1.1 million for office lease payments and
approximately $3.0 million for capital expenditures over the next 12 months.
From inception, we have made capital expenditures of $3.1 million, less
accumulated depreciation and amortization of $1.1 million, to support our
research and development, sales and marketing and administrative activities. We
expect capital expenditures to increase over the next several years as we
expand facilities and acquire equipment to support our planned expansion in
sales and marketing and research and development. We expect to utilize cash
resources to purchase additional equipment over the next 12 months.
In January 1998, we obtained a revolving credit facility of $3.0 million from
a commercial bank. We renewed this credit facility in March 1999. The credit
facility expires on February 5, 2000. 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 our assets, and we must
maintain certain financial ratios and comply with other covenants. At June 30,
1999, we had no borrowings outstanding under the credit facility, and the
unused amount of $3.0 million is available for drawdowns through February 5,
2000. We were in compliance with all covenants as of June 30, 1999 but we
cannot assure you that we will be able to continue to comply with our loan
covenants in the future.
We intend to continue to invest heavily in the development of new products
and enhancements to our existing products. Our 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
development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which our 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. We believe that the proceeds from this offering, together with our
current cash and investment balances and any cash generated from operations and
from available or future debt financing, will be sufficient to meet our
operating and capital requirements for at least the next 12 months. However, it
is possible that we may require additional financing within this period. We
have no current plans, and we are not currently negotiating, to obtain
additional financing following the completion of this offering. The factors
described in this paragraph will affect our future capital requirements and the
adequacy of our available funds. We may be required to raise additional funds
through public or private financing, strategic relationships or other
arrangements. We cannot assure you that such funding, if needed, will be
available to us on terms attractive to us, 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 us to
relinquish our rights to certain of our technologies or products. If we fail to
raise capital when needed, our failure could have a negative impact on our
operating results and financial condition.
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Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, the
AICPA, issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Statement of
Position No. 98-1 requires us to capitalize certain costs related to internal
use software once certain criteria have been met. We expect that the adoption
of Statement of Position No. 98-1 will not have a material impact on our
financial position or results of operations. We will be required to implement
Statement of Position No. 98-1 for our fiscal year beginning July 1, 2000.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities." Statement of Position No. 98-5 requires us to
expense all start-up costs related to new operations as incurred. In addition,
all start-up costs that were capitalized in the past must be written off when
we adopt Statement of Position No. 98-5. We expect that the adoption of
Statement of Position No. 98-5 will not have a material impact on our financial
position or results of operations. We will be required to implement Statement
of Position No. 98-5 for our fiscal year beginning July 1, 2000.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging activities." SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we
do not currently hold any derivative instruments and do not engage in hedging
activities, we expect that the adoption of SFAS No. 133 will not have a
material impact on our financial position or results of operations. We will be
required to implement SFAS No. 133 for the fiscal year beginning July 1, 2001.
In December 1998, the AICPA issued Statement of Position 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions." Statement of Position 98-9 amends Statement of Position 98-4,
"Deferral of Effective Date of SOP 97-2" to further defer the application of
certain passages of Statement of Position 97-2, "Software Revenue Recognition"
through fiscal years that begin on or before March 15, 1999. We do not believe
that the adoption of Statement of Position 98-9 will have a material effect on
our results of operations or financial condition.
Qualitative and Quantitative Disclosures About Market Risk
We develop products in the United States and sell those products primarily in
North America and Europe. In fiscal 1999, our license revenue for sales outside
North America was 22% of our total license revenue. As a result, our financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. As all of our
sales are currently made in U.S. dollars, a strengthening of the dollar could
make our products less competitive in foreign markets.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we
have concluded that we do not have material market risk exposure.
Our investment policy requires us to invest funds in excess of current
operating requirements in:
. obligations of the U.S. government and its agencies;
. investment grade state and local government obligations;
. securities of U.S. corporations rated A1 or P1 by Standard & Poors or
the Moody's equivalents; and/or
. money market funds, deposits or notes issued or guaranteed by U.S.
and non-U.S. commercial
banks meeting certain credit rating and net worth requirements with
maturities of less than two years.
At June 30, 1999, our cash and cash equivalents consisted primarily of demand
deposits and money market funds held by large institutions in the U.S., and our
short-term investments were invested in corporate debt maturing in less than 60
days.
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Year 2000 Readiness
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
Our products. We are currently conducting a review of the current versions of
our products to determine Year 2000 compliance. We have reviewed the software
code for each of these applications and believe that we have identified all
instances where date specific information is required. We have further
investigated whether these date fields contain two or four digits, and have
initiated efforts to upgrade our software when date fields that contain only
two digits were discovered. Based on our preliminary review and the results of
limited testing, we believe that our OnePoint product suite, when configured
and used in accordance with its instruction manual, correctly recognizes date
codes after 1999 and functions with four digit date codes. We intend to conduct
further tests on all of our applications to identify areas of deficiency and to
develop action plans to correct and upgrade our software code.
We are in the final stages of assessing our Year 2000 readiness. Despite
preliminary investigation and testing by us and our partners, our software
applications and the underlying hardware systems and protocols running the
software may contain undetected errors or defects associated with Year 2000
date functions. Our software applications operate in complex network
environments and directly and indirectly interact with a number of other
hardware and software systems. We are unable to predict to what extent our
business may be affected if our software or the systems that operate in
conjunction with our software experience a material Year 2000 failure. Known or
unknown errors or defects that affect the operation of our software could
result in:
. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to our reputation;
. increased service and warranty costs; and
. litigation costs,
any of which could adversely affect our business, financial condition and
results of operation.
Our software products run on several hardware platforms and the Windows NT
and pre-release version of Windows 2000 operating systems. In addition, our
software operates in accordance with several external Windows NT protocols,
such as http and nntp. Our software is therefore dependent upon the correct
processing of dates by these systems and protocols. We have reviewed
information made publicly available by our hardware platform partners regarding
Year 2000 compliance and researched the date handling capabilities of
applicable Windows NT protocols. Based on this research, we do not believe that
the underlying systems and protocols that operate in conjunction with our
software products contain material Year 2000 deficiencies. However, we have not
conducted our own tests to determine to what extent our software running on any
of our hardware platforms and in accordance with any of our supported Windows
NT protocols fails to properly recognize Year 2000 dates.
Our state of readiness. Our business depends on the operation of numerous
systems that could potentially be impacted by Year 2000 related problems. The
systems include:
. computer and communications hardware and software systems used to
deliver services;
. computer and communications hardware and software systems we use
internally to manage our business;
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. communications networks such as the Internet and private intranets;
and
. non-information technology systems and services we use to manage our
business, such as telephone, security and building management
systems.
Based on an analysis of all systems potentially impacted by conducting
business in the year 2000 and beyond, we are pursuing a phased approach to
making our systems and our operations ready for the year 2000. Beyond an
awareness of the issue and scope of systems involved, we will:
. identify third party product reliance and document their use in our
Year 2000 compliance tests;
. complete a review of the third-party product for potential date
related issues; and
. validate and test technologically-compliant Year 2000 solutions.
The table below provides a summary of the status and timing of our internal
readiness activities:
<TABLE>
<CAPTION>
Targeted
Impacted Systems Status Implementation
---------------- ------ ---------------
<S> <C> <C>
Hardware and software Systems upgraded or replaced as October 1, 1999
systems used to develop appropriate, conducting validation and
our products testing
Hardware and software Systems upgraded or replaced as October 1, 1999
systems used to manage appropriate, conducting validation and
our business testing
Communication networks Assessment completed, conducting October 1, 1999
used to develop our validation and testing
products
Non-information Completed Completed
technology systems and
services
</TABLE>
We use multiple software systems for internal business purposes, including
accounting, email, development, human resources, customer service and support
and sales tracking systems. All of these applications have been purchased
within the preceding 18 months. We conducted research with the vendors about
the systems and software that we believe are critical to our business regarding
their Year 2000 readiness of the vendors and their products. Each of these
vendors has indicated through publicly available information and through their
web sites that the vendor believes the vendor's applications are Year 2000
compliant. We have completed operational testing on those systems which are
reported to be Year 2000 compliant, and they appear to pass these Year 2000
tests. We have scheduled updates of all systems for which we cannot prove Year
2000 readiness, and those updates will be completed before October 1, 1999.
Costs to Address Year 2000 Issues. To date, the costs for conducting our
assessment have not been material, and we expect total costs incurred in
connection with our Year 2000 project to be less than $100,000. We cannot be
sure that Year 2000 issues will not be discovered in our products or internal
software systems. If any issues are discovered, we cannot be sure that the
costs of making such products and systems Year 2000 ready will not harm our
business and financial conditions. We believe that it is not possible to
determine with complete certainty that all Year 2000 problems affecting us have
been identified or corrected. The number of devices and the interactions among
these devices are simply too numerous. In addition, no one can accurately
predict how many Year 2000 problem-related failures will occur or the severity,
duration or financial consequences of these perhaps inevitable failures. As a
result, we believe the following consequences are possible:
. we, our customers or our suppliers may experience a significant number of
operational inefficiencies that could divert our or their management's
time and attention or resources from ordinary business activities;
. we may become involved in disputes and claims for pricing adjustments or
penalties due to Year 2000 problems with our suppliers or customers; and
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. our customers could allege that we failed to comply with the terms of
contracts or industry standards, and these allegations could result in
the customer cancelling our contract or filing litigation against us.
Contingency Plans. We have not yet developed a contingency plan for handling
Year 2000 problems that are not detected and corrected prior to their
occurrence. Upon completion of testing and implementation activities, we will
be able to assess areas requiring contingency planning and we expect to
institute appropriate contingency planning at that time. Any failure to address
any unforseen Year 2000 issues could harm our business. Depending on our
systems affected, our Year 2000 contingency plans could include:
. accelerated replacement of affected equipment or software, resulting in
higher equipment expense and depreciation;
. short to medium term use of backup equipment and software;
. increased work hours for our staff, resulting in higher compensation
expense and possibly higher employee turn-over; and
. use of contract personnel to correct any Year 2000 problems that arise or
to develop manual work arounds for information systems, each on an
accelerated schedule.
