<PAGE>
As filed with the Securities and Exchange Commission on October 25, 1999
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MISSION CRITICAL SOFTWARE, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 7372 76-0509513
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
Mission Critical Software, Inc.
13939 Northwest Freeway
Houston, Texas 77040
(713) 548-1700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Stephen E. Odom
Chief Financial Officer
Mission Critical Software, Inc.
13939 Northwest Freeway
Houston, Texas 77040
(713) 548-1700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Robert P. Latta John S. Watson
Paul R. Tobias Brian M. Moss
Christopher J. Ozburn Vinson & Elkins L.L.P.
Julia Reigel First City Tower
Matthew J. Esber Suite 2300
Wilson Sonsini Goodrich & Rosati 1001 Fannin Street
Professional Corporation Houston, Texas 77022-6760
8911 Capital of Texas Highway North (713) 758-2222
Suite 3350
Austin, Texas 78759
(512) 338-5400
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement
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If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 145 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Maximum
Title of Each Class of Aggregate Proposed Maximum
Securities to be Amount to be Price Per Aggregate Amount of
Registered Registered(1) Share(2) Offering Price Registration Fee
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<S> <C> <C> <C> <C>
Common stock, $0.001
par value............. 4,600,000 $44.6875 $205,562,500 $57,147
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</TABLE>
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(1) Includes 600,000 shares that the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) promulgated under the Securities
Act of 1933, as amended based on the average of the high and low closing
price of the Registrant's common stock on October 19, 1999 as reported on
the Nasdaq National Market.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell these securities, and it is +
+not soliciting an offer to buy these securities in any jurisdiction where the +
+offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 25, 1999
PROSPECTUS
4,000,000 Shares
[LOGO OF MISSION CRITICAL SOFTWARE APPEARS HERE]
Common Stock
This is a public offering of common stock by Mission Critical Software, Inc.
Of the 4,000,000 shares of common stock being sold in this offering, 1,500,000
shares are being sold by Mission Critical Software and 2,500,000 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.
-----------
Our common stock is traded on the Nasdaq National Market under the symbol
MCSW. On October 22, 1999, the last reported sale price of our common stock on
the Nasdaq National Market was $64.00.
-----------
<TABLE>
<CAPTION>
Per
Share Total
------ -----------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Mission Critical Software, before expenses...... $ $
Proceeds to selling stockholders, before expenses........... $ $
</TABLE>
Mission Critical Software has granted the underwriters an option for a period
of 30 days to purchase up to 600,000 additional shares of common stock.
-----------
Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 7.
-----------
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
ROBERTSON STEPHENS
SOUNDVIEW TECHNOLOGY GROUP
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
October , 1999.
<PAGE>
[GRAPHICAL DEPICTION OF THE EXTENDED ENTERPRISE.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 20
Use of Proceeds.......................................................... 20
Price Range of Common Stock.............................................. 20
Dividend Policy.......................................................... 21
Capitalization........................................................... 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 38
Management............................................................... 51
Certain Transactions..................................................... 62
Principal and Selling Stockholders....................................... 66
Description of Capital Stock............................................. 69
Shares Eligible for Future Sale.......................................... 72
Underwriting............................................................. 74
Legal Matters............................................................ 76
Experts.................................................................. 76
Where You Can Find Additional Information................................ 76
Index to Financial Statements............................................ F-1
</TABLE>
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2
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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
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 Operations
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.
3
<PAGE>
As of September 30, 1999, our products had been installed by over 700
customers, including more than 50 of the 1999 Fortune 100 companies and some of
the largest Internet datacenters in the world. 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 Dell Computer, Dow Chemical, Ericsson, GTE, Johnson &
Johnson, Lockheed Martin, Microsoft, Nortel, USAA and Wells Fargo.
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 and the first quarter of fiscal 2000.
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 13939 Northwest Freeway, Houston, Texas 77040,
and our telephone number is (713) 548-1700.
4
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The Offering
<TABLE>
<S> <C>
Common Stock offered by Mission Critical
Software................................... 1,500,000 shares
Common Stock offered by the selling
stockholders............................... 2,500,000 shares
Common Stock to be outstanding after this
offering................................... 15,507,567 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 14,007,567 shares outstanding as of September 30, 1999. This number excludes
4,520,363 shares of common stock issuable upon exercise of stock options and
190,000 shares of common stock issuable upon exercise of warrants outstanding
as of September 30, 1999 with weighted average exercise prices of $8.27 and
$1.50 respectively. This number also excludes 3,232,903 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.
5
<PAGE>
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 in the fiscal year
ended June 30, 1999 and $290,000 for the three months ended September
30, 1999;
. abandoned lease costs of $1.0 million for the fiscal year ended June 30,
1999 and a recovery of $295,000 of those costs in the three months ended
September 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 1,500,000 shares of common stock in this
offering at an assumed public offering price of $64.00 per share and the
deduction of the estimated underwriting discount and estimated offering
expenses. Basic and diluted net income (loss) per share applicable to common
stockholders for each period presented reflects the excess of consideration
paid to redeem preferred stock and dividends in arrears on our company's
preferred stock.
<TABLE>
<CAPTION>
Three Months
July 19, 1996 Year Ended Ended
(inception) June 30, September 30,
to June 30, ---------------- --------------
1997 1998 1999 1998 1999
------------- ------- ------- ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue....................... $ 4,267 $14,376 $24,827 $4,665 $9,020
Operating income (loss)....... (3,500) (2,379) 43 33 786
Net income (loss)............. (3,323) (2,316) 342 76 1,018
Basic net income (loss) per
share........................ $ (1.44) $ (2.47) $ (0.25) $(0.07) $ 0.10
Diluted net income (loss) per
share........................ (1.44) (2.47) (0.25) (0.07) $ 0.06
Pro forma basic net income per share (unaudited).... $ 0.04
=======
Pro forma diluted net income per share (unaudited).. $ 0.03
=======
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
-------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................. $62,187 $152,327
Working capital........................................... 52,242 142,382
Total assets.............................................. 69,700 159,840
Long-term debt, less current maturities................... -- --
Total stockholders' equity................................ 55,641 145,781
</TABLE>
6
<PAGE>
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 only
achieved marginal profitability in the fiscal year ended June 30, 1999 and the
three months ended September 30, 1999. 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
7
<PAGE>
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, in September 1999 we moved to a new 70,000
square feet office in Houston, Texas for which we have a five year lease. 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 fiscal years
ended June 30, 1998 and 1999 and the three months ended September 30, 1999,
sales of OnePoint Administrator products accounted for approximately 88%, 82%
and 74% 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. 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 Operations Manager product in
October 1999. 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 Operations 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 and the three months ended
September 30, 1999, additional sales to our existing customers represented
approximately 50% and 65% 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 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.
8
<PAGE>
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 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 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
9
<PAGE>
Windows 2000 offerings, and we also 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 Operations 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 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.
10
<PAGE>
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.
11
<PAGE>
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
12
<PAGE>
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.
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 Operations Manager or OnePoint File Administrator products will
be successful or that our customers will widely accept and adopt these
products.
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
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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.
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, at
June 30, 1999 we had a total of 163 employees and at September 30, 1999 we had
a total of 193 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 and the three months ended September
30, 1999, customers outside North America accounted for 22% and 18% 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;
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<PAGE>
. 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 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 have completed our initial assessment of 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 have completed our initial assessment of our Year 2000 readiness. We have
concluded our investigation and performed 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
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<PAGE>
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.
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.
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<PAGE>
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.
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 increase the number of shares of our common
stock available to be resold in the public market. 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 26.6% 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
Our board of directors has 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.
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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.
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. We are 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 72 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 our initial public offering in August 1999, 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 for our
initial public offering to the individuals who received the electronic mail
prior to sending the electronic mail. Although we later
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<PAGE>
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 in the initial public offering 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 terminated the directed shares program, and took steps to prevent
any potential participants in the proposed directed share program from
purchasing any shares in the initial public 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.
We may be subject to damages or be required to indemnify our officers and
directors if current litigation by one of our stockholders is decided against
our company, our officers or directors or if we enter into a settlement.
We received correspondence from Commerce Funding Corporation, one of our
stockholders, alleging that we failed to give it proper notice of its right of
first refusal with respect to the proposed resale of 250,000 shares of our
stock by two of our stockholders. We filed a petition seeking a declaratory
judgement that Mission Critical has no liability with respect to Commerce
Funding Corporation's claims on July 1, 1999. On August 2, 1999, Mission
Critical, our Chief Executive Officer and Chief Financial Officer were named as
defendants in a complaint filed by Commerce Funding Corporation. The parties to
these actions are now conducting discovery. We believe that Commerce Funding
Corporation's claims are without merit and intend to vigorously defend the
complaint. If Commerce Funding Corporation were to be awarded a judgement in
its complaint or we were unable to obtain the relief we have requested, we
would be required to indemnify our officers with respect to legal fees, pay our
legal expenses and possibly those of Commerce Funding Corporation. In addition,
even if Commerce Funding Corporation's claims are denied, this litigation could
distract our officers and directors from the day to day management of our
business and cause us to incur substantial legal expenses.
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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 1,500,000 shares of
common stock that we are selling in this offering will be approximately $90.1
million ($126.4 million if the underwriters exercise their over-allotment
option in full) based on an assumed public offering price of $64.00 per share
and after deducting the estimated underwriting discount and estimated offering
expenses payable by us. We will not receive any proceeds from the sale of the
2,500,000 shares being sold by the selling stockholders.
The principal purpose of this offering is to increase the number of shares of
our common stock available to be resold in the public market. 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 or investments in products,
technologies and businesses. However, we currently have no present commitments
or agreements with respect to any acquisitions or investments. Pending these
uses, we intend to invest the net proceeds in interest-bearing, investment-
grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
Symbol MCSW since August 5, 1999. The following table sets forth for the
periods indicated the high and low sale prices of our common stock, as reported
by the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Fiscal year ending June 30, 2000
First Quarter (from August 4, 1999)..................... $47.125 $16.00
Second Quarter (through October 22, 1999)............... $65.50 $39.625
</TABLE>
On October 22, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $64.00. As of September 30, 1999, there were
14,007,567 shares of our common stock outstanding held by approximately 154
holders of record.
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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.