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BUSINESS
The following business section contains forward-looking statements relating
to future events or the future financial performance of Mission Critical
Software, which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors including those set forth in "Risk Factors" and
elsewhere in this prospectus.
Overview
We provide systems administration and operations management software products
for corporate and Internet-based Windows NT networks. Our 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. Our products can be deployed
quickly, are based on an open and extensible architecture and are easy to use.
As of June 30, 1999, our products had been installed by over 600 customers,
including more than 40 of the 1999 Fortune 100 companies and some of the
largest Internet datacenters in the world. We market and sell our products
worldwide through a network of sales offices and distribution partners. Our
products have been adopted in a wide variety of industries, including banking
and finance, energy, healthcare, insurance and pharmaceuticals. Representative
customers include Bear, Stearns & Company, Dell Computer, Dow Chemical,
Ericsson, Johnson & Johnson, Kaiser Foundation Health Plan, Lockheed Martin,
Microsoft, Nortel and USAA.
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
servers in greater quantities and are using these Windows NT servers to address
a broadening scope of business needs. Adoption of Windows NT has accelerated as
servers running on the Windows NT 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 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 2.2 million in 1998 to 6.3
million in 2002.
The growing complexity of corporate and Internet-based Windows NT 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
servers are flexible and powerful operating systems, they require ongoing
management support. To keep Windows NT networks running smoothly, companies
have employed large departments of skilled systems administrators. This
approach has proven costly and ineffective as the scarcity
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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 networks, businesses are increasingly 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 and MVS. However, we believe 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,
we believe that these framework solutions typically provide limited depth
of functionality for Windows NT systems management given their broad
scope.
We believe that products in these categories have exhibited a variety of
shortcomings in addressing Windows NT 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. We believe 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
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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.
The Mission Critical Software Solution
We provide software products that enable scalable systems administration and
operations management for corporate and Internet-based Windows NT networks. Our
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. Our products are based on an
open and extensible architecture, can be deployed quickly and are flexible and
easy to use. Our 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 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 by providing systems
administrators with the ability to test implementations and convert systems
incrementally.
Designed to manage and enable electronic commerce. Our software
solutions enable systems administration and management of Windows NT
servers that power electronic commerce applications. OnePoint enables
Internet businesses to provide continuous, secure systems availability --
24 hours, 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 our products is
designed to operate in complex, enterprise-scale Windows NT environments.
OnePoint centrally manages a large number of interlinked Windows NT servers
and facilitates the expansion of the number of servers under management
without time-consuming implementation. In addition, our products can be
deployed rapidly and be implemented incrementally either by product or by
department. The modular architecture of our products enables users to
customize these products to meet their networks' specific needs.
Lower total cost of ownership. We reduce 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. We believe that our
policy-based approach further reduces the number of required personnel by
enabling businesses to automate many systems management tasks. Unlike many
other alternatives, our software products enable systems administrators to
implement network-wide policies and rules without extensive programming or
customization. Our 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. Our products are designed to
be easy to install and use. Their automated implementation capabilities
allow them to be installed in minutes, configured in hours
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and deployed worldwide in days. In addition, our products offer a familiar
Windows look and feel that accelerates user adoption and minimizes the need
for formal training. As a result, our 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 our ActiveKnowledge modules to
incorporate Windows NT-specific problem solving into their systems
administration tools without extensive on-site custom programming. We
believe our rules-based approach is not only many times more scalable than
simplistic script-based approaches but makes our products far easier and
faster to deploy.
The Mission Critical Software Strategy
Our objective is to maintain and strengthen our position as a provider of
systems management software for corporate and Internet-based Windows server
networks. Key elements of our strategy include:
Extend our OnePoint product suite. We plan to increase the functionality
of our OnePoint product suite through internal development and,
potentially, strategic acquisitions. We will continue to extend our
existing technology in systems administration and operations management and
broaden our platform migration modules. For example, we intend to
commercially release a new OnePoint product, File Administrator, in late
1999. We also intend to release products that facilitate migration from
Windows NT and Netware to the commercial release version of Windows 2000.
We have already released products that enable customers to transition from
Windows NT to the current pre-release version of Windows 2000 and from
Netware to Windows NT. We 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 our products with framework solutions.
Target companies and service providers conducting Internet commerce. We
believe that the growth of the Internet is accelerating demand for Windows
NT servers. Our products are designed to support high volume, Internet-
based networks and are currently being used to manage web server farms and
electronic commerce sites. We intend to expand our Internet systems
management business by specifically targeting online retailers, Internet
service providers, electronic commerce service providers and other
companies for which Windows NT systems management products are an
operational necessity.
Increase sales to existing customer base. Our variable license fee
structure, which is based on the number of users and servers, allows
customers to try our products without committing to a full enterprise-wide
implementation. To date, a substantial portion of our revenues have come
from additional sales of the same products within an existing customer's
organization. We believe that there is a large market for selling new
licenses for the same products as well as other products to our existing
customers. We intend to continue our current incremental selling strategy.
We will also pursue enterprise-wide initial sales whenever appropriate.
Expand our customer base. Our products have been deployed by many of the
largest organizations in the world. While we intend to expand our direct
sales efforts to these large organizations, our variable license fee
structure makes our solution viable for smaller enterprises as well.
Through our ChannelOne partnership program and targeted telesales
campaigns, we intend to increase our 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. We believe these customers' business and
computing needs are growing rapidly due to their adoption of Internet-based
applications and other software solutions.
Leverage and expand Microsoft relationship. We are currently a leading
vendor of Windows NT-based systems management software, both in product
sales and technology. We have developed an extensive relationship with
Microsoft that includes the sharing of technology, joint marketing and
sales efforts. Microsoft uses our OnePoint Event Manager product for its
global Internet and corporate
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datacenters. We 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. Our Vice
President of Strategic Alliances works closely with Microsoft at its
Redmond, Washington campus to help us manage and expand our relationship.
In addition, we have sales engineer and developer personnel located on
Microsoft's Redmond campus.
Expand global distribution channels. We believe that the international
marketplace provides a significant growth opportunity as organizations
worldwide adopt Windows NT and Windows 2000. To date, we have sold our
products domestically through our direct sales force and internationally
through a limited number of distributors. We believe that the ease of
deployment and use of our products and our pricing model make our products
well suited for resale through indirect channels such as international
distributors and strategic partners. We intend to expand indirect selling
of our products through strategic partner arrangements and to engage
international distributors with substantial market penetration in the
enterprise systems software segment. In addition, we intend to expand our
direct sales presence in key international markets.
Products and Technology
Our 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 Administrator
.Exchange Administrator
.Event Manager
.Framework Integration
The major components of the OnePoint suite are summarized below.
[Graphic showing components of One Point suite include -- Systems
Administration, Security, Operations Management; Products--Directory and
Resource Administrator, Domain Administrator, Exchange Administrator, Event
Manager, Framework Integration; Infrastructure--Active Knowledge Library,
Active Administration & Operations Engine]
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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 networks expand. Each generation of OnePoint products
has introduced additional functionality, such as our May 1999 Release 5.0 that
added a migration tool for the current pre-release version of Windows 2000.
Our 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 systems;
. Applying centrally determined rules to Windows NT 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; and
. Facilitating more rapid security audits through monitoring and
logging capabilities.
The major components of the OnePoint Suite are summarized below.
OnePoint Suite--Products
Products Features
- -------------------------------- --------------------------------------------
OnePoint Directory & Resource . Central definition of security policies
Administrator and rules
. Secure distribution of administrative
tasks to line of business departments to
increase service levels and reduce
systems administrator workload
Provides unified, policy-based
administration of directory
content and nondirectory
resources for increased . Monitoring and logging facilities for
security, data integrity and comprehensive security audit
reduced administrative effort.
OnePoint Domain Administrator . Domain consolidation and reconfiguration
to simplify systems administration,
reduce systems administrator workload and
reduce the amount of hardware required to
run a Windows NT-based network
Simplifies networks by reducing
the number of domains and
variety of operating systems
required. . Design, modeling, testing and
implementation of the current pre-release
version of Windows 2000 Active Directory
structures to enable flexible, efficient
responses to organizational change
. Simplified and rapid migration from
Windows NT 4.0 to the current pre-release
version of Windows 2000
. Simplified and rapid migration from
Novell Netware to Windows NT 4.0 and the
current pre-release version of Windows
2000
OnePoint Exchange Administrator . Unified administration of the Exchange
and Windows NT directories to insure data
consistency and integrity
Enables secure, distributed and
synchronized administration of . Central definition of security policies
Microsoft Exchange mailboxes and rules for mailbox administration
and distribution lists. . 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
41
<PAGE>
Products Features
- --------------------------------- -------------------------------------------
OnePoint Event Manager . Real-time system availability and
performance monitoring
Enables operations management . Comprehensive security monitoring and
and monitoring of a wide range intrusion detection
of network components by . Comprehensive monitoring of operation,
providing real-time event and performance and security for web farms
problem detection and automated . Automated problem resolution via
problem resolution. 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
OnePoint Framework Integration . Continuous monitoring of a OnePoint-
managed network through the Tivoli
management console
Enables OnePoint to integrate
with existing frameworks and
systems management environments.