CAPITALIZATION
The following table shows our capitalization as of September 30, 1999. The as
adjusted information reflects the sale and issuance of 1,500,000 shares of our
common stock by us in this offering at an assumed public offering price of
$64.00 per share and the deduction of the estimated underwriting discount and
estimated offering expenses. 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 24 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 4,520,363
shares were subject to outstanding options as of September 30, 1999 at a
weighted average exercise price of $8.27 and 190,000 shares of common stock
issuable upon exercise of outstanding warrants at a weighted average exercise
price of $1.50. In addition, the outstanding share information also excludes:
. 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>
September 30, 1999
--------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Long-term debt, less current portion...................... $ -- $ --
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding--
actual and as adjusted................................. -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized, 14,007,567 issued and outstanding--actual;
50,000,000 shares authorized, 15,507,567 shares issued
and outstanding--as adjusted........................... 14 16
Additional paid-in capital.............................. 64,401 154,539
Deferred stock compensation............................. (1,590) (1,590)
Accumulated deficit..................................... (7,184) (7,184)
------- --------
Total stockholders' equity............................ 55,641 145,781
------- --------
Total capitalization................................ $55,641 $145,781
======= ========
</TABLE>
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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. The statement
of operations data for the three months ended September 30, 1998 and 1999 and
the balance sheet data set forth below as of September 30, 1999 are derived
from our unaudited financial statements included elsewhere in this prospectus.
We prepared the unaudited financial statements on the same basis as the audited
financial statements, and in our opinion, these unaudited statements contain
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of our financial position. These historical results are not
necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Sept.
July 19, 1996 June 30, 30,
(inception) to ---------------- ---------------
June 30, 1997 1998 1999 1998 1999
-------------- ------- ------- ------- ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
License.................. $ 4,087 $12,767 $21,067 $ 4,052 $7,442
Maintenance.............. 180 1,609 3,760 613 1,578
------- ------- ------- ------- ------
Total revenue.......... 4,267 14,376 24,827 4,665 9,020
Cost of revenue:
Cost of license.......... 206 392 380 96 90
Cost of maintenance...... 142 933 914 226 256
------- ------- ------- ------- ------
Total cost of revenue.. 348 1,325 1,294 322 346
------- ------- ------- ------- ------
Gross margin........... 3,919 13,051 23,533 4,343 8,674
Operating expenses:
Sales and marketing...... 3,554 9,590 13,480 2,479 4,774
Research and develop-
ment.................... 1,317 3,612 5,986 1,223 2,161
General and administra-
tive.................... 973 2,228 2,458 576 958
Amortization of deferred
stock compensation...... -- -- 532 32 290
Abandoned lease costs
(recovery).............. -- -- 1,034 -- (295)
Acquired in-process re-
search and development.. 1,575 -- -- -- --
------- ------- ------- ------- ------
Total operating ex-
penses................ 7,419 15,430 23,490 4,310 7,888
------- ------- ------- ------- ------
Operating income (loss).... (3,500) (2,379) 43 33 786
Other income, net.......... 2 63 299 43 412
------- ------- ------- ------- ------
Income (loss) before income
taxes..................... (3,498) (2,316) 342 76 1,198
Income tax expense
(benefit)................. (175) -- -- -- 180
------- ------- ------- ------- ------
Net income (loss).......... (3,323) (2,316) 342 76 1,018
Excess of consideration
paid to redeem preferred
stock and
dividends in arrears...... (181) (3,714) (1,059) (264) --
------- ------- ------- ------- ------
Net income (loss) applica-
ble to common stockhold-
ers....................... $(3,504) $(6,030) $ (717) $ (188) $1,018
======= ======= ======= ======= ======
Basic net income (loss) per
share applicable to common
stockholders.............. $ (1.44) $ (2.47) $ (0.25) $ (0.07) $ 0.10
======= ======= ======= ======= ======
Diluted net income (loss)
per share applicable to
common stockholders....... $ (1.44) $ (2.47) $ (0.25) $ (0.07) $ 0.06
======= ======= ======= ======= ======
Pro forma basic net income
per share (unaudited)..... $ 0.04
=======
Pro forma diluted net in-
come per share (unau-
dited).................... $ 0.03
=======
</TABLE>
<TABLE>
<CAPTION>
June 30,
-------------------------
Sept. 30,
1997 1998 1999 1999
------- ------- ------- ---------
Balance Sheet Data: (in thousands)
<S> <C> <C> <C> <C>
Cash and cash equiva-
lents.................. $ 299 $ 4,575 $11,031 $62,187
Working capital (defi-
cit)................... (2,523) 3,241 4,176 52,242
Total assets............ 4,595 10,958 17,786 69,700
Long-term debt, less
current maturities..... 33 352 81 --
Redeemable convertible
preferred stock........ 3,189 13,179 13,179 --
Total stockholders' eq-
uity (deficit)......... (3,520) (8,516) (7,224) 55,641
</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"), the fiscal year ended June
30, 1999 ("fiscal 1999") and the three months ended September 30, 1999, sales
of OnePoint Administrator products accounted for approximately 100%, 88%, 82%
and 74% 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 modules start at
$9 per managed user account, and our per server license fees begin at $495 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. 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, $24.8 million in fiscal 1999
and $9.0 million in the three months ended September 30, 1999. Historically,
our revenue has been attributable primarily to sales in North America. In
fiscal 1997, fiscal 1998, fiscal 1999 and the three months ended September 30,
1999, license revenue attributable to sales outside of North America accounted
for approximately 16%, 17%, 22% and 18% 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, fiscal 1999 and the three months ended September
30, 1999, maintenance revenue comprised 4%, 11%, 15% and 18% 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 and the three months ended September 30, 1999, approximately
50% and 65% 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 $515,000 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 193 employees at September 30, 1999, a substantial increase from 50,
92 and 163 at June 30, 1997, 1998 and 1999, 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
--------------------------------------------
Three Months
Year Ended Ended
July 19, 1996 June 30, September 30,
(inception) to ------------- --------------
June 30, 1997 1998 1999 1998 1999
-------------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
License........................ 95.8% 88.8% 84.9% 86.9% 82.5%
Maintenance.................... 4.2 11.2 15.1 13.1 17.5
----- ----- ----- ------ ------
Total revenue.............. 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of license................ 4.8 2.7 1.5 2.1 1.0
Cost of maintenance............ 3.3 6.5 3.7 4.8 2.8
----- ----- ----- ------ ------
Total cost of revenue...... 8.1 9.2 5.2 6.9 3.8
----- ----- ----- ------ ------
Gross margin............... 91.9 90.8 94.8 93.1 96.2
Operating expenses:
Sales and marketing............ 83.3 66.7 54.3 53.1 52.9
Research and development....... 30.9 25.1 24.1 26.2 24.0
General and administrative..... 22.8 15.5 9.9 12.3 10.6
Amortization of deferred stock
compensation.................. -- -- 2.1 0.7 3.2
Abandoned lease costs
(recovery).................... -- -- 4.2 -- (3.2)
Acquired in-process research
and development............... 36.9 -- -- -- --
----- ----- ----- ------ ------
Total operating expenses... 173.9 107.3 94.6 92.4 87.5
----- ----- ----- ------ ------
Operating income (loss).......... (82.0) (16.5) 0.2 0.7 8.7
Other income, net................ -- 0.4 1.2 0.9 4.6
----- ----- ----- ------ ------
Income (loss) before income
taxes........................... (82.0) (16.1) 1.4 1.6 13.3
Income tax expense (benefit)..... (4.1) -- -- -- 2.0
----- ----- ----- ------ ------
Net income (loss)................ (77.9)% (16.1)% 1.4% 1.6% 11.3%
===== ===== ===== ====== ======
</TABLE>
25
<PAGE>
Comparison of Three Months Ended September 30, 1998 and 1999
Revenue
Our revenue was $4.7 million and $9.0 million for the three months ended
September 30, 1998 and 1999, respectively, representing an increase of $4.3
million or 93% from the three months ended September 30, 1998 to the three
months ended September 30, 1999. This increase was 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.
License. License revenue was $4.1 million and $7.4 million for the three
months ended September 30, 1998 and 1999, respectively. License revenue
represented 86.9% and 82.5% of total revenue for the three months ended
September 30, 1998 and 1999, respectively. License revenue increased 84% from
the three months ended September 30, 1998 to the three months ended September
30, 1999. The increase in license revenue in absolute dollars was primarily
attributable to increased unit sales of our products. The decrease of license
revenue as a percentage of total revenue was primarily due to an increase in
first year maintenance sold with the product licenses and, to a lesser extent,
the number of renewal maintenance agreements purchased.
Maintenance. Maintenance revenue was $613,000 and $1.6 million for the three
months ended September 30, 1998 and 1999, respectively. Maintenance revenue
represented 13.1% and 17.5% of total revenue for the three months ended
September 30, 1998 and 1999, respectively. Maintenance revenue increased 157%
from the three months ended September 30, 1998 to the three months ended
September 30, 1999. This increase resulted primarily from the growth in
software license revenue, as new software licenses are generally sold with one
year of maintenance, and, to a lesser extent, renewals of maintenance
agreements by existing customers.
Cost of Revenue
License. License costs consist primarily of the amortization of acquired
technology and to a lesser extent the expenses incurred to manufacture, package
and ship our products. License costs were $96,000 and $90,000 in the three
months ended September 30, 1998 and 1999, respectively. License costs
represented 2.4% and 1.2% of license revenue in the three months ended
September 30, 1998 and 1999, respectively. Acquired technology is being
expensed over periods ranging from three to five years. The 6.3% decrease in
absolute dollars was attributable to a reduction in amortization cost as
acquired technology became fully amortized. The decrease as a percentage of
revenue was primarily a result of increased growth of revenue in relation to
amortization expense for acquired technology, which remained basically
unchanged from period to period. We expect license costs to decrease in the
future due to the reduction in amortization expense as acquired technology
becomes fully amortized.
Maintenance. Maintenance costs include salary expense and other related costs
for our technical support. Maintenance costs were $226,000 and $256,000 in the
three months ended September 30, 1998 and 1999, respectively. Maintenance costs
represented 36.9% and 16.2% of maintenance revenue in the three months ended
September 30, 1998 and 1999, respectively. The 13.3% increase in absolute
dollars was attributable to the increase of our average headcount from 8 to 13
in our technical support department. The decrease in maintenance costs as a
percentage of maintenance revenue was primarily attributable to increased
growth of revenue in relation to maintenance costs and increased utilization of
our technical support staff. We expect maintenance costs to increase in the
future as we continue to expand our customer base.