OnePoint Suite--Infrastructure Components
Component Features
- --------------------------------- -------------------------------------------
ActiveKnowledge Library . Designed to eliminate the need for
service intensive implementations
Library of prebuilt rules based . Predefined event filters, performance
on widely accepted Windows NT counters, alerts and automated responses
systems management procedures for a wide range of events and problem
that enable out of the box conditions
automation of systems . Over 25 modules for most Windows NT
administration and operations components and applications such as
management tasks. Windows NT Security Logs and Microsoft
Internet Information Server
. Customizable and extensible modules
Active Administration & . High performance and scalability due to
Operations Engine multi-level client server architecture
Provides common infrastructure . Complete extensibility and customization
services for all OnePoint of OnePoint products through
modules. customization engine
. Integration with third party products
. Comprehensive support for Microsoft's
Active Directory Services Interface
OnePoint Architecture
OnePoint is based on a multi-level client server architecture as illustrated
below. OnePoint 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. We believe 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 our products and those of other
vendors.
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<PAGE>
[Graphic description of tools, system and application services and the three
layers that includes the presentation layer, the business logic layer and the
data layer]
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.
. 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.
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 ActiveDirectory, Exchange, application
event logs, Windows NT system services and the Windows Registry.
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Customers
Our products have been sold to over 600 corporations, governmental agencies
and other organizations worldwide including more than 40 of the 1999 Fortune
100 companies. The following table lists our customers that each accounted for
more than $100,000 in total revenue from July 1, 1997 to June 30, 1999, and who
have purchased maintenance in the fiscal year ended June 30, 1999. These
customers accounted for an aggregate of 58% of our license revenue in the 24
months ended June 30, 1999.
<TABLE>
<S> <C>
ALCOA Force 3 Raychem Corporation
Allied Signal GE Republic Industries,
Allstate Insurance Guardian Life Inc.
Company Insurance Rogers Cable TV
Anheuser-Busch Honeywell Schering-Plough
Bayerisch Landesbank Johnson & Johnson Corporation
Bear, Stearns & Kaiser Foundation Shell Services
Company, Inc. Health Plan International Inc.
BellSouth Cellular LM Ericsson AB SHL Computer
British Petroleum Lehman Brothers Innovation
Carnival Cruise Lines Lockheed Martin SHL System House--
The Chubb Corporation Marathon Oil Company Amoco Division
CNF Service Company Mayo Foundation Sonnenschein Nath &
Coca Cola Company MCI Systemhouse Rosenthal
Columbia Healthcare Merck & Co., Inc. Sprint Corporation
Compaq Computer Merrill Lynch, Pierce, Sutter Health
Corporation Fenner & Smith SwissCom AG
Countrywide Home Loan Microsoft Corporation Time Warner
Cummins Engine Co. Morgan Stanley & Co., Corporation
Dell Computer Inc. Trellis Network
Corporation Motorola, Inc. Services, Inc.
Department of Foreign Nationwide Building TRW Inc.
Affairs Society Turner Broadcasting
Deutsche Morgan Nike System
Grenfell Nortel Unisys Corporation
Digital Equipment Norwest Bank N.A. USAA
Corporation Novartis Argentina SA UUNet
Dow Chemical Pacific Gas & Electric Washington State
DuPont Public Service Department of
Eastman Kodak Electric & Gas Co. Corrections
Chemicals Wells Fargo & Company
Equitable Life Western Wireless
Insurance Weyerhauser Company
F. Hoffman-LaRoche
Ltd.
First Union National
Bank
</TABLE>
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, later expand their use of our products into other parts of the
organization. We believe we can sell our existing products more deeply within
our existing customer sites and sell new products as we expand our product
line. We will continue to pursue enterprise wide sales as appropriate. In
fiscal 1998 and fiscal 1999, no single customer comprised more than 10% of our
revenue.
Microsoft Relationship
Currently Microsoft is our supplier, partner and customer.
Supplier. Our products are focused on the Windows NT marketplace. We have 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. We also have 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. We believe that these relationships
enable us 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, we believe that the relationship enables us to
have early access to technologies and/or influence the development of special
requirements.
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<PAGE>
Partner. We are a member of numerous Microsoft program partnerships. We
participate as partners in the Microsoft Certified Solution Provider, ADSI
Partner and Security Partner programs. We also participate in Microsoft's
BackOffice program, whereby Microsoft tests and certifies our products as
BackOffice compatible. We have 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 server sales by
informing both Microsoft field personnel as well as potential customers about
the added value of our solutions. We also participate in numerous Microsoft
sponsored events such as COMDEX, Windows 2000 Rapid Deployment Conferences and
TechEd. At some of the tradeshows we attend, we demonstrate and/or present as a
member of the Microsoft Partner Pavilion. In addition to the above, we
participate 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 our customer in
June 1998 when Microsoft licensed our OnePoint Event Manager product. Microsoft
selected OnePoint Event 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 Event Manager product to centrally monitor and provide alert
notification for proactively managing the health status of more than 3,000
critical business systems.
Sales and Marketing
We sell our products primarily through our direct sales force and
distributors. Historically our sales efforts have focused on companies with
more than 3,000 employees. We intend to continue these efforts and to expand
our sales efforts to middle-market companies. We have relied on systems
integrators and consulting service providers for only a limited number of
sales, but we intend to explore opportunities to work with systems integrators
and consulting service providers in the future.
Direct Sales. We sell our products primarily through a direct sales force
using a team approach. We believe this approach allows us 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
our products. Our typical sales cycle has averaged three months.
Our direct sales force for North America is distributed throughout the United
States and Toronto, Canada and accounts for substantially all of our North
American revenues. During 1999, we established direct sales activities in
Germany and France. We also have sales representatives based in London,
England. We have increased the size of our direct sales organization from 29 to
56 individuals over the past year and expect to continue hiring sales personnel
over the next 12 months, primarily in North America.
Distributors and Resellers. In addition to our direct sales strategy, we have
established indirect sales channels through distributors and other resellers.
Outside North America, we have historically relied heavily on our indirect
sales channel. We have established a network of resellers and distributors in
Europe, Australia and Brazil, with the concentration of our distributors being
located in Europe.
Our 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. We actively train our international distributors in
both product and sales methodology.
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<PAGE>
Systems Integrators and Consulting Service Providers. To date, we have yet to
significantly utilize systems integrators or consulting service providers in
our selling efforts. We are currently evaluating opportunities for and plan to
expand joint sales with systems integrators and consulting service providers,
particularly with respect to the implementation of Windows 2000.
Marketing Programs. To support our growing sales organization and channel, we
have devoted significant resources in the past year to building and launching a
series of marketing campaigns. Our marketing efforts have included a number of
programs, such as seminars, industry trade shows, mailings, analyst and press
tours, advertising and public relations. We believe these marketing programs
have resulted in a number of sales leads.
Customer Service and Support
We believe that a high level of customer service and support is critical to
the successful marketing and sale of our products. We are developing a
comprehensive service and support organization to manage customer accounts and
expect to provide an increasing level of support as our products are deployed
across a range of customers. We provide support for our products and services
primarily from our Houston, Texas location. We plan to establish additional
service and support sites internationally commensurate with customer needs.
Our products are designed to be implemented quickly and effectively by our
customers and to require minimal support from us. We provide technical support
to our 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. We generally provide
our support via electronic mail, the Internet, facsimile and telephone. We make
software upgrades available to customers with maintenance agreements as the
upgrades are released.
Research and Development
We believe that strong product development capabilities are essential to our
strategy of enhancing our core technology, developing additional applications
and increasing the competitiveness of our product offerings. We have invested
significant time and resources in creating a structured process for undertaking
all product development projects. This process involves all functional groups
within our company 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, we have actively
recruited key computer engineers and software developers with expertise and
degrees in computer science. Our product development strategy emphasizes rapid
innovation and product releases. As of June 30, 1999, our research and
development staff consisted of 61 employees. To date, none of our development
staff has left our company since inception.
We are currently preparing our OnePoint product suite to support the
commercial release version of Windows 2000. Our research and development
expenses totaled $1.3 million for fiscal 1997, $3.6 million for fiscal 1998 and
$6.0 million for fiscal 1999.
Competition
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing. We face competition primarily from systems management
software vendors that provide solutions for distributed computing systems. We
have experienced and expect to continue to experience increased competition
from current and potential competitors, many of which have significantly
greater financial, technical, marketing and other resources.
46
<PAGE>
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., Micromuse, Inc., Fastlane Technologies, Inc.,
Entevo Corporation, NetIQ Corporation, System Options Ltd. and Aelita
Software Group;
. providers of security and audit products for Windows NT 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.
We believe the principal factors that will draw end-users to a systems
management software product include:
. depth of product functionality;
. ability to work natively with Windows NT;
. scalability;
. product quality and performance;
. conformance to industry standards;
. competitive price; and
. customer support.
We expect 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
Our software products rely on our internally developed intellectual property
and other proprietary rights. We rely primarily on a combination of copyright,
trademark and trade secret laws, confidentiality procedures and contractual
provisions to protect our intellectual property and other proprietary rights.
However, we believe that these measures afford only limited protection. We
license our 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. We believe that these measures afford
only limited protection. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
our products is difficult and we are unable to determine the extent to which
piracy of our software products exists. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
United States.
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<PAGE>
We are not aware that our products employ technologies that infringe any
proprietary rights of third parties. We expect that software product developers
will increasingly be subject to infringement claims as the number of products
and competitors in our 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; or
. require us to enter into royalty or licensing agreements.
These royalty or licensing agreements may not be available on terms acceptable
to us, if at all.
We use the following trademarks:
<TABLE>
<S> <C>
. Active . OnePoint . OnePoint Exchange
Administration Administrator Administrator
. Active Knowledge . OnePoint Directory . OnePoint File
. Channel One Administrator Administrator
. MCS . OnePoint Domain . OnePoint Resource
. Mission Critical Administrator Administrator
Software . OnePoint Event . OnePoint logo
. Mission Critical Administrator . SeNTry--
Software logo . OnePoint Event the Enterprise Event Manager
Manager
</TABLE>
Each trademark, trade name or service mark of any other company appearing in
this prospectus belongs to its holder.
Employees
As of June 30, 1999, we had 163 employees, 61 of whom were engaged in
research and development, 72 in sales and marketing, 11 in customer support,
and 19 in finance, administration and operations. None of our employees is
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
Facilities
We lease approximately 32,000 square feet in a single office building located
in Houston, Texas pursuant to a lease that expires in August 2003. We have
signed a five-year lease for approximately 70,000 square feet of office space
in Houston, Texas. We also lease space in Lakewood, California; Atlanta,
Georgia; Austin, Texas; McLean, Virginia; and London, England. The term of each
of these leases is 12 months or less.
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<PAGE>
MANAGEMENT
Executive Officers And Directors
The following table sets forth information regarding our executive officers
and directors of and their ages as of June 30, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael S. Bennett...... 47 Chairman of the Board, President and Chief Executive Officer
Thomas P. Bernhardt..... 46 Chief Technology Officer and Director
Stephen E. Odom......... 47 Chief Operating Officer, Chief Financial Officer, Treasurer and Secretary
Brian J. McGrath........ 60 Vice President of Sales
Richard J. Pleczko...... 41 Vice President of Marketing and Product Management
Stephen Kangas.......... 46 Vice President of Strategic Alliances
Olivier J. Thierry...... 43 Vice President of Marketing Communications
D. Von Jones............ 35 Vice President of Development
Michael Rovner.......... 29 Director of Business Development
Douglas L. Ayer(2)...... 62 Director
Michael J. Maples....... 56 Director
John J. Moores(1)....... 54 Director
Scott D. Sandell(2)..... 34 Director
John D. Thornton(1)..... 34 Director
</TABLE>
- ---------------------
(1) Member of audit committee
(2) Member of compensation committee
Michael S. Bennett has served as the President, Chief Executive Officer and a
member of the board of directors of our company 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 our company and has served as a director
since July 1996. Mr. Bernhardt was a consultant to our company from September
1996 to January 1997, when he joined us on a full time basis as our Chief
Technology Officer, which is his current role. From February 1998 to May 1998,
he also served as our 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 our Chief Financial Officer, Treasurer and
Secretary since May 1998. In January 1999, Mr. Odom was also appointed our
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 our company as a consultant in January 1997 and has
served as our 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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<PAGE>
Richard Pleczko has served as our 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 our 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 our 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 our Vice President of Marketing
Communications since February 1998. Mr. Thierry also served as our Vice
President of Product Management from February 1998 to December 1998. From
December 1993 until joining our company, 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.
Michael Rovner has served as our 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.
Douglas L. Ayer has served as a director of our company since September 1996.
Mr. Ayer has served as President and Managing Partner of International Capital
Partners, Inc., a venture capital firm, since 1989. Prior to joining
International Capital Partners, Mr. Ayer was the Chief Executive Officer of
Cametrics, Inc., a manufacturer of engineered metal components. Mr. Ayer also
serves as a member of the boards of directors of Biopool, Inc., a medical
diagnostic test kit company, and Coffee People, Inc., a coffee retailer and
franchise company. Mr. Ayer holds a B.S.E. degree in Aeronautical Engineering
from Princeton University and an M.B.A. degree from Harvard University.
Michael J. Maples has served as a director of our company 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
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<PAGE>
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.
John J. Moores has served as a director of our company since June 1997. Mr.
Moores has served as owner and Chairman of the Board of the San Diego Padres
Baseball Club, L.P. since December 1994 and since September 1991 as Chairman of
the Board of JMI Services, Inc., a private investment company. In 1980, Mr.
Moores founded BMC Software, Inc., a vendor of system software utilities, and
served as its President and Chief Executive Officer until 1986 and as its
Chairman of the Board until 1992. Mr. Moores also serves as Chairman of the
Board of Peregrine Systems, Inc., an infrastructure management software
company, and of Neon Systems, Inc., an enterprise middleware and systems
management software company, as well as numerous privately held companies. Mr.
Moores serves as a director of BindView Development Corporation, a systems
management software company. Mr. Moores is a member of the Board of Regents of
The University of California, The Carter Center of Emory University and Scripps
Research, Inc. Mr. Moores holds a B.S. degree in Economics and a J.D. degree
from University of Houston.
Scott D. Sandell has served as a director of our company 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.
John D. Thornton has served as a director of our company since June 1997. Mr.
Thornton is a general partner of Austin Ventures, a venture capital firm, where
he has been employed in various capacities since 1991. Prior to joining Austin
Ventures, Mr. Thornton was a consultant with McKinsey & Co., an international
consulting firm. Mr. Thornton also serves on the board of directors of Vignette
Corporation, an Internet relationship management software company, and is also
a member of the boards of directors of several privately held companies. Mr.
Thornton holds a B.A. degree in Economics from Trinity University and an M.B.A.
degree from the Stanford Graduate School of Business.
Prior to the closing of this offering, our board of directors will be 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,
Sandell and Thornton will be in the class of directors whose term expires at
the 1999 annual meeting of stockholders. Mr. Moores will be in the class of
directors whose term expires at the 2000 annual meeting of the stockholders.
Messrs. Ayer, Bernhardt and Maples will be in the class of directors whose term
expires at the 2001 annual meeting of stockholders.
Our board of directors currently consists of seven members. At each annual
meeting of stockholders, the successors to each class of directors will be
elected to serve for three year terms from the time of election and
qualification until the next annual meeting at which such director's class
stands for election. Our 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.
Mr. Sandell is Mr. Ayer's son-in-law. There are no other family relationships
among any of our directors, officers or key employees.
Board Committees
We have established an audit committee and a compensation committee. The
audit committee reviews our internal accounting procedures and consults with
and reviews the services provided by our independent
51
<PAGE>
accountants. The compensation committee reviews and recommends to the board of
directors the compensation and benefits of all of our officers and establishes
and reviews general policies relating to compensation and benefits of our other
employees.
Compensation Committee Interlocks and Insider Participation
Our board of directors established its compensation committee in December
1997. Prior to establishing the compensation committee, our board of directors
as a whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between any member of our compensation
committee and any member of any other company's board of directors or
compensation committee.
Director Compensation
Directors do not currently receive any cash compensation from our company for
their service as members of our board of directors, although they are
reimbursed for travel expenses in connection with attendance at board and
committee meetings. Under our 1997 Stock Plan, nonemployee directors are
eligible to receive stock option grants at the discretion of the board of
directors, and, after this offering is completed, all nonemployee directors
will receive stock options pursuant to the automatic option grant program in
effect under the 1999 Director Option Plan. See "--Incentive Stock Plans" for
more about the automatic grant program.
Executive Compensation
Summary Compensation Table. The following table sets forth the compensation
earned for services rendered to us in all capacities by our Chief Executive
Officer and our four next most highly compensated executive officers who earned
more than $100,000 -- collectively, the "Named Executive Officers" -- for the
fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------------ ------------
Securities
Underlying All Other
Name and Principal Positions Salary($) Bonus($) Options(#) Compensation
- ---------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Michael S. Bennett
President and Chief Executive Of-
ficer............................ $200,016 $134,167 250,000 $1,696
Thomas P. Bernhardt
Chief Technology Officer......... 172,916 30,000 160,000 1,696
Stephen E. Odom
Chief Operating Officer, Chief
Financial Officer, Treasurer and
Secretary........................ 200,016 28,000 100,000 1,696
Brian McGrath
Vice President of Sales.......... 200,016 718,801 -- 7,371
Olivier J. Thierry
Vice President of Marketing
Communications................... 175,008 46,667 -- 80,999
</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 $79,303
for moving expenses paid in connection with his relocation agreement.
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Option Grants in Fiscal Year Ended June 30, 1999. The following table sets
forth certain information with respect to stock options granted to each of the
Named Executive Officers during the fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Annual Rates of Stock
Securities Percent of Total Appreciation for
Underlying Options Granted Option Term
Name and Principal Options to Employees Exercise Price Expiration ---------------------
Position Granted(#) During Period ($/share) Date 5% 10%
- ------------------ ---------- ---------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Bennett
President and Chief
Executive Officer..... 250,000 11.7 15.00 06/21/09 2,358,355 5,976,634
Thomas P. Bernhardt
Chief Technology
Officer............... 160,000 7.5 2.75 08/27/03 3,469,347 5,784,982
Stephen E. Odom
Chief Operating
Officer, Chief
Financial Officer,
Treasurer and
Secretary............. 100,000 4.7 15.00 06/21/09 943,342 2,390,614
Brian McGrath
Vice President of
Sales................ -- -- -- -- -- --
Olivier J. Thierry
Vice President of
Marketing
Communications........ -- -- -- -- -- --
</TABLE>
The potential realizable value assumes an initial public offering price of
$15.00 per share over the 10 year term of the options based on assumed rates of
stock appreciation of 5% and 10%, compounding annually less the total option
exercise price.
In fiscal 1999, we granted options to purchase an aggregate of 2,131,510
shares to employees and consultants.
The exercise price of the option grant to Thomas P. Bernhardt was equal to
110% of the fair market value of the common stock on the date of grant as
determined by the board of directors.
Options under the stock option plan generally vest over four years with 25%
of the shares subject to the option vesting on the first anniversary of the
grant date, and the remaining option shares vesting ratably monthly thereafter.
Mr. Bennett's option vests as to 1/36th of the shares per month as to 125,000
shares over the first three years and as to 1/12th of the remaining shares per
month in months 37 through 48. Mr. Odom's option vests as to 1/48th of the
shares per month for 48 months.