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 $2.5 million and $4.8 million in the three months ended September
30, 1998 and 1999, respectively. Sales and marketing expenses represented
53.1%, and 52.9% of total revenue in
26
<PAGE>
the three months ended September 30, 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 43 as of
September 30, 1998 to 98 at September 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. Discretionary marketing expense
for the three months ended September 30, 1999 increased 27% from the three
months ended September 30, 1998 as compared to our revenue increases of 93% 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 $1.2 million and $2.2 million in the three months
ended September 30, 1998 and 1999, respectively. Research and development
expenses represented 26.2% and 24.0% of total revenue in the three months ended
September 30, 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 28 as of September 30, 1998, to 61 at
September 30, 1999. To a lesser extent, the absolute dollar level of research
and development expense increased as a result of additional infrastructure,
such as office space, computer equipment and development software to support
these employees. The infrastructure cost increased by 89% from the three months
ended September 30, 1998 to the three months ended September 30, 1999 compared
to an overall increase in research and development expense of 77% 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 $576,000, and $958,000 in the three months ended September 30, 1998 and
1999, respectively. General and administrative expenses represented 12.3% and
10.6% of total revenue in the three months ended September 30, 1998 and 1999,
respectively. The absolute dollar increase was primarily related to
approximately $200,000 in consulting cost associated with vesting of deferred
stock compensation and costs associated with expansion and relocation 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 16 as of September 30, 1998 to 21 at
September 30, 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
$32,000 and $290,000 of deferred stock compensation in the three months ended
September 30, 1998 and 1999, respectively. We expect to amortize the remaining
$1.6 million of deferred stock compensation through fiscal 2003.
Abandoned Lease Costs (Recovery). During fiscal 1999, we took a charge of
$1,034,000 for the abandonment of an office facility leased through January
2003 and write-off of its related infrastructure. This charge was primarily for
the future lease costs and required exit fees. At the time of the charge, it
was determined that potential recovery or avoidance of these costs would be
remote. On September 15, 1999, we were released from a portion of the lease and
consequently reduced the amount accrued by $295,000 for amounts no longer due.
27
<PAGE>
Other Income, Net
Other income, net is generated primarily from the interest earned on cash and
cash equivalents. Other income, net was $43,000 and $412,000 in the three
months ended September 30, 1998 and 1999, respectively. The growth in other
income, net was primarily the result of increased cash and cash equivalent
balances from the proceeds of our initial public offering.
Income Taxes
We did not record a provision for income taxes in the three months ended
September 30, 1998, because we had generated net operating loss carryforwards
of approximately $3.5 million since our inception. A full valuation allowance
was recorded due to the uncertainty of our ability to recognize the future
benefits of such losses. 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.
The provision for income tax expense for the three months ended September 30,
1999 was $180,000, or 15% of pre-tax income. The difference in the effective
rate versus the statutory U.S. tax rate is primarily due to the impact of tax
benefits associated with the anticipated utilization of net operating loss
carryforwards during fiscal 2000.
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 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.
28
<PAGE>
Maintenance. 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.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses were $3.6 million,
$9.6 million and $13.5 million in fiscal 1997, 1998 and 1999, respectively.
Sales and marketing expenses represented 83.3%, 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 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.
Research and Development Expenses. Research and development expenses were
$1.3 million, $3.6 million and $6.0 million in fiscal 1997, 1998 and 1999,
respectively. Research and development expenses represented 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.
General and Administrative Expenses. General and administrative expenses were
$973,000, $2.2 million and $2.5 million in fiscal 1997, 1998 and 1999,
respectively. General and administrative expenses represented 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 atJune 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.
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.
Other Income, Net
Other income, net was $2,000, $63,000 and $299,000 in fiscal 1997, 1998 and
1999, respectively. The growth in other income, net was primarily the result of
increased cash and cash equivalent balances.
29
<PAGE>
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 1998 or 1999,
because we have generated net operating loss carryforwards of approximately
$2.4 million from inception through June 30, 1999. 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 Operations
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 Operations Manager, an entirely new and
internally developed product. We estimated that we would derive revenue from
OnePoint Operations Manager through 2004. We deducted estimated operating
expenses and income taxes from estimated
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<PAGE>
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 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 nine
quarters in the period ending September 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, Sept. 30,
1997 1997 1998 1998 1998 1998 1999 1999 1999
--------- -------- -------- -------- --------- -------- -------- -------- ---------
(in thousands)
<S> <C> <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 $7,442
Maintenance............ 235 339 501 534 613 760 1,087 1,300 1,578
------- ------ ------ ------ ------ ------ ------ ------ ------
Total revenue.......... 2,275 3,134 3,825 5,142 4,665 5,504 6,732 7,926 9,020
Cost of revenue:
Cost of license........ 98 98 98 98 96 96 99 89 90
Cost of maintenance.... 155 280 245 253 226 215 240 233 256
------- ------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenue.. 253 378 343 351 322 311 339 322 346
------- ------ ------ ------ ------ ------ ------ ------ ------
Gross margin........... 2,022 2,756 3,482 4,791 4,343 5,193 6,393 7,604 8,674
Operating expenses:
Sales and marketing.... 2,015 2,282 2,294 2,999 2,479 2,912 3,561 4,528 4,774
Research and
development........... 822 932 716 1,142 1,223 1,418 1,633 1,712 2,161
General and
administrative........ 598 504 493 633 576 621 664 597 958
Amortization of
deferred stock
compensation.......... -- -- -- -- 32 46 158 296 290
Abandoned lease costs
(recovery)............ -- -- -- -- -- -- 1,034 -- (295)
------- ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 3,435 3,718 3,503 4,774 4,310 4,997 7,050 7,133 7,888
------- ------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)................. (1,413) (962) (21) 17 33 196 (657) 471 786
Other income, net....... 17 38 7 1 43 80 83 93 412
------- ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... (1,396) (924) (14) 18 76 276 (574) 564 1,198
Income tax expense...... -- -- -- -- -- -- -- -- 180
------- ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $(1,396) $ (924) $ (14) $ 18 $ 76 $ 276 $ (574) $ 564 $1,018
======= ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
31
<PAGE>
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.
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,
$257,000 and $290,000 in the quarters ended September 30, 1998, December 31,
1998, March 31, 1999, June 30, 1999 and September 30, 1999, respectively.
We recorded deferred stock compensation of $475,000 and related amortization
expense of $39,000 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. In the three months ended
September 30, 1999, the Board of Directors vested these options in full. We
consequently recognized the remaining $436,000 of deferred stock compensation
during the quarter. Such compensation was allocated to sales and marketing,
research and development, and general and administrative expenses.
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.
32
<PAGE>
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 September 30, 1999 and the proceeds of approximately $61.1 million
from the sale of common stock, preferred stock and warrants. At September 30,
1999, we had cash and cash equivalents of $62.2 million. As of September 30,
1999, we had an accumulated deficit of $7.2 million and working capital of
$58.4 million, net of a short-term component of deferred revenue of $6.1
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
and $4.8 million in the three months ended September 30, 1999. Net cash used by
operating activities in fiscal 1997 and fiscal 1998 was due primarily to net
operating losses and increases in accounts receivable. Our operations generated
net cash in fiscal 1999 and the three months ended September 30, 1999 primarily
due to increased revenue, improved accounts receivable collection efforts and
increased liabilities. The increase in liabilities during fiscal 1999 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. The increase in liabilities for the three
months ended September 30, 1999 was primarily due to increases in deferred
maintenance and accounts payable. Deferred maintenance increases are due to
higher revenues which typically include initial maintenance and increased
amounts of renewal maintenance due to larger amount of cumulative licenses
revenue. Accounts payable increases related to costs associated with our new
office facility and our initial public offering which had not been paid as of
September 30, 1999.
Our investing activities used net cash of $1.2 million, $492,000, $1.4
million and $1.5 million in fiscal 1997, 1998, 1999 and the three months ended
September 30, 1999, respectively. Our investing activities consisted primarily
of net purchases of property and equipment.
Our financing activities provided cash of $3.1 million, $5.2 million and
$47.9 million in fiscal 1997, 1998 and the three months ended September 30,
1999, respectively. In fiscal 1997 and fiscal 1998, financing activities
consisted primarily of sales of redeemable convertible preferred stock
partially offset in fiscal 1998 by the repurchase of 950,000 shares of Series A
preferred stock for $2,850,000 and net repayments on debt facilities. In the
three months ended September 30, 1999, cash provided from finance activities
consisted of net proceeds from our initial public offering. In fiscal 1999, we
used $124,000 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. 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 and it 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 September 30, 1999, we had
no borrowings outstanding under the credit facility, and the entire facility
was available, subject to a pre-established funding formula, through February
5, 2000. We were in compliance with all covenants as of September 30, 1999, but
we cannot assure you that we will be able to continue to comply with our loan
covenants in the future.
33
<PAGE>
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 ensure 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.
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 and the three months ended September
30, 1999, our license revenue for sales
34
<PAGE>
outside North America was 22% and 18% of our total license revenue,
respectively. 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 September 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.
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 completed 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 completed efforts to
upgrade our software when date fields that contain only two digits were
discovered. Based on our 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 new applications to identify areas of deficiency and to develop action
plans to correct and upgrade our software code.
We have finalized our assessment of 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;
35
<PAGE>
. 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;
. 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 pursued 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 have:
. identified third party product reliance and documented their use in
our Year 2000 compliance tests;
. completed a review of the third-party product for potential date
related issues; and
. validated and tested technologically-compliant Year 2000 solutions.
The table below provides a summary of the status and timing of our internal
readiness activities:
<TABLE>
<CAPTION>
Impacted Systems Status
---------------- ------
<S> <C>
Hardware and software systems used to develop our Completed
products
Hardware and software systems used to manage our Completed
business
Communication networks used to develop our products Completed
Non-information technology systems and services Completed
</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
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<PAGE>
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 updated all systems for which we could not prove
Year 2000 readiness with systems which are reported to be Year 2000 compliant
which appear to pass our Year 2000 tests.
Costs to Address Year 2000 Issues. To date, the costs for conducting our
assessment have not been material, and with total costs incurred in connection
with our Year 2000 project being 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 some of 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
. 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 are developing contingency plans for handling Year 2000
problems that are not detected and corrected prior to their occurrence. Now
that we have completed Year 2000 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.
37
<PAGE>
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 September 30, 1999, our products had been installed by over 700
customers, including more than 50 of the 1999 Fortune 100 companies and some of
the largest Internet datacenters in the world. 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 Dell Computer, Dow Chemical, Ericsson, GTE, Johnson &
Johnson, Lockheed Martin, Microsoft, Nortel, USAA and Wells Fargo.
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 1.7 million in 1998 to 3.4
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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<PAGE>
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. 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 Operations 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
.File Administrator
.Operations Manager
.Framework Integration
The major components of the OnePoint suite are summarized below.
[Chart of OnePoint Suite Appears Here]
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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 the October 1999 release of
our File Administrator product and our Operations Manager product.
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 and rules for mailbox administration
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
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Products Features
- -------------------------------- --------------------------------------------
OnePoint File Administrator . Policy-based administration of the NT
file system
Enables efficient . Security permission management and
administration of the NT file auditing across the entire enterprise
system and file security. . Analysis, reporting and management of
Windows NT and Windows 2000 service
configuration enables administrators to
identify service accounts and change
service account settings across a large
number of users simultaneously
OnePoint Operations Manager
. Real-time system availability and
performance monitoring
Enables operations management
and monitoring of a wide range . Comprehensive security monitoring and
of network components and intrusion detection
applications by providing real- . Comprehensive monitoring of operation,
time event and problem performance and security for web farms
detection, automated problem and business applications
resolution and service level . Automated problem resolution via
management. execution of ActiveKnowledge modules and
integration with OnePoint administration
products
. Real-time console, pager and email alerts
. High performance, low overhead data
collection and filtering
. Continuous monitoring of tens of
thousands of servers and applications
. Monitoring and management of service
level agreements for availability,
performance and problem resolution
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
consulting service intensive
implementations
Library of prebuilt rules based
on widely accepted Windows NT . Predefined event filters, performance
systems management procedures counters, alerts and automated responses
that enable out of the box for a wide range of events and problem
automation of systems conditions
administration and operations . Over 25 modules and 4,500 rules for
management tasks. managing most Windows NT components and
applications such as Windows NT Security
Logs, Microsoft Internet Information
Server and Microsoft Exchange
. Customizable and extensible modules
Active Administration & . High performance and scalability due to
Operations Engine multi-level client server architecture
. Complete extensibility and customization
Provides common infrastructure of OnePoint products through
services for all OnePoint customization engine
modules. . Integration with third party products
. Comprehensive support for Microsoft's
Active Directory Services Interface
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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.
[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]
OnePoint Architecture
OnePoint is based on a multi-level client server architecture as illustrated
above. 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.
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.
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Customers
Our products have been sold to over 700 corporations, governmental agencies
and other organizations worldwide including more than 50 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 September 30, 1999,
and who have maintenance contracts at September 30, 1999. These customers
accounted for an aggregate of 61% of our license revenue in the 27 months ended
September 30, 1999.
<TABLE>
<S> <C>
Pacific Gas & Electric
ALCOA Eaton Corporation Public Service
Allied Signal Equitable Life Electric & Gas Co.
Allstate Insurance Insurance Raychem Corporation
Company F. Hoffman-LaRoche Republic Industries,
Anheuser-Busch Ltd. Inc.
Australian Department First Union National Rogers Cable TV
of Defense Bank Schering-Plough
Bayerisch Landesbank Force 3 Corporation
Bear, Stearns & GE Shell Services
Company, Inc. GTE International Inc.
BellSouth Cellular Guardian Life SHL Computer
British Petroleum Insurance Innovation
Carnival Cruise Lines Honeywell SHL System House--
The Chubb Corporation Johnson & Johnson Amoco Division
CNF Service Company Kaiser Foundation Sonnenschein Nath &
Coca Cola Company Health Plan Rosenthal
Columbia Healthcare Kemper Insurance Sprint Corporation
Compaq Computer LM Ericsson AB Sutter Health
Corporation Lockheed Martin SwissCom AG
Conoco Inc. Marathon Oil Company Time Warner
Correctional Services Mayo Foundation Corporation
of Canada MCI Systemhouse Trellis Network
Countrywide Home Loan Merck & Co., Inc. Services, Inc.
Cummins Engine Co. Merrill Lynch, Pierce, TRW Inc.
Dayton Hudson Fenner & Smith Turner Broadcasting
Dell Computer Microsoft Corporation System
Corporation Morgan Stanley & Co., Unisys Corporation
Department of Foreign Inc. USAA
Affairs Motorola, Inc. UUNet
Deutsche Morgan Nationwide Building Washington State
Grenfell Society Department of
Digital Equipment Nike Corrections
Corporation Nortel Wells Fargo & Company
Dow Chemical Norwest Bank N.A. Western Wireless
DuPont Novartis Argentina SA Weyerhauser Company
Eastman Kodak
Chemicals
</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, fiscal 1999 and the three months ended September 30, 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
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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.
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 Operations Manager product.
Microsoft selected OnePoint Operations Manager to perform strategic event
management of its global Internet and corporate data centers. Microsoft has
five primary datacenters, including three Internet datacenters -- in Redmond,
Washington, the United Kingdom and Japan -- and two main corporate data centers
- -- in Redmond and Ireland. The Microsoft Information Technology Group uses the
OnePoint Operations Manager product to centrally monitor and provide alert
notification for proactively managing the health status of more than 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
73 individuals over the past 15 months 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.
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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.
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 September 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,
$6.0 million for fiscal 1999 and $2.2 million for the three months ended
September 30, 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.
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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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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:
. Active Administration
. Mission Critical . OnePoint Exchange
. Active Knowledge Software logo Administrator
. Active Operations . OnePoint . OnePoint File
. Active Agent Administrator Administrator
. Channel One . OnePoint Directory . OnePoint Operations
. MCS Administrator Manager
. Mission Critical . OnePoint Domain . OnePoint Resource
Software Administrator Administrator
. OnePoint Event . OnePoint logo
Administrator . SeNTry--
the Enterprise Event
Manager
Each trademark, trade name or service mark of any other company appearing in
this prospectus belongs to its holder.
. OnePoint Event
Manager
Employees
As of September 30, 1999, we had 193 employees, 61 of whom were engaged in
research and development, 98 in sales and marketing, 13 in customer support,
and 21 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 70,000 square feet in a single office building located
in Houston, Texas pursuant to a lease that expires in August 2004. 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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MANAGEMENT
Executive Officers And Directors
The following table sets forth information regarding our executive officers
and directors of and their ages as of September 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......... 48 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
Janell Heathcock........ 47 Vice President North American Sales
Leslie Willard.......... 36 Vice President, Finance
Simon Church............ 34 Director, International Sales
Michael Rovner.......... 29 Director of Business Development
Douglas L. Ayer(2)...... 62 Director
Michael J. Maples....... 57 Director
John J. Moores(1)....... 54 Director
Scott D. Sandell(2)..... 35 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.
Janell H. Heathcock has served as our Vice President, North America Sales
since July 1999. From January 1997 to July 1999, Ms. Heathcock served in
various capacities at Peregrine Systems, Inc., an infrastructure management
software company, the most recent of which was Regional Director of Sales. Ms.
Heathcock served as Director of Sales for Co-Counsel, Inc., a legal staffing
company, from January 1996 to December 1996. From December 1992 until September
1995, Ms. Heathcock served as a Regional Manager of Sales at Lexis-Nexis, a
legal and information technology company.
Leslie Willard has served as our Vice President of Finance since June 1998.
From October 1995 until May 1998, he served as Vice President of Finance for
Learmonth & Burchett. From January 1986 until September 1995, Mr. Willard
served in various positions, including Senior Manager, with
PricewaterhouseCoopers LLP. Mr. Willard holds a B.B.A. in Accounting and
Finance from Texas Tech University.
Simon Church has served as our Director of International Sales since August
1998. From August 1996 to July 1998, Mr. Church owned and operated ADM
Solutions, Ltd., a software company. From June 1994 to July 1996, Mr. Church
served in various capacities at Learmonth & Burchett, the most recent of which
was as Director of Channel Sales.
Michael Rovner has served as 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.
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<PAGE>
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 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.
Our board of directors currently consists of seven members. Our board of
directors is divided into three classes, with each director serving a three-
year term and one class being elected at each year's annual meeting of
stockholders. Messrs. Bennett, Sandell and Thornton are in the class of
directors whose term expires at the 1999 annual meeting of stockholders. Mr.
Moores is in the class of directors whose term expires at the 2000 annual
meeting of the stockholders. Messrs. Ayer, Bernhardt and Maples are in the
class
53
<PAGE>
of directors whose term expires at the 2001 annual meeting of stockholders. 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 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>
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<PAGE>
Mr. McGrath received sales commissions of $718,801. Commissions are variable
cash-based incentive compensation that are payable as a percentage of revenue
cash collected.
All other compensation represents excess compensation associated with
premiums for life insurance of $1,696 for each of Messrs. Bennett, Bernhardt,
Odom and Thierry and $7,371 for Mr. McGrath. Mr. Thierry also received $79,303
for moving expenses paid in connection with his relocation agreement.
Option Grants in Fiscal Year Ended June 30, 1999. The following table sets
forth certain information with respect to stock options granted to each of the
Named Executive Officers during the fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Annual Rates of Stock
Securities Percent of Total Appreciation for
Underlying Options Granted Option Term
Name and Principal Options to Employees Exercise Price Expiration ---------------------
Position Granted(#) During Period ($/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 a fair market value of $15.00 per
share over the 10 year term of the options based on assumed rates of stock
appreciation of 5% and 10%, compounding annually less the total option exercise
price.
In fiscal 1999, we granted options to purchase an aggregate of 2,131,510
shares to employees and consultants.
The exercise price of the option grant to Thomas P. Bernhardt was equal to
110% of the fair market value of the common stock on the date of grant as
determined by the board of directors.
Options under the stock option plan generally vest over four years with 25%
of the shares subject to the option vesting on the first anniversary of the
grant date, and the remaining option shares vesting ratably monthly thereafter.
Mr. Bennett's option vests as to 1/36th of the shares per month as to 125,000
shares over the first three years and as to 1/12th of the remaining shares per
month in months 37 through 48. Mr. Odom's option vests as to 1/48th of the
shares per month for 48 months.