Option Exercises in Last Fiscal Year. The following table sets forth
information with respect to the Named Executive Officers concerning option
exercises for the fiscal year ended June 30, 1999 and exercisable and
unexercisable options held as of June 30, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares Value June 30, 1999 (#) June 30, 1999 ($)
Name and Principal Acquired on Realized ------------------------- -------------------------
Positions Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ------------ --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Bennett
President and Chief
Executive Officer..... 200,000 2,400,000 136,378 850,270 1,977,481 8,703,915
Thomas P. Bernhardt
Chief Technology
Officer............... -- -- 16,875 173,125 244,688 2,150,313
Stephen E. Odom
Chief Operating
Officer, Chief
Financial Officer,
Treasurer and
Secretary............. 50,184 602,208 8,364 242,188 121,278 2,061,726
Brian McGrath
Vice President of
Sales................ 70,623 415,314 15,002 94,375 217,529 1,368,438
Olivier J. Thierry
Vice President of
Marketing
Communications........ 69,999 839,988 10,000 160,001 145,000 2,320,015
</TABLE>
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<PAGE>
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 our 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. Our 1997 stock option plan was adopted by our board
of directors in March 1997 and approved by our 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 our stock option plan,
together with an annual increase in the number of shares reserved thereunder
beginning on the first day of our fiscal year--commencing July 1, 2000--in an
amount equal to the lesser of:
. 750,000 shares;
. five percent of our outstanding shares of common stock on the last day of
the prior fiscal year; or
. an amount determined by our board of directors.
The 1997 stock option plan provides for grants of incentive stock options to
our employees including officers and employee directors and nonstatutory stock
options to our consultants including nonemployee directors. The purposes of our
stock option plan are to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to our
employees and consultants and to promote the success of our business. At the
request of the board of directors, the compensation committee administers our
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 our 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 our 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, we 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 our board of
directors terminates it sooner.
As of June 30, 1999, we had issued 866,161 shares of common stock upon the
exercise of options granted under our stock option plan, we had outstanding
options to purchase 4,534,380 shares of common stock at a weighted average
exercise price of $4.77 per share and 3,394,459 shares remain available for
future option grants under our stock option plan.
1999 Employee Stock Purchase Plan. Our 1999 employee stock purchase plan was
adopted by our board of directors in May 1999 and will become effective upon
the closing of this offering. We have reserved a total of 600,000 shares of
common stock for issuance under the 1999 employee stock purchase plan, together
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<PAGE>
with an annual increase in the number of shares reserved thereunder beginning
on the first day of our fiscal year commencing July 1, 2000 in an amount equal
to the lesser of:
. 500,000 shares;
. four percent of our outstanding common stock on the last day of the
prior fiscal year; or
. an amount determined by our board of directors.
Our employee stock purchase plan is administered by the board of directors
and is intended to qualify under Section 423 of the Internal Revenue Code. Our
employees, including our officers and employee directors but excluding our 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. Our 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, where compensation is
defined on Form W-2, or $25,000.
Our 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 our employee
stock purchase plan will begin on the effective date of this offering, 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 our 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 our common
stock under our employee stock purchase plan will be 85 percent of the lesser
of the fair market value per share 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 our company.
Our employee stock purchase plan will terminate in May 2009, unless our board
of directors terminates it sooner.
1999 Director Option Plan. Our 1999 director option plan will become
effective upon the closing of this offering. We have 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 our fiscal year commencing July 1,
2000 equal to the lesser of:
. 250,000 shares;
. two percent of the outstanding shares of our 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 our 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
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<PAGE>
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 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 shares per month thereafter.
401(k) Plan. In September 1996, we adopted a Retirement Savings and
Investment Plan, the 401(k) Plan, covering our 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 us and the investment earnings thereon are not taxable to the
employees until withdrawn. If our 401(k) Plan qualifies under Section 401(k) of
the Internal Revenue Code, our contributions will be deductible by us when
made. Our 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 us, but does not
require us, to make additional matching contributions on behalf of all
participants. To date, we have not made any contributions to the 401(k) Plan.
Employment Agreements and Change in Control Arrangements
We have entered into the following employment, noncompete and change in
control arrangements and agreements with our current officers. For a
description of arrangements with our former officers, directors and substantial
stockholders, see "Certain Transactions" on page 60.
Michael S. Bennett, our Chairman of the Board, Chief Executive Officer and
President, entered into an offer letter with us 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, we are 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 our company
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, our Chief Operating Officer, Chief Financial Officer,
Treasurer and Secretary, entered into an offer letter with us 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, we are 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 our company or our 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, our Chief Technology Officer, entered into an employment
agreement with us 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 us. Mr. Bernhardt has agreed that for a period
of one year after his separation from our company, regardless of the reason, he
will not:
. engage in direct competition with us;
. conduct a business of the type or character engaged in by us at the
time of his separation; or
. develop, market, sell and/or distribute products or services directly
competitive with ours. Mr. Bernhardt has also agreed to not employ any
of our employees or induce or attempt to
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<PAGE>
influence any of our employees to voluntarily terminate his or her
employment with us other than those employees not directly involved in
the development, marketing, sales and/or distribution of our products
or services during Mr. Bernhardt's employment.
Brian J. McGrath, our Vice President of Sales, entered into an employment
agreement with us 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 us, 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. We have agreed with Mr.
McGrath that for a six month period after his separation from our company, he
will not compete with us and will not solicit a list of customers set forth in
the January 1999 agreement as amended by us from time to time. Mr. McGrath
agreed that for a period one year not to employ any of our employees or induce
or attempt to influence any of our employees to voluntarily terminate his or
her employment with our company. In the event Mr. McGrath is terminated
without cause, his warrant to purchase shares of our 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, our Vice President--Marketing Communications, has
entered into an employment agreement with us dated February 23, 1998. This
agreement provides that Mr. Thierry is entitled to severance equal to six
months salary upon his termination by us, other than for cause. Mr. Thierry
has agreed that for a period of one year after his separation from our
company, regardless of the reason, he will not (1) engage in direct
competition with us or (2) develop, market, sell and/or distribute products or
services directly competitive with ours. Mr. Thierry has also agreed for a
period of two years not to employ any of our employees or induce or attempt to
influence any of our employees to voluntarily terminate his or her employment
with us.
Under the February 23, 1998 agreement, we also agreed to grant Mr. Thierry a
relocation loan of $80,000. The noninterest bearing relocation loan is due and
payable in February 2002. We 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 our employee. In addition, we 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. We 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
us;
. we are 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, we paid $79,303 to Mr. Thierry for
loan forgiveness and tax reimbursement.
Richard Pleczko, our Vice President of Marketing and Product Management, has
entered into an employment agreement with us 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 our company, if his quarterly bonus from PLATINUM technologies inc. is
not paid to him due to Mr. Pleczko's employment with our company. 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
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<PAGE>
employment with our company. 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 us. Mr. Pleczko also agreed for
a period of two years not to employ any of our employees or induce or influence
any of our employees to voluntarily terminate his or her employment with us.
Stephen Kangas, our Vice President of Strategic Alliances, entered into an
employment agreement with us 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 our common stock in the event that Mr. Kangas is
terminated without cause as a result of a merger or acquisition of our company
prior to the first anniversary of his employment with our company. 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 us.
Mr. Kangas has also agreed for a period of two years not to employ any of our
employees or induce or influence any of our employees to voluntarily terminate
his or her employment with us.
Leslie D. Willard, our Vice President--Finance, entered into an employment
agreement with us 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, our company 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, our Director of Business Development, entered into an
employment agreement with us dated March 24, 1999. This agreement provides that
Mr. Rovner is entitled to (1) acceleration of 25% of 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
our company 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 us. Mr. Rovner has also agreed for a period of two years not to
employ any of our employees or induce or influence any of our employees to
voluntarily terminate his or her employment with us.
Limitations On Directors' Liability And Indemnification
Our certificate of incorporation limits the liability of our 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 our company or our 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 our 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.
Our certificate of incorporation together with our bylaws provide that we
must indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf
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<PAGE>
of any officer, director, employee or other agent for any liability arising out
of his or her actions in that capacity, regardless of whether our bylaws would
permit indemnification.
Prior to the effective time of this offering we expect to enter into
agreements to indemnify our directors and executive officers. These agreements
provide for indemnification of our 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. We expect the actions
and proceedings for which a claim for indemnification could be made to include
any action by or in the right of our company, arising out of such person's
services as a director or executive officer of our company, one of our
subsidiaries or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as our directors and
executive officers.
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<PAGE>
CERTAIN TRANSACTIONS
All future transactions, other than compensation, stock options pursuant to
the plans and other benefits available to employees generally, including any
loans from us to our officers, directors, principal stockholders or affiliates,
will be approved by a majority of our board of directors, including a majority
of our independent and disinterested members of our board of directors. If
required by law, the future transactions will be approved by a majority of the
disinterested stockholders. These future transactions will be on terms no less
favorable to us than we could obtain from unaffiliated third parties.
Stock Issuances and Redemptions to our Directors, Officers and Principal
Stockholders
In September 1996, we issued 2,431,350 shares of common stock to six
individuals for aggregate proceeds of $3,000. Of such shares, we issued
1,045,480 shares to Thomas P. Bernhardt and 1,045,480 shares to Louis R.
Woodhill. We acquired our OnePoint Administrator software product from Mission
Critical 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. We also
issued 121,568 shares of Series A Preferred Stock to E. Alexander Goldstein for
aggregate proceeds of $25,000. In September 1996, we also issued 2,650,000
shares of Series B preferred stock for aggregate proceeds of $2,650,000. We
repurchased 950,000 shares of the Series A preferred stock issued to Mission
Critical Software I, Inc. in July 1997 for an aggregate of $2,850,000 in
connection with our Series C preferred stock financing. The purpose was to
reallocate some shares between our classes of capital stock as agreed by our
existing stockholders and new investors. In July 1997, we issued 3,450,000
shares of Series C preferred stock for aggregate proceeds of $10,350,000. Upon
closing of this offering, all shares of outstanding preferred stock will be
automatically converted into shares of common stock. Listed below are those
persons who participated in the financings described above who are our
executive officers, directors or stockholders who beneficially own five percent
or more of our 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
Entities............... -- -- -- 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
our company, 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 our company, 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 our company, is
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<PAGE>
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 and
dispositive power over 1,792,815 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 our Former Founders, Directors and
Officers
Our company 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 Mission Critical Software. By mutual agreement,
Louis Woodhill, Paul Koffend and James Woodhill each left our company during
fiscal 1998 and fiscal 1999 because each of the former founders wanted to
participate in a start-up stage company and our company had matured to a larger
enterprise requiring management with different skill sets and experience. The
following analysis sets forth the terms of our 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, we entered
into an employment agreement with Louis R. Woodhill, then our 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
our company, regardless of the reason, he would not:
. engage in direct competition with us;
. conduct a business of the type or character engaged in by us at the time
Mr. Woodhill's employment ceased; or
. develop, market, sell and/or distribute products or services directly
competitive with ours.