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<PAGE>
Option Exercises in Last Fiscal Year. The following table sets forth
information with respect to the Named Executive Officers concerning option
exercises for the fiscal year ended June 30, 1999 and exercisable and
unexercisable options held as of June 30, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares Value June 30, 1999 (#) June 30, 1999 ($)
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>
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
56
<PAGE>
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 September 30, 1999, we had issued 1,041,734 shares of common stock upon
the exercise of options granted under our stock option plan, we had outstanding
options to purchase 4,520,363 shares of common stock at a weighted average
exercise price of $8.27 per share and 3,232,903 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 the initial offering period
began on August 4, 1999. We have reserved a total of 600,000 shares of common
stock for issuance under the 1999 employee stock purchase plan, together with
an annual increase in the number of shares reserved thereunder beginning on the
first day of 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 began on August 4, 1999, and the subsequent offering
periods will begin on the first trading day on or after February 1 and August 1
of each year. Each participant will be granted an option on the first day of
the offering period and the option will be automatically exercised on the date
six months later, the end of a purchase period, throughout the offering period.
If the fair market value of 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.
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<PAGE>
1999 Director Option Plan. Our 1999 director option plan became effective
upon the closing of our initial public 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 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 62.
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.
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<PAGE>
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 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
59
<PAGE>
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 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.
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<PAGE>
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 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.
We have entered 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 believe that these provisions and agreements are necessary to
attract and retain qualified persons as our directors and executive officers.
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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. All
shares of outstanding preferred stock converted automatically into shares of
common stock on a one for one basis upon the closing of our initial public
offering in August 1999. 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.
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<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.
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<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 agreement, the directors will
receive no other compensation for these services but each former director's
stock options was vested in full in August 1999.
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<PAGE>
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 September 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 54,
. each director of our company,
. all directors and executive officers as a group and
. all other selling stockholders.
<TABLE>
<CAPTION>
Shares of Common Shares Beneficially
Stock Beneficially Owned Number Owned After
Prior to Offering of Shares Offering
Name of Beneficial ----------------------------- Being -------------------
Owner Number Percentage Offered Number Percentage
- ------------------ -------------- ---------------------- -------- ----------
<S> <C> <C> <C> <C> <C>
New Enterprise
Associates Entities... 2,026,452 14.4
2490 Sand Hill Rd.
Menlo Park, California
94025
Austin Ventures
Entities.............. 1,317,220 9.4
114 W. 7th St., Suite
1300,
Austin, Texas 78701
JMI Equity Fund III,
L.P................... 713,250 5.0
12680 High Bluff Drive
San Diego, California
92130
International Capital
Partners, Inc......... 138,195 *
300 First Stamford
Place
Stamford, Connecticut
06902
Zesiger Capital Group
LLC................... 1,792,815 12.8
320 Park Avenue
New York, New York
10022
Mission Critical
Software I, Inc....... 643,997 4.5
Michael S. Bennett..... 461,071 3.2
Thomas P. Bernhardt.... 1,014,294 7.2
Stephen E. Odom........ 109,879 *
Oliver J. Thierry...... 105,000 *
Brian J. McGrath....... 277,377 2.0
Scott D. Sandell....... 2,026,452 14.4
John D. Thornton....... 1,317,220 9.4
Douglas L. Ayer........ 138,195 *
Michael J. Maples...... -- *
John J. Moores......... 713,250 5.0
All executive officers
and directors as a
group (17 persons) ... 6,162,733 42.5
Other selling
stockholders who
individually own less
than 1%
( persons)..........
</TABLE>
- ---------------------
* Less than 1% of the outstanding shares of common stock.
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<PAGE>
Except as otherwise noted above, the address of each person listed on the
table is 13939 Northwest Freeway, Houston, Texas 77040.
As of September 30, 1999, 14,007,567 shares of our common stock was
outstanding. 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 2,100,000 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 September 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 September 30, 1999:
Securities Exercisable Within 60 Days of September 30, 1999
<TABLE>
<CAPTION>
Options
-------
<S> <C>
Michael S. Bennett................................................ 242,066
Thomas P. Bernhardt............................................... 70,000
Stephen E. Odom................................................... 39,691
Olivier J. Thierry................................................ 35,001
Brian J. McGrath.................................................. 33,754
Scott D. Sandell.................................................. 25,000
John D. Thornton.................................................. 2,344
Douglas L. Ayer................................................... 25,000
Michael J. Maples................................................. --
John J. Moores.................................................... 21,875
All directors and officers........................................ 565,244
Other selling stockholders........................................
</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 25,000
shares subject to options exercisable within 60 days from September 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
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<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 2,344 shares subject to options exercisable within 60 days from
September 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 21,875 shares
subject to options exercisable within 60 days of September 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 25,000 shares subject to
options exercisable within 60 days from September 30, 1999 held by Mr. Ayers.
The beneficial ownership reported for Zesiger Capital includes 1,792,815
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 643,997 shares held by Mission Critical
Software I, Inc.
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<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 September 30, 1999, we had 14,007,567 shares of common stock
outstanding that were held of record by approximately 154 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
Our board of directors has 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 September 30, 1999, we had outstanding warrants to purchase 190,000
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.
Holders of Registration Rights Can Require Us to Register Shares of Our Stock
for Resale
The holders of 5,992,500 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
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<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.
70
<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.
71
<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 15,507,567 shares of common
stock, based upon shares outstanding as of September 30, 1999, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants after September 30, 1999. All of the shares
sold in this offering and the 4,312,500 shares sold in our initial public
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 7,195,067 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 7,186,107 restricted
shares, and the underwriters entered into lock-up agreements in connection
with our initial public 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 until January 31, 2000. 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 January 31, 2000.
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 September 30, 1999 and January 31,
2000......................................................... 8,960
At various times thereafter upon the expiration of applicable
holding periods.............................................. 7,186,107
</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
72
<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.
At September 30, 1999, options to purchase 4,520,363 shares of common stock
were outstanding of which options approximating 746,690 shares were then vested
and exercisable. Beginning on January 31, 2000, effective date of this
offering, approximately 1,154,899 shares issuable upon the exercise of vested
stock options will become eligible for sale in the public market, if such
options are exercised.
The holders of an aggregate of 5,992,500 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.
73
<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 Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated, 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.........................................
BancBoston Robertson Stephens Inc.............................
SoundView Technology Group, Inc...............................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated.................................................
---------
Total......................................................... 4,000,000
=========
</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 $ per share. The underwriters may allow and such dealers may reallow a
concession not in excess of $ 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
600,000 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.
74
<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........................ $ $
Underwriting discounts and commissions paid by
selling stockholders.............................
</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 7,186,107
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 January 31, 2000. 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 January 31, 2000, 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.
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.
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.
As permitted by Rule 103 under the Exchange Act, certain underwriters (and
selling group members, if any) that are market makers ("passive market
markers") in the common stock may make bids for or purchases of common stock in
the Nasdaq National Market until a stabilizing bid has been made. Rule 103
generally provides:
. a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months, or any
75
<PAGE>
60 consecutive days ending within the 10 days, immediately preceding the
filing date of the registration statement of which this prospectus forms
a part,
. a passive market maker may not effect transactions or display bids for
the common stock at a price that exceeds the highest independent bid for
the common stock by persons who are not passive market makers, and
. bids made by passive market makers must be identified as such
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $580,000.
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
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any materials we file with the Commission at the Commission's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
Commission at 1-800-SEC-0330 for more information on its public reference
rooms. The Commission also maintains an Internet website at http://www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the Commission.
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.
76
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
INDEX TO FINANCIAL STATEMENTS
THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999
<TABLE>
<S> <C>
Condensed Balance Sheets.................................................... F-2
Statements of Operations.................................................... F-3
Statement of Stockholders' Equity (Deficit)................................. F-4
Statements of Cash Flows.................................................... F-5
Condensed Notes to Financial Statements..................................... F-6
</TABLE>
FISCAL PERIODS ENDED
JUNE 30, 1997, 1998 AND 1999
<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-9
Balance Sheets............................................................. F-10
Statements of Operations................................................... F-11
Statements of Stockholders' Deficit........................................ F-12
Statements of Cash Flows................................................... F-13
Notes to Financial Statements.............................................. F-14
</TABLE>
F-1
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, September 30,
1999(1) 1999
-------- -------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents.................................. $11,031 $62,187
Receivables, net...................................... 3,299 3,320
Other current assets.................................. 758 311
------- -------
Total current assets................................ 15,088 65,818
Property and equipment, net........................... 2,048 3,322
Acquired technology, net.............................. 607 515
Other assets.......................................... 43 45
------- -------
Total assets........................................ $17,786 $69,700
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable...................................... $ 918 $ 1,622
Accrued liabilities................................... 5,429 5,576
Current maturities of long-term notes payable......... 265 257
Deferred revenue...................................... 4,300 6,121
------- -------
Total current liabilities........................... 10,912 13,576
Deferred revenue, less current portion................ 838 483
Long-term notes payable, less current maturities...... 81 --
------- -------
Total liabilities................................... 11,831 14,059
Redeemable convertible preferred stock, Series A,
$0.001 par value,
868,650 and no shares authorized and outstanding,
respectively......................................... 179 --
Redeemable convertible preferred stock, Series B,
$0.001 par value, 2,650,000 and no shares authorized
and outstanding, respectively........................ 2,650 --
Redeemable convertible preferred stock, Series C,
$0.001 par value, 3,450,000 and no shares authorized
and outstanding, respectively........................ 10,350 --
Preferred Stock, $0.001 par value, 5,000,000 shares
authorized, no shares issued or outstanding.......... -- --
Common stock, $0.001 par value, 50,000,000 shares
authorized, 3,307,511 and 14,007,567 shares
outstanding, respectively............................ 3 14
Additional paid-in capital............................ 3,290 64,401
Deferred stock compensation........................... (2,315) (1,590)
Accumulated deficit................................... (8,202) (7,184)
------- -------
Total stockholders' equity (deficit)................ (7,224) 55,641
------- -------
Total liabilities and stockholders' equity
(deficit).......................................... $17,786 $69,700
======= =======
</TABLE>
(1) Derived from the Company's audited financial statements as of June 30,
1999.
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
--------------
1998 1999
------ ------
(unaudited)
<S> <C> <C>
Revenues:
License fees................................................ $4,052 $7,442
Maintenance................................................. 613 1,578
------ ------
Total revenues.............................................. 4,665 9,020
------ ------
Cost of revenue:
Cost of license............................................. 96 90
Cost of maintenance......................................... 226 256
------ ------
Total cost of revenue....................................... 322 346
------ ------
Gross margin.............................................. 4,343 8,674
------ ------
Operating expenses:
Sales & marketing........................................... 2,479 4,774
Research & development...................................... 1,223 2,161
General & administrative.................................... 576 958
Amortization of deferred stock compensation................. 32 290
Abandoned lease costs (recovery)............................ -- (295)
------ ------
Total operating expense..................................... 4,310 7,888
------ ------
Operating income.......................................... 33 786
------ ------
Interest income............................................... 59 420
Interest expense.............................................. (19) (9)
Other income, net............................................. 3 1
------ ------
Income before income taxes.................................. 76 1,198
Income tax expense............................................ -- 180
------ ------
Net income.................................................... 76 1,018
Increase in dividends in arrears on redeemable convertible
preferred stock.............................................. (264) --
------ ------
Net income (loss) applicable to common stockholders........... $ (188) $1,018
====== ======
Earnings (loss) per common share:
Basic....................................................... $(0.07) $ 0.10
Diluted..................................................... $(0.07) $ 0.06
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Deferred
----------------- Paid-in Stock Accumulated
Number Amount Capital Compensation Deficit Total
---------- ------ ---------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1999................... 3,307,511 $ 3 $ 3,290 $(2,315) $(8,202) $(7,224)
---------- --- ------- ------- ------- -------
Amortization of deferred
stock compensation..... 725 725
Common stock issued upon
exercise of stock
options................ 175,573 138 138
Common stock issued upon
exercise of stock
warrants............... 243,333 1 315 316
Common stock issued in
initial public
offering, net.......... 3,312,500 3 47,486 47,489
Conversion of preferred
stock.................. 6,968,650 7 13,172 13,179
Net income.............. 1,018 1,018
---------- --- ------- ------- ------- -------
Balance at September 30,
1999................... 14,007,567 $14 $64,401 $(1,590) $(7,184) $55,641
========== === ======= ======= ======= =======
</TABLE>
F-4
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
---------------
1998 1999
------ -------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 76 $ 1,018
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 198 277
Noncash compensation expense.............................. 32 725
Gain on disposal of assets................................ (1) --
Changes in operating assets and liabilities:
Accounts receivable....................................... 544 (21)
Prepaid and other current assets.......................... 32 447
Other assets.............................................. 80 (2)
Accounts payable.......................................... (30) 704
Accrued liabilities and other............................. 650 147
Deferred revenue.......................................... 242 1,466
------ -------
Net cash provided by operating activities..................... 1,823 4,761
Cash flows from investing activities:
Proceeds from sale of property and equipment................ 6 27
Purchase of property and equipment.......................... (211) (1,486)
------ -------
Net cash used in investing activities......................... (205) (1,459)
Cash flows from financing activities:
Payments on long-term debt.................................. (65) (66)
Repayment of capital lease.................................. (2) (23)
Exercised options, net...................................... 75 138
Exercised warrants, net..................................... -- 316
Proceeds from initial stock offering, net................... -- 47,489
------ -------
Net cash provided by financing activities:.................... 8 47,854
------ -------
Net increase in cash and cash equivalents..................... 1,626 51,156
------ -------
Beginning cash and cash equivalents........................... 4,575 11,031
------ -------
Ending cash and cash equivalents.............................. $6,201 $62,187
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and in accordance with Form 10-Q and Rule 10.01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited financial statements contained in
this report reflect all adjustments, consisting of only normal recurring
adjustments considered necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented.
Operating results for interim periods are not necessarily indicative of results
for the full year. These unaudited financial statements, footnote disclosures
and other information should be read in conjunction with the financial
statements and the notes thereto included in the Company's audited financial
statements for the year ended June 30, 1999 which are included in the Company's
Registration Statement filed on Form S-1, as amended, on August 4, 1999 (Reg.
No. 333-79501).
2. Stockholders' Equity
In the period July 1, 1999 through September 30, 1999, options to purchase
175,573 shares of common stock at exercise prices of $0.50 to $2.50 per share
were exercised. At September 30, 1999, there were options outstanding to
purchase 4,520,363 shares of common stock.
In August 1999, the Company completed an initial public offering in which the
Company sold a total of 3,312,500 shares of its common stock for net proceeds
to the Company of $47.5 million. Upon closing of the initial public offering,
all outstanding Series A, B, and C Redeemable Convertible Preferred Stock were
converted to 6,968,650 shares of common stock.
The Company 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. In the
three months ended September 30, 1999, the Board of Directors vested the
options that would have vested during the remaining term of the consulting
agreement. As a result of the Board of Director's action, the Company
recognized the remaining $436,000 of stock compensation expense during the
quarter.
For the periods ended September 30, 1998 and 1999, comprehensive income was
the same as net income.
3. Income Taxes
The provision for income tax expense for the three months ended September 30,
1999 was 15% of pre-tax income. The difference in the effective rate versus the
statutory U.S. tax rate is primarily due to the impact of tax benefits
associated with the anticipated utilization of net operating loss carryforwards
during fiscal 2000.
The Company did not record a provision for income taxes in the three month
period ended September 30, 1998, because it had generated net operating loss
carryforwards of approximately $3.5 million since the Company's inception. A
full valuation allowance was recorded due to the uncertainty of its ability to
recognize the future benefits of such losses. The net operating loss
carryforwards begin to expire in 2012 and may be subject to various IRS code
limitations.
4. Earnings Per Share
The Company follows the provisions of SFAS No. 128, Earnings Per Share. Basic
net income (loss) per share is computed by dividing net income (loss)
applicable to common stockholders by the weighted average
F-6
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
number of shares of common stock outstanding during the period. Diluted net
income (loss) per share is computed by dividing net income (loss) applicable to
common stockholders by the weighted average number of shares of common stock
outstanding, adjusted to reflect common stock equivalents, such as convertible
preferred stock, stock options and warrants to purchase common stock, to the
extent they are dilutive, less the number of shares that could have been
repurchased with the exercise proceeds using the treasury stock method.
The following table presents the calculation of basic and diluted net income
(loss) per share and pro forma basic and diluted net income per share (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net income........................................... $ 76 $ 1,018
Increase in dividends in arrears on redeemable
convertible preferred stock......................... (264) --
----------- -----------
Net income (loss) applicable to common shareholders.. $ (188) $ 1,018
=========== ===========
Pro forma net income applicable to common
stockholders........................................ $ 76
===========
Shares used in computing:
Basic net income (loss) per share.................. 2,549,240 9,948,991
=========== ===========
Diluted net income (loss) per share................ 2,549,240 16,031,298
=========== ===========
Pro forma basic net income per share............... 9,517,890
===========
Pro forma diluted net income per share............. 12,171,729
===========
Computation of:
Basic net income (loss) per share applicable to
common stockholders............................... $ (0.07) $ 0.10
=========== ===========
Diluted net income (loss) per share applicable to
common stockholders............................... $ (0.07) $ 0.06
=========== ===========
Pro forma basic net income loss per share.......... $ 0.01
===========
Pro forma diluted net income loss per share........ $ 0.01
===========
</TABLE>
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
redeemable convertible preferred stock into common stock concurrent with the
closing of the Company's initial public offering. Accordingly, a pro forma
calculation for the three month period ended September 30, 1998 assuming the
conversion of all outstanding shares of redeemable convertible preferred stock
into common stock upon the Company's initial public offering using the if-
converted method from their respective dates of issuance is presented. 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
2,653,839 common stock equivalents using the treasury stock method.
5. Segment Reporting
Effective July 1, 1998, the Company adopted SFAS No. 131 Disclosures About
Segments of an Enterprise and Related Information. The adoption of SFAS 131 did
not have a significant effect on the disclosure of segment information as the
Company continues to consider its business activities to be in a single
segment.
F-7
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
6. Litigation
The Company received correspondence from Commerce Funding Corporation, one of
its stockholders, alleging that the Company failed to give it proper notice of
its right of first refusal with respect to the proposed resale of 250,000
shares of its common stock by two of its stockholders. The Company filed a
petition seeking a declaratory judgement that the Company has no liability with
respect to Commerce Funding Corporation's claims on July 1, 1999. On August 2,
1999, the Company, its Chief Executive Officer and Chief Financial Officer were
named as defendants in a complaint filed by Commerce Funding Corporation. The
parties to these actions are now conducting discovery. The Company believes
that Commerce Funding Corporation's claims are without merit and intends to
vigorously defend the claim. The ultimate outcome of this claim is not expected
to have a material adverse effect on the financial statements, operating
results or financial conditions. If Commerce Funding Corporation were to be
awarded a judgment in its complaint or the Company were unable to obtain the
relief the Company has requested, the Company would be required to indemnify
its officers with respect to legal fees, pay its legal expenses and possibly
those of Commerce Funding Corporation.
7. Proposed Stock Offering
On October 13, 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.
F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Mission Critical Software, Inc.
We have audited the accompanying balance sheets of Mission Critical Software,
Inc. (the "Company") as of June 30, 1999 and 1998, and the related statements
of operations, stockholders' deficit, and cash flows for the years ended June
30, 1999 and 1998, and the period from July 19, 1996 (date of inception) to
June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 except for Note 14, as to
which the date is August 4, 1999
F-9
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30,
----------------
1998 1999
------- -------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 4,575 $11,031
Accounts receivable, net of allowance of $150 and $395,
respectively................................................ 3,912 3,299
Prepaid and other current assets............................. 202 758
------- -------
Total current assets....................................... 8,689 15,088
Property and equipment, net.................................. 1,199 2,048
Acquired technology, net of accumulated amortization of $598
and $959, respectively...................................... 968 607
Other assets................................................. 102 43
------- -------
Total assets............................................... $10,958 $17,786
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Revolving line of credit and current maturities of long-term
debt........................................................ $ 536 $ 265
Accounts payable............................................. 288 918
Accrued liabilities.......................................... 2,154 5,429
Deferred revenue............................................. 2,470 4,300
------- -------
Total current liabilities.................................. 5,448 10,912
Long-term debt, less current maturities...................... 352 81
Deferred revenue, less current portion....................... 495 838
------- -------
Total liabilities.......................................... 6,295 11,831
Redeemable convertible preferred stock, Series A, $0.001 par
value, authorized and outstanding--868,650 shares; ($.205647
per share liquidation preference)........................... 179 179
Redeemable convertible preferred stock, Series B, $0.001 par
value, authorized and outstanding--2,650,000 shares; ($1 per
share liquidation preference)............................... 2,650 2,650
Redeemable convertible preferred stock, Series C, $0.001 par
value, authorized 3,450,000 shares, outstanding--3,450,000
shares; ($3 per share liquidation preference)............... 10,350 10,350
Stockholders' deficit:
Common stock, $0.001 par value, authorized--50,000,000
shares, outstanding 2,484,971 and 3,307,511 shares,
respectively................................................ 2 3
Additional paid-in capital................................... 26 3,290
Deferred stock compensation.................................. -- (2,315)
Accumulated deficit.......................................... (8,544) (8,202)
------- -------
Total stockholders' deficit................................ (8,516) (7,224)
------- -------
Total liabilities and stockholders' deficit................ $10,958 $17,786
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<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-11
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Deferred
---------------- Paid-in Stock Accumulated
Number Amount Capital Compensation Deficit Total
--------- ------ ---------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued
for cash............. 2,431,350 $ 2 $ 1 $ -- $ -- $ 3
Effect of deferred tax
liability recorded
for acquired 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)
========= === ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<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-13
<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-14
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
technological feasibility. Based on the Company's product development process,
technological feasibility is established upon completion of a working model.