This noncompetition period will expire in November 1999.
Mr. Woodhill also agreed that for a period of two years not to employ any of
our employees or induce or attempt to influence any of our employees to
voluntarily terminate his or her employment with us other than those employees
not directly involved in the development, marketing, sales and/or distribution
of our products or services during Mr. Woodhill's employment with our company.
Mr. Woodhill agreed that for a two year period after his separation from our
company 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 us in connection with the
products or services that were developed or under active development,
consideration for development, marketed, sold and/or distributed by us.
On May 21, 1998, we 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 our company 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 our 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.
61
<PAGE>
We also agreed to and granted Mr. Woodhill an option to purchase 15,000
shares of our 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 the
remaining shares vest as to 1/48th per month thereafter.
Mr. Woodhill is also bound by noncompetition, nonsolicitation and nonhiring
provisions similar to those set forth in the September 1996 agreement. These
noncompetition provisions terminate in November 1999 and the nonsolicitation
and nonhiring provisions terminate in November 2000.
Employment Agreement with James R. Woodhill. On September 4, 1996, we entered
into an employment agreement with James R. Woodhill, then our 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.
Mr. Woodhill agreed that for a period of one year after his separation from
our company, regardless of the reason, he would not:
. engage in direct competition with us;
. conduct a business of the type or character engaged in by us at the time
Mr. Woodhill's employment ceased; or
. develop, market, sell and/or distribute products or services directly
competitive with ours.
Mr. Woodhill also agreed for a period of two years not to employ any of our
employees or induce or attempt to influence any of our employees to voluntarily
terminate his or her employment with us other than those employees not directly
involved in the development, marketing, sales and/or distribution of our
products or services during Mr. Woodhill's employment. Mr. Woodhill agreed that
for a two year period after his separation from our company, 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 us in connection with the products or services that
were developed or under active development, consideration for development,
marketed, sold and/or distributed by us.
Mr. Woodhill left our employ on May 15, 1998, and we paid him severance and
related payments of $60,000. Mr. Woodhill's noncompetition, nonsolicitation and
nonhiring provisions will terminate in May 2000.
Employment Agreement with Paul F. Koffend, Jr. On September 4, 1996, we
entered into an employment agreement with Paul F. Koffend, Jr., then our Chief
Financial Officer. Mr. Koffend agreed that for a period of one year after his
separation from our company, regardless of the reason, he would not:
. engage in direct competition with us;
. conduct a business of the type or character engaged in by us at the time
Mr. Koffend's employment ceased; or
. develop, market, sell and/or distribute products or services directly
competitive with ours.
Mr. Koffend also agreed for a period of two years not to employ any of our
employees or induce or attempt to influence any of our employees to voluntarily
terminate his or her employment with us other than those employees not directly
involved in the development, marketing, sales and/or distribution of our
products or services during Mr. Koffend's employment. Mr. Koffend agreed that
for a two year period after his separation from our company, 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 us in connection with the products or services that
were developed or under active development, consideration for development,
marketed, sold and/or distributed by us.
62
<PAGE>
Mr. Koffend left our employ effective June 30, 1998, and we 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 our company. Each of Messrs.
Koffend, Woodhill and Goldstein entered into a consulting agreement with us
that provides for the former director to provide continued services to us as
requested from time to time by our 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 agreements, each former director's
stock options will continue to vest on the schedule as originally set forth in
their respective option agreements but will receive no other compensation for
these services.
63
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our Common Stock as of June 30, 1999, and as adjusted
to reflect the sale of common stock offered hereby by:
. each stockholder known by us to own beneficially more than five percent
of our common stock,
. each of the executive officers listed in our Summary Compensation Table
on page 52,
. each director of our company,
. all directors and executive officers as a group and
. all other selling stockholders.
<TABLE>
<CAPTION>
Shares of Common
Stock Beneficially Owned Number Shares Beneficially
Prior to Offering of Shares Owned After Offering
----------------------------- Being --------------------
Name of Beneficial Owner Number Percentage Offered Number Percentage
- ------------------------ -------------- ---------------------- --------- ----------
<S> <C> <C> <C> <C> <C>
New Enterprise
Associates Entities.... 2,024,108 19.7 -- 2,024,108 15.3
2490 Sand Hill Rd.
Menlo Park, California
94025
Austin Ventures
Entities............... 1,314,786 12.8 -- 1,314,786 10.0
114 W. 7th St., Suite
1300,
Austin, Texas 78701
JMI Equity Fund III,
L.P.................... 710,906 6.9 -- 710,906 5.4
12680 High Bluff Drive
San Diego, California
92130
International Capital
Partners, Inc.......... 135,851 1.3 -- 135,851 1.0
300 First Stamford
Place
Stamford, Connecticut
06902
Zesiger Capital Group
LLC.................... 1,792,815 17.5 -- 1,792,815 13.6
320 Park Avenue
New York, New York
10022
Mission Critical
Software I, Inc........ 1,003,085 9.8 253,085 750,000 5.7
Louis R. Woodhill....... 568,294 5.5 250,000 318,294 2.4
E. Alexander Goldstein.. 179,362 1.7 50,000 129,362 *
Serverware Group plc.... 333,333 3.2 143,333 190,000 1.4
Denton House
40-44 Wicklow Street
London WCIX 9HL
England
Michael S. Bennett...... 397,637 5.8 -- 397,637 3.0
Thomas P. Bernhardt..... 1,103,605 10.7 101,186 1,002,419 7.6
Stephen E. Odom......... 91,083 * -- 91,083 *
Oliver J. Thierry....... 90,000 * -- 90,000 *
Brian J. McGrath........ 266,125 2.6 -- 266,125 2.0
Scott D. Sandell........ 2,024,108 19.7 -- 2,024,108 15.3
John D. Thornton........ 1,314,786 12.8 -- 1,314,786 10.0
Douglas L. Ayer......... 135,851 1.3 -- 135,851 1.0
Michael J. Maples....... -- -- -- -- --
John J. Moores.......... 710,906 6.9 -- 710,906 5.4
All executive officers
and directors as a
group ................. 6,221,691 58.0 101,186 6,120,505 44.6
Other selling
stockholders who
individually own less
than 1%
(5 persons)
Paul M. Koffend....... 93,116 * 72,941 20,175 *
Therese Woodhill...... 90,000 * 50,000 40,000 *
Goran Rynger.......... 52,057 * 10,000 42,057 *
Mary von Schuyler
Raiser............... 49,455 * 49,455 -- *
Marc Geller........... 20,823 * 20,000 823 *
</TABLE>
- ---------------------
* Less than 1% of the outstanding shares of common stock.
64
<PAGE>
Except as otherwise noted above, the address of each person listed on the
table is 720 North Post Oak Rd. Suite 505, Houston, Texas 77024-3835.
As of June 30, 1999, 10,276,161 shares of our common stock was outstanding,
assuming that each share of preferred stock were converted on a one-for-one
basis to common stock. The columns regarding the number of shares being offered
and beneficial ownership after the offering assume that the underwriters' over-
allotment option is not exercised. If the over-allotment option is exercised in
full, we will sell an aggregate of 3,312,500 shares of new common stock.
We have 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, we
have 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 June 30, 1999, but we have not included those shares for purposes of
computing percentage ownership of any other person. We have 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.
The beneficial ownership of the persons set forth in the table above includes
the following options or warrants to purchase our common stock that may be
exercised by such person within 60 days of June 30, 1999:
Securities Exercisable Within 60 Days of June 30, 1999
<TABLE>
<CAPTION>
Options Warrants
------- --------
<S> <C> <C>
Michael S. Bennett....................................... 178,632 --
Thomas P. Bernhardt...................................... 58,125 --
Stephen E. Odom.......................................... 20,895 --
Olivier J. Thierry....................................... 20,001 --
Brian J. McGrath......................................... 22,502 100,000
Scott D. Sandell......................................... 22,656 --
John D. Thornton......................................... 19,531 --
Douglas L. Ayer.......................................... 22,656 --
Michael J. Maples........................................ -- --
John J. Moores........................................... 19,531 --
All directors and officers............................... 442,029 100,000
Other selling stockholders............................... 20,625 --
</TABLE>
The beneficial ownership reported for New Enterprise Associates entities and
Mr. Sandell includes 1,913,455 shares held by New Enterprise Associates VII
Ltd. Partnership, 82,691 shares held by NEA President's Fund, L.P. 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 22,656
shares subject to options exercisable within 60 days from June 30, 1999 held by
Mr. Sandell.
The beneficial ownership reported for Austin Ventures entities and Mr.
Thornton includes 1,233,654 shares held by Austin Venture V, L.P. and 61,691
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
65
<PAGE>
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. Wesner and Jeff Garvey. These numbers and percentages also
include 19,531 shares subject to options exercisable within 60 days from June
30, 1999 held by Mr. Thornton.
Mr. Moores disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest. The general partners of JMI Equity Fund III,
L.P. are Charles E. Noell, Harry S. Gruner, Norris Van der Berg, Paul Barber
and Robert Sywolski. These numbers and percentages also include 19,531 shares
subject to options exercisable within 60 days of June 30, 1999 held by
Mr. Moores.
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 22,656 shares subject to
options exercisable within 60 days from June 30, 1999 held by Mr. Ayers.
The beneficial ownership reported for Zesiger Capital includes 1,837,242
shares over which Zesiger has voting and dispositive power, but the shares are
held in the names of the individuals for whom Zesiger acts as an investment
advisor.
James R. Woodhill is the sole stockholder of Mission Critical Software I,
Inc. and is deemed to beneficially own 897,082 shares held by Mission Critical
Software I, Inc.
The beneficial ownership of Mr. Goldstein includes 10,937 shares issuable
upon exercise of an option held by Mr. Goldstein within 60 days of June 30,
1999.
The beneficial ownership of Serverware plc includes a warrant to purchase
333,333 shares of our common stock that may be exercised in full at the
discretion of its holder. See "Description of Capital Stock--Warrants" on page
67 for more information about this warrant.
66
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 50,000,000 shares of common stock, $0.001 par
value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value.
Common Stock
As of June 30, 1999, we had 10,276,161 shares of common stock outstanding
that were held of record by approximately 130 stockholders.
The holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably any dividends that may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event of our liquidation, dissolution or winding up, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to be issued upon
the closing of this offering will be fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, our board of directors will have the
authority, without action by our stockholders, to designate and issue preferred
stock in one or more series. The board of directors may also designate the
rights, preferences and privileges of each series of preferred stock; any or
all of which may be greater than the rights of the common stock. It is not
possible to state the actual effect of the issuance of any shares of preferred
stock upon the rights of holders of the common stock until the board of
directors determines the specific rights of the holders of the preferred stock.
However, these effects might include:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; and
. delaying or preventing a change in control of our company without further
action by the stockholders.
We have no present plans to issue any shares of preferred stock.
Warrants
As of June 30, 1999, we had outstanding warrants to purchase:
. 333,333 shares of common stock issued to Serverware Group plc at an
exercise price of $1.50 per share that will expire on June 26, 2007 and
. 100,000 shares of common stock issued to Brian McGrath, our Vice
President of Sales, at an exercise price of $1.00 per share that will
expire on August 6, 2000.
Holders of Registration Rights Can Require Us to Register Shares of Our Stock
for Resale
The holders of 7,056,254 shares of common stock or their permitted
transferees are entitled to certain rights with respect to registration of such
shares under the Securities Act of 1933, as amended. These rights
67
<PAGE>
are provided under the terms of our agreement with the holders of registrable
securities. Under these registration rights, holders of at least a majority of
the then outstanding registrable securities may require on two occasions that
we register their shares for public resale. We are obligated to register these
shares if the holders of a majority of the eligible shares request registration
and only if the shares to be registered have an anticipated public offering
price of at least $1,000,000. In addition, holders of registrable securities
may require on three separate occasions that we register their shares for
public resale on Form S-3 or similar short-form registration, if we are
eligible to use Form S-3 or similar short-form registration, and the value of
the securities to be registered is at least $1,000,000. If we elect to register
any of our shares of common stock for any public offering, the holders of
registrable securities are entitled to include shares of common stock in the
registration. However we may reduce the number of shares proposed to be
registered in view of market conditions. We will pay all expenses in connection
with any registration, other than underwriting discounts and commissions.
Anti-Takeover Effects of Some Provisions of Delaware Law
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the acquisition of our company by means of a tender offer, a
proxy contest or otherwise more difficult or to make the removal of incumbent
officers and directors more difficult. We expect these provisions to discourage
certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of our company to first
negotiate with our board of directors. We believe that the benefits provided by
our ability to negotiate with the proponent of an unfriendly or unsolicited
proposal outweigh the disadvantages of discouraging such proposals. We believe
the negotiation of an unfriendly or unsolicited proposal could result in an
improvement of its terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless the business combination or the transaction
in which the person became an interested stockholder is approved in the manner
set forth in the statute. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns or within three years prior
to the determination of interested stockholder status, did own 15% or more of a
corporation's voting stock. We expect the existence of this provision to have
an anti-takeover effect with respect to transactions our board of directors
does not approve in advance. We also anticipate that Section 203 may also
discourage attempts that might result in a premium over the market price for
the shares of common stock held by stockholders.
Anti-Takeover Effects of Certain Provisions of Our Charter Documents
Our certificate of incorporation provides for our board to be divided into
three classes serving staggered terms. Approximately one-third of the board
will be elected each year. The provision for a classified board could prevent a
party who acquires control of a majority of the outstanding voting stock from
obtaining control of the board of directors until the second annual
stockholders meeting following the date the acquiror obtains the controlling
stock interest. The classified board provision could discourage a potential
acquiror from making a tender offer or otherwise attempting to obtain control
of our company and could increase the likelihood that incumbent directors will
retain their positions. Our certificate of incorporation provides that
directors may be removed:
. with cause by the affirmative vote of the holders of at least a majority
of the outstanding shares of voting stock; or
. without cause by the affirmative vote of the holders of at least 66 2/3%
of the then-outstanding shares of the voting stock.
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<PAGE>
Our bylaws establish an advance notice procedure for stockholder proposals to
be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to the board of directors. At an annual
meeting stockholders may only consider proposals or nominations specified in
the notice of meeting or brought before the meeting by or at the direction of
the board of directors. Stockholders may also consider a proposal or nomination
by a person who was a stockholder of record on the record date for the meeting,
who is entitled to vote at the meeting and who has given to our Secretary
timely written notice, in proper form, of his or her intention to bring that
business before the meeting. The bylaws do not give the board of directors the
power to approve or disapprove stockholder nominations of candidates or
proposals regarding other business to be conducted at a special or annual
meeting of the stockholders. However, our bylaws may have the effect of
precluding the conduct of certain business at a meeting if the proper
procedures are not followed. These provisions may also discourage or defer a
potential acquiror from conducting a solicitation of proxies to elect the
acquiror's own slate of directors or otherwise attempting to obtain control of
our company.
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. Our bylaws authorize a majority of
our board of directors, the chairman of the board or the chief executive
officer to call a special meeting of stockholders. Because our stockholders do
not have the right to call a special meeting, a stockholder could not force
stockholder consideration of a proposal over the opposition of the board of
directors by calling a special meeting of stockholders prior to such time as a
majority of the board of directors believed or the chief executive officer
believed the matter should be considered or until the next annual meeting
provided that the requestor met the notice requirements. The restriction on the
ability of stockholders to call a special meeting means that a proposal to
replace the board also could be delayed until the next annual meeting.
Delaware law provides that stockholders may execute an action by written
consent in lieu of a stockholder meeting. However, Delaware law also allows us
to eliminate stockholder actions by written consent. Elimination of written
consents of stockholders may lengthen the amount of time required to take
stockholder actions since actions by written consent are not subject to the
minimum notice requirement of a stockholder's meeting. However, we believe that
the elimination of stockholders' written consents may deter hostile takeover
attempts. Without the availability of stockholder's actions by written consent,
a holder controlling a majority of our capital stock would not be able to amend
our bylaws or remove directors without holding a stockholders meeting. The
holder would have to obtain the consent of a majority of the board of
directors, the chairman of the board or the chief executive officer to call a
stockholders' meeting and satisfy the notice periods determined by the board of
directors. Our certificate of incorporation provides for the elimination of
actions by written consent of stockholders upon the closing of this offering.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is BankBoston, N.A.
BankBoston, N.A. is located at 150 Royall Street, Canton, Massachusetts 02021,
and its telephone number is (508) 575-3120.
69
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of such sales occurring could
adversely affect prevailing market prices for our common stock or could impair
our ability to raise capital through an offering of equity securities.
After this offering, we will have outstanding 13,169,494 shares of common
stock, based upon shares outstanding as of June 30, 1999, assuming no exercise
of the underwriters' over-allotment option and no exercise of outstanding
options or warrants after June 30, 1999. All of the shares sold in this
offering will be freely tradable without restriction under the Securities Act
except for any shares purchased by our "affiliates" as that term is defined in
Rule 144 under the Securities Act. The remaining 9,419,494 shares of common
stock held by existing stockholders are "restricted" shares as that term is
defined in Rule 144 under the Securities Act. We issued and sold the
restricted shares in private transactions in reliance upon exemptions from
registration under the Securities Act. Restricted shares may be sold in the
public market only if they are registered under the Securities Act or if they
qualify for an exemption from registration, such as Rule 144 or 701 under the
Securities Act, which are summarized below.
Our officers, directors, employees the selling stockholders and certain
other stockholders, who collectively hold an aggregate of 9,419,494 restricted
shares, and the underwriters entered into lock-up agreements in connection
with this offering. These lock-up agreements provide that, with certain
limited exceptions, our officers, directors, employees, selling stockholders
and such other stockholders have agreed not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of any of our shares for a
period of 180 days after the effective date of this offering. Hambrecht &
Quist LLC may, in its sole discretion and at any time without prior notice,
release all or any portion of the shares subject to these lock-up agreements.
We have also entered into an agreement with Hambrecht & Quist LLC that we will
not offer, sell or otherwise dispose of our common stock until 180 days after
the effective date of this offering.
Taking into account the lock-up agreements, the number of shares that will
be available for sale in the public market under the provisions of Rules 144,
144(k) and 701 will be as follows:
<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ---------
<S> <C>
At various times between June 30, 1999 and January 31, 2000... 0
At various times thereafter upon the expiration of applicable
holding periods.............................................. 9,419,494
</TABLE>
Following the expiration of the lock-up period, shares issued upon exercise
of options granted by us prior to the completion of this offering will also be
available for sale in the public market pursuant to Rule 701 under the
Securities Act unless those shares are held by one of our affiliates,
directors or officers.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. In general, under Rule 144 as currently in effect, a
person, or persons whose shares are aggregated, who has beneficially owned
restricted shares for at least one year, including the holding period of any
prior owner except an affiliate, would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been an
affiliate of our company at any time during the three months preceding a sale,
and who has
70
<PAGE>
beneficially owned the shares proposed to be sold for at least two years
including the holding period of any prior owner except an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
We intend to file a registration statement on Form S-8 under the Securities
Act covering shares of common stock reserved for issuance under the stock plans
and subject to outstanding options under our 1997 stock option plan. See
"Management--Stock Plans." We expect this registration statement to be filed
and become effective as soon as practicable after the effective date of this
offering. Shares of common stock issued upon exercise of options under the Form
S-8 will be available for sale in the public market, subject to Rule 144 volume
limitations applicable to affiliates and subject to the contractual
restrictions described above. At June 30, 1999, options to purchase 4,534,380
shares of common stock were outstanding of which options approximately 560,796
shares were then vested and exercisable. Beginning 180 days after the effective
date of this offering, approximately 1,221,608 shares issuable upon the
exercise of vested stock options will become eligible for sale in the public
market, if such options are exercised.