Costs incurred by the Company between completion of the working model and the
point at which the product is ready for general release have been
insignificant. Through June 30, 1999, all software development costs have been
expensed as incurred.
Acquired Technology
Acquired technology is recorded at cost and amortized on the straight-line
method over the products' estimated useful lives, generally three to five
years.
Stock-Based Compensation
SFAS 123, Accounting for Stock-Based Compensation, prescribes accounting and
reporting standards for all stock-based compensation plans, including employee
stock options. As allowed by SFAS 123, the Company has elected to continue to
account for its employee stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Income Taxes
Income taxes have been provided in accordance with the liability method of
accounting for income taxes. Accordingly, deferred income taxes are recorded to
reflect the tax consequences on future years of temporary differences between
the tax basis of assets and liabilities and their financial amounts. A
valuation allowance is provided, if necessary, to reduce deferred tax assets to
their estimated net realizable value.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, Reporting Comprehensive Income. SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components. For the
periods ended June 30, 1997, 1998 and 1999, comprehensive income or loss was
the same as net income or loss.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $181,000,
$613,000, and $1,502,000 for the periods ended June 30, 1997, 1998 and 1999,
respectively.
F-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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. Stock Offering
In August 1999, the Company issued 3,312,500 shares of its common stock in
connection with its initial public offering at a per share price of $16.00 per
share. Immediately prior to the closing of the offering, all outstanding shares
of redeemable convertible preferred stock were converted to 6,968,650 shares of
common stock.
F-27
<PAGE>
[Graphic showing components of One Point suite including -- Systems
Administration, Security, Operations Management; Products--Directory and
Resource Administrator, Domain Administrator, Exchange Administrator, File
Administrator, Operations Manager, Framework Integration; Infrastructure--Active
Knowledge Library, Active Administration & Operations Engine]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,000,000 Shares
[Mission Critical Software Logo]
Common Stock
------------
PROSPECTUS
------------
HAMBRECHT & QUIST
ROBERTSON STEPHENS
SOUNDVIEW TECHNOLOGY GROUP
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
------------
, 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Mission Critical Software in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 57,147
NASD filing fee................................................. 21,057
Nasdaq National Market listing fee.............................. 17,500
Printing and engraving costs.................................... 200,000
Legal fees and expenses......................................... 200,000
Accounting fees and expenses.................................... 50,000
Blue Sky fees and expenses...................................... 10,000
Transfer Agent and Registrar fees............................... 20,000
Miscellaneous expenses.......................................... 4,295
--------
Total........................................................... $580,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law. Articles Nine and Ten of
the Registrant's Restated Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law. Article 8 of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if
such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the Registrant, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his or her conduct was unlawful. The Registrant has entered into
indemnification agreements with its directors and executive officers, in
addition to indemnification provided for in the Registrant's Bylaws, and
intends to enter into indemnification agreements with any new directors and
executive officers in the future.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued unregistered
securities to a limited number of persons, as described below. None of these
transactions involved any underwriters, underwriting discounts or commissions,
or any public offering, and the Registrant believes that each transaction was
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant
to compensatory benefit plans and contracts relating to compensation as
provided under such Rule 701. The recipients of securities in each such
transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Registrant, to
information about the Registrant.
Since July 1996, (inception), the Registrant has issued and sold (without
payment of any selling commission to any person) the following unregistered
securities:
1. On September 4, 1996, the Registrant issued and sold pursuant to
Section 4(2) of the Securities Act:
. 2,431,350 shares of Common Stock to employees for $3,000,
. 1,818,650 shares of Series A Preferred Stock to one investor and
one director in exchange for our OnePoint Administrator Software,
and $25,000 and
. 2,650,000 shares of Series B Preferred Stock to seven investors
for an aggregate purchase price of $2,650,000.
II-1
<PAGE>
2. On July 2, 1997, the Registrant issued and sold 3,450,000 shares of
Series C Preferred Stock to twelve investors for an aggregate purchase
price of $10,350,000 pursuant to Section 4(2), promulgated under the
Securities Act.
3. Pursuant to Rule 701 promulgated under the Securities Act, from
March 1997 to September 30, 1999, the Registrant issued and sold 1,041,734
shares of Common Stock to employees and consultants for aggregate
consideration of $571,027, upon exercise of stock options, pursuant to the
Registrant's 1997 Stock Option Plan.
4. In July 1999 and August 1999, the Registrant issued and sold
100,000 and 143,333 shares of common stock, respectively, upon the exercise
of warrants to two holders for aggregate proceeds of $100,000 and $215,000
pursuant to Section 4(2) promulgated under the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1.2* Certificate of Incorporation of the Registrant to be filed after the
closing of the offering made under this Registration Statement
3.2.2* Bylaws of the Registrant
4.1* Specimen common stock certificate
4.2* Amended and Restated Investors Rights Agreement, dated as of July 2,
1997, by and among the Registrant and certain stockholders of the
Registrant
4.3* Amended and Restated Stockholders' Agreement, dated as of July 2,
1997, by and among the Registrant and certain stockholders of the
Registrant
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2* Amended and Restated 1997 Stock Option Plan
10.2.1* Form of Option Agreement under the 1997 Stock Option Plan
10.3* 1999 Employee Stock Purchase Plan
10.3.1* Form of Subscription Agreement under the 1999 Employee Stock Purchase
Plan
10.4* 1999 Director Option Plan
10.4.1* Form of Option Agreement under 1999 Director Option Plan
10.5* Lease Agreement dated October 22, 1996 between Soaring Eagles Orchard,
Inc. and the Registrant for the premises located at 720 North Post Oak
Road, Houston, Texas 77024
10.5.1* First Amendment dated February 13, 1997 to Lease Agreement between
Soaring Eagles Orchards, Inc. and the Registrant
10.5.2* Second Amendment dated April 1, 1997 to Lease Agreement between
Soaring Eagles Orchards, Inc. and the Registrant
10.5.3* Third Amendment dated July 22, 1997 to Lease Agreement between Soaring
Eagles Orchards, Inc. and the Registrant
10.6* Quickstart Loan and Security Agreement dated February 7, 1997 between
the Registrant and Silicon Valley Bank
10.6.1* Amendment dated January 23, 1998 to Quickstart Loan Agreement between
Silicon Valley Bank and the Registrant
10.6.2* Loan and Security Agreement dated January 26, 1998 between the
Registrant and Silicon Valley Bank
10.6.3* First Amendment dated March 19, 1999 to Loan and Security Agreement
between the Registrant and Silicon Valley Bank
10.7* Employment Agreement dated September 4, 1996 between the Registrant
and Paul F. Koffend, Jr.
10.8* Employment Agreement dated September 4, 1996 between the Registrant
and Louis R. Woodhill
10.8.1* Amended and Restated Employment Agreement dated May 21, 1998 between
the Registrant and Louis R. Woodhill
10.9* Employment Agreement dated September 4, 1996 between the Registrant
and James R. Woodhill
10.10* Employment Agreement dated January 1, 1997 between the Registrant and
Thomas P. Bernhardt
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.10.1* Consulting Agreement dated September 4, 1996 between the Registrant
and Thomas P. Bernhardt
10.11* Employment Agreement dated August 6, 1997 between the Registrant and
Brian McGrath
10.11.1* Letter Agreement dated January 13, 1999 between the Registrant and
Brian McGrath
10.12* Employment Agreement dated February 23, 1998 between the Registrant
and Olivier Thierry
10.12.1* Relocation Agreement dated February 23, 1998 between the Registrant
and Olivier Thierry
10.13* Offer Letter dated April 13, 1998 between the Registrant and Michael
S. Bennett
10.14* Offer Letter dated April 13, 1998 between the Registrant and Stephen
E. Odom
10.15* Offer Letter dated May 28, 1998 between the Registrant and Leslie D.
Willard
10.15.1* Letter Agreement dated May 26, 1999 between the Registrant and Leslie
D. Willard
10.16* Employment Agreement dated December 21, 1998 between the Registrant
and Richard Pleczko
10.16.1* Offer Letter dated December 2, 1998 between Registrant and Richard
Pleczko
10.17* Sub-Lease Agreement between Learmonth & Burchett Management Systems
and the Registrant regarding the premises located at 9009 Mountain
Ridge Drive, Suite 250, Austin, Texas 78759
10.18* Offer Letter dated February 8, 1999 between the Registrant and
Richard Kangas
10.18.1* Employment Agreement dated February 8, 1999 between the Registrant
and Richard Kangas
10.19* Offer Letter dated March 1, 1999 between the Registrant and Michael
J. Rovner
10.19.1* Employment Agreement dated March 24, 1999 between the Registrant and
Michael J. Rovner
10.20* Form of Consulting Agreement
10.21* Lease Agreement dated April 8, 1999 between the Registrant and
EnergyCorp Group LC for the premises located at 13939 Northwest
Freeway, Houston, Texas
21.1 Subsidiaries
23.1 Consent of Independent Auditors
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-5)
27.1 Financial Data Schedule
</TABLE>
- --------
* Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(Reg. No. 333-79501) declared effective by the Securities and Exchange
Commission on August 4, 1999.