Following this offering, the holders of an aggregate of 7,056,254 shares of
outstanding common stock will have the right to require us to register their
shares for sale upon meeting certain requirements. See "Description of Capital
Stock--Registration Rights" for additional information regarding registration
rights.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, Hambrecht & Quist LLC, BancBoston Robertson Stephens
Inc., SoundView Technology Group, Inc. and Charles Schwab & Co., Inc. have
severally agreed to purchase from us the following respective number of shares
of Mission Critical Software common stock:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Hambrecht & Quist LLC........................................... 1,350,000
BancBoston Robertson Stephens Inc............................... 810,000
SoundView Technology Group, Inc................................. 540,000
Charles Schwab & Co., Inc....................................... 150,000
Banc of America Securities LLC.................................. 100,000
CIBC World Markets Corp......................................... 100,000
Deutsche Banc Alex. Brown....................................... 100,000
SG Cowen Securities Corporation................................. 100,000
Volpe Brown Whelan & Company LLC................................ 100,000
Dain Rauscher Wessels........................................... 50,000
First Southwest Company......................................... 50,000
Harris Webb & Garrison, Inc..................................... 50,000
Jeffries & Company Inc.......................................... 50,000
Legg Mason Wood Walker Inc...................................... 50,000
Raymond James & Associates Inc.................................. 50,000
Sanders Morris Mundy Inc........................................ 50,000
Tucker Anthony Cleary Gull...................................... 50,000
---------
Total........................................................... 3,750,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to the conditions precedent set forth therein, including the
absence of any material adverse change in our business and the receipt of
certificates, opinions and letters from us, our counsel and independent
auditors. The nature of the underwriters' obligation requires that they
purchase all shares of common stock offered in this offering if they purchase
any of the shares in this offering.
The underwriters propose to offer the shares of common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $0.62 per share. The underwriters may allow and such dealers may reallow a
concession not in excess of $0.10 per share to certain other dealers. After the
public offering of the shares, the offering price and other selling terms may
be changed by the underwriters.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of the effective date of this offering to purchase up to
562,500 additional shares of common stock at the public offering price, less
the underwriting discount, set forth on the cover page of this prospectus. To
the extent that the underwriters exercise this option, each underwriter will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of common stock to be purchased by it shown in the
above table bears to the total number of shares of common stock offered in this
offering. We will be obligated to sell shares to the underwriters to the extent
the option is exercised. The underwriters may exercise the option only to cover
over-allotments made in connection with the sale of common stock offered in
this prospectus.
72
<PAGE>
The following table summarizes the compensation that we and the selling
stockholders will pay to the underwriters in connection with this offering:
<TABLE>
<CAPTION>
Total
---------------------
Without With
Per Over- Over-
Share allotment allotment
----- ---------- ----------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by
Mission Critical Software........................ 1.12 $3,080,000 $3,710,000
Underwriting discounts and commissions paid by
selling stockholders............................. 1.12 1,120,000 1,120,000
</TABLE>
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities connected to this offering, including liabilities under the
Securities Act, and to contribute to payments the underwriters may be required
to make in respect thereof.
A majority of our stockholders, including all executive officers and
directors and the selling stockholders, who own in the aggregate 9,419,494
shares of common stock have agreed that they will not, without the prior
written consent of Hambrecht & Quist LLC, offer, sell, or otherwise dispose of
any shares of common stock, options or warrants to acquire shares of common
stock or securities exchangeable for or convertible into shares of common stock
owned by them until the date 180 days after the offering is effective. We have
agreed that we will not, without the prior written consent of Hambrecht & Quist
LLC, offer, sell or otherwise dispose of any shares of common stock, options or
warrants to acquire shares of common stock or securities exchangeable for or
convertible into shares of common stock until the date 180 days following the
date after this offering is effective, except that we may issue shares upon the
exercise of options granted prior to the date hereof, and may grant additional
options under our stock option plans, provided that without the prior written
consent of Hambrecht & Quist LLC the additional options shall not be
exercisable during such period.
Prior to this offering, there has been no public market for our shares. The
initial public offering price has been negotiated among our company and the
underwriters. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be our historical performance, estimates of our business
potential and earnings, prospects, an assessment of management and the
consideration of the above factors in relation to market valuation of companies
in related businesses.
We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol MCSW.
An electronic prospectus is available on the web site maintained by Charles
Schwab & Co., Inc. The underwriters have agreed to allocate a limited number of
shares to Charles Schwab & Co., Inc. for sale to its brokerage account holders.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
73
<PAGE>
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over the counter market or otherwise.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $875,000.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California and Austin, Texas. Legal matters related solely to this offering
will be passed upon for the underwriters by Vinson & Elkins L.L.P., Houston,
Texas.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements 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. Our
financial statements are included in this prospectus in reliance on their
report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Mission Critical Software has filed with the Securities and Exchange
Commission a registration statement on Form S-1 under the Securities Act with
respect to the shares of common stock offered hereby. This prospectus does not
contain all the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to our
company and our common stock, reference is made to the registration statement
and to the exhibits and schedules filed therewith. A copy of the registration
statement may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed
fees. The Commission maintains a web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
74
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity (Deficit)................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<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' equity (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 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, 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 generally
accepted accounting principles.
/s/ Ernst & Young LLP
Austin, Texas
July 7, 1999
F-2
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
June 30, Stockholders'
---------------- Equity at
1998 1999 June 30, 1999
------- ------- -------------
(unaudited)
ASSETS
<S> <C> <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' EQUITY (DEFICIT)
<S> <C> <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, $0.001 par value, authorized and
outstanding--868,650 shares; no shares
outstanding on a pro forma basis at June 30,
1999 ($.205647 per share liquidation
preference)................................... 179 179 $ --
Redeemable convertible preferred stock, Series
B, $0.001 par value, authorized and
outstanding--2,650,000 shares; no shares
outstanding on a pro forma basis at June 30,
1999 ($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; no
shares outstanding on a pro forma basis at
June 30, 1999 ($3 per share liquidation
preference)................................... 10,350 10,350 --
Stockholders' equity (deficit):
Common stock, $0.001 par value, authorized--
50,000,000 shares, outstanding 2,484,971 and
3,307,511 shares, respectively; 10,276,161
shares outstanding on a pro forma basis at
June 30, 1999................................. 2 3 10
Additional paid-in capital..................... 26 3,290 16,462
Deferred stock compensation.................... -- (2,315) (2,315)
Accumulated deficit............................ (8,544) (8,202) (8,202)
------- ------- -------
Total stockholders' equity (deficit)......... (8,516) (7,224) $ 5,955
------- ------- =======
Total liabilities and stockholders' equity
(deficit)................................... $10,958 $17,786
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<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-4
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (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 technol-
ogy.................. -- -- -- -- (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 compen-
sation 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)
========== === ======= ======= ======= =======
Pro forma stockholders'
equity at June 30, 1999
(unaudited)............ 10,276,161 $10 $16,462 $(2,315) $(8,202) $ 5,955
========== === ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<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-6
<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-7
<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.
Pro-Forma Stockholder's Equity (Unaudited)
If the offering contemplated by this prospectus is closed, all of the
redeemable convertible preferred stock outstanding will automatically be
converted into common stock. Pro forma stockholders' equity (unaudited) at June
30, 1999, as adjusted for the assumed conversion of redeemable convertible
preferred stock based on the shares of redeemable convertible preferred stock
outstanding at June 30, 1999, is disclosed on the balance sheet.
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-8
<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-9
<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-10
<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, 2001.
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-11
<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-12
<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-13
<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-14
<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
F-15
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
nonstatutory options. In the event of a 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-16
<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-17
<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
F-18
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
the market and ahead of competitors. The in-process research and development
effort, at the time of purchase, 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.
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.
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
F-19
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
$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. Proposed Stock Offering
On May 21, 1999, the board of directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its Common Stock and shares held by
existing stockholders to the public (the "Offering"). If the Offering is
consummated under the terms presently anticipated, all of the currently
outstanding redeemable convertible preferred stock will convert to 6,968,650
shares of Common Stock. Pro forma stockholders' equity at June 30, 1999
(unaudited) as adjusted for the conversion of the redeemable convertible
preferred stock is set forth in the accompanying Balance Sheets and Statements
of Stockholders' Equity (Deficit).
F-20
<PAGE>
[Graphic showing components of One Point suite including -- Systems
Administration, Security, Operations Management; Products--Directory and
Resource Administrator, Domain Administrator, Exchange Administrator, Event
Manager, Framework Integration; Infrastructure--Active Knowledge Library,
Active Administration & Operations Engine]
<PAGE>
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3,750,000 Shares
[Mission Critical Software Logo]
Common Stock
------------
PROSPECTUS
------------
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
SOUNDVIEW TECHNOLOGY GROUP
Charles Schwab & Co., Inc.
------------
August 4, 1999
------------
You should rely only on information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. We are offering to sell, and seeking offers to buy, shares
of common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions as to this offering and
the distribution of this prospectus applicable to that jurisdiction.
Until August 29, 1999, all dealers that buy, sell or trade in our common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This requirement is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
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