** To be filed by amendment.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-3
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 25th day of October 1999.
MISSION CRITICAL SOFTWARE, INC.
By: /s/ Michael S. Bennett
----------------------------------
Michael S. Bennett
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael S. Bennett and Stephen E. Odum and each
of them, his attorneys-in-fact, each with the power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ Michael S. Bennett President, Chief October 25, 1999
- ----------------------------------- Executive Officer and
(Michael S. Bennett) Director (Principal
Executive Officer)
/s/ Stephen E. Odom Chief Operating Officer, October 25, 1999
- ----------------------------------- Chief Financial Officer,
(Stephen E. Odom) Treasurer and Secretary
(Principal Financial and
Accounting Officer)
/s/ Thomas P. Bernhardt Chief Technology October 25, 1999
- ----------------------------------- Officer and
(Thomas P. Bernhardt) Director
/s/ Douglas L. Ayer Director October 25, 1999
- -----------------------------------
(Douglas L. Ayer)
/s/ Michael J. Maples Director October 25, 1999
- -----------------------------------
(Michael J. Maples)
/s/ John J. Moores Director October 25, 1999
- -----------------------------------
(John J. Moores)
/s/ Scott D. Sandell Director October 25, 1999
- -----------------------------------
(Scott D. Sandell)
/s/ John D. Thornton Director October 25, 1999
- -----------------------------------
(John D. Thornton)
II-5
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
4,600,000 SHARES/1/
Common Stock
UNDERWRITING AGREEMENT
----------------------
November ___, 1999
Hambrecht & Quist LLC
BancBoston Robertson Stephens Inc.
Soundview Technology Group, Inc.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Mission Critical Software, Inc., a Delaware corporation (herein called the
Company), proposes to issue and sell 1,500,000 shares of its authorized but
unissued Common Stock, $0.001 par value (herein called the Common Stock), and
the stockholders of the Company named in Schedule II hereto (herein collectively
called the Selling Securityholders) propose to sell an aggregate of 2,500,000
shares of Common Stock of the Company (said 4,000,000 shares of Common Stock
being herein called the Underwritten Stock). The Company proposes to grant to
the Underwriters (as hereinafter defined) an option to purchase up to 600,000
additional shares of Common Stock (herein called the Option Stock and with the
Underwritten Stock herein collectively called the Stock). The Common Stock is
more fully described in the Registration Statement and the Prospectus
hereinafter mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 33-_______), including the related preliminary prospectus, for the
registration under the Securities Act of 1933,
- ---------------------
/1/ Plus an option to purchase from the Company up to 600,000 additional shares
to cover over-allotments.
<PAGE>
as amended (herein called the Securities Act) of the Stock. Copies of such
registration statement and of each amendment thereto, if any, including the
related preliminary prospectus (meeting the requirements of Rule 430A of the
rules and regulations of the Commission) heretofore filed by the Company with
the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES.
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own or lease its properties and conduct its business
as described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property owned
or leased or the nature of the business transacted by it makes
qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole).
(ii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition
or results of operations of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and
-2-
<PAGE>
since such dates, except in the ordinary course of business, neither the
Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement and the
Prospectus.
(iii) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
subparagraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
(iv) The Stock is duly and validly authorized, is (or, in the case of
shares of the Stock to be sold by the Company, will be, when issued and
sold to the Underwriters as provided herein) duly and validly issued, fully
paid and nonassessable and conforms to the description thereof in the
Prospectus. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the transfer and
sale of the Stock to be sold by the Selling Securityholders or the issuance
and sale of the Stock as contemplated herein.
(v) Prior to the Closing Date the Stock to be issued and sold by the
Company and the Selling Securityholders will be authorized for listing by
the Nasdaq National Market upon official notice of issuance.
(vi) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act").
(b) Each of the Selling Securityholders hereby represents and warrants as
follows:
(i) Such Selling Securityholder has good and marketable title to all
the shares of Stock to be sold by such Selling Securityholder hereunder,
free and clear of all liens, encumbrances, equities, security interests and
claims whatsoever, with full right and authority to deliver the same
hereunder, subject, in the case of each Selling Securityholder, to the
rights of BancBoston, N.A. as Custodian (herein called the Custodian), and
that upon the delivery of and payment for such shares of the Stock
hereunder, the several Underwriters
-3-
<PAGE>
will receive good and marketable title thereto, free and clear of all
liens, encumbrances, equities, security interests and claims whatsoever.
(ii) Such Selling Securityholder has duly authorized, executed and
delivered, in the form heretofore furnished to the Underwriters, a Custody
Agreement and Power of Attorney (the "Custody Agreement and Power of
Attorney") appointing Thomas P. Bernhardt and Louis R. Woodhill as
attorneys-in-fact (collectively, the "Attorneys" and individually, an
"Attorney") and appointing BankBoston, N.A. as Custodian; the Custody
Agreement and Power of Attorney constitutes a valid and binding agreement
on the part of such Selling Securityholder, enforceable in accordance with
its terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general
equitable principles; and each of such Selling Securityholder's Attorneys,
acting alone, is authorized to execute and deliver this Agreement and the
certificate referred to in Section 9(c) hereof on behalf of such Selling
Securityholder, to determine (within the limitations therein specified) the
purchase price to be paid by the several Underwriters to such Selling
Securityholder as provided in Section 3 hereof, to authorize the delivery
of the shares of Stock to be sold by such Selling Securityholder under this
Agreement and to duly endorse (in blank or otherwise) the certificate or
certificates representing such Stock or a stock power or powers with
respect thereto, to accept payment therefor, and otherwise to act on behalf
of such Selling Securityholder in connection with this Agreement.
(iii) All consents, approvals, authorizations and orders required for
the execution and delivery by such Selling Securityholder of the Custody
Agreement and Power of Attorney, the execution and delivery by or on behalf
of such Selling Securityholder of this Agreement and the sale and delivery
of the shares of Stock to be sold by such Selling Securityholder under this
Agreement (other than, at the time of the execution hereof, if the
Registration Statement has not yet been declared effective by the issuance
of the order of the Commission declaring the Registration Statement
effective and such consents, approvals, authorizations or orders as may be
necessary under state or other securities or Blue Sky laws) have been
obtained and are in full force and effect; such Selling Securityholder, if
other than a natural person, has been duly organized and is validly
existing in good standing under the laws of the jurisdiction of its
organization as the type of entity that it purports to be; and such Selling
Securityholder has full legal right, power and authority to enter into and
perform its obligations under this Agreement and such Custody Agreement and
Power of Attorney, and to sell, assign, transfer and deliver the Stock to
be sold by such Selling Securityholder under this Agreement.
(iv) Certificates in negotiable form for the shares of the Stock to be
sold by such Selling Securityholder have been placed in custody under a
Custody Agreement and Power of Attorney for delivery under this Agreement
with the Custodian; such Selling Securityholder specifically agrees that
the shares of the Stock represented by the certificates so held in custody
for such Selling Securityholder are subject to the interests of the several
Underwriters and the Company, that the arrangements made by such Selling
Securityholder for such custody, including the Power of Attorney provided
for in such Custody Agreement and Power of Attorney, are to that extent
irrevocable, and that the obligations of such Selling Securityholder shall
not be terminated by any act of such Selling
-4-
<PAGE>
Securityholder or by operation of law, whether by the death or incapacity
of such Selling Securityholder (or, in the case of a Selling Securityholder
that is not an individual, the dissolution or liquidation of such Selling
Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur
before the delivery of such shares of the Stock hereunder, certificates for
such shares of the Stock shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death,
incapacity, dissolution, liquidation or other event had not occurred,
regardless of whether the Custodian shall have received notice of such
death, incapacity, dissolution, liquidation or other event.
(v) Such Selling Securityholder will comply with all agreements and
satisfy all conditions on its part to be complied with or satisfied
pursuant to this Agreement on or prior to the Closing Date and will advise
one of its Attorneys and Hambrecht & Quist LLC prior to the Closing Date if
any statement to be made on behalf of such Selling Securityholder in the
certificate contemplated by Section 9(e) would be inaccurate if made as of
the Closing Date.
(vi) Such Selling Securityholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the Stock.
(vii) Such Selling Securityholder does not have, or has waived prior
to the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Stock that are to be
sold by the Company to the Underwriters pursuant to this Agreement; such
Selling Securityholder does not have, or has waived prior to the date
hereof, any registration right or other similar right to participate in the
offering made by the Prospectus, other than such rights of participation as
have been satisfied by the participation of such Selling Securityholder in
the transactions to which this Agreement relates in accordance with the
terms of this Agreement; and such Selling Securityholder does not own any
warrants, options or similar rights to acquire, and does not have any right
or arrangement to acquire, any capital stock, rights, warrants, options or
other securities from the Company, other than those described in the
Registration Statement and the Prospectus.
(viii) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by such Selling
Securityholder expressly for use therein, such Preliminary Prospectus and
the Registration Statement did, and the Prospectus and any further
amendments or supplements to the Registration Statement and the Prospectus,
when they become effective or are filed with the Commission, as the case
may be, will conform in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder and will
not, insofar as it relates to such Selling Securityholder, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading.
-5-
<PAGE>
(ix) Such Selling Securityholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Stock.
(c) Thomas P. Bernhardt (the "Founder") hereby represents and warrants to
each Underwriter that the representations and warranties of the Company set
forth in Section 2(a) above are true and correct.
(d) Each of Louis R. Woodhill, James R. Woodhill, E. Alexander Goldstein
and Paul M. Koffend (collectively, the "Significant Stockholders") hereby
represents and warrants to his knowledge to each Underwriter that the share
ownership information set forth in the Principal and Selling Stockholder Table
contained in the Registration Statement is true and correct.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
1,500,000 shares of the Underwritten Stock to the several Underwriters, each
Selling Securityholder agrees to sell to the several Underwriters the number of
shares of the Underwritten Stock set forth in Schedule II opposite the name of
such Selling Securityholder, and each of the Underwriters agrees to purchase
from the Company and the Selling Securityholders the respective aggregate number
of shares of Underwritten Stock set forth opposite its name in Schedule I. The
price at which such shares of Underwritten Stock shall be sold by the Company
and the Selling Securityholders and purchased by the several Underwriters shall
be $_______ per share. The obligation of each Underwriter to the Company and
each of the Selling Securityholders shall be to purchase from the Company and
the Selling Securityholders that number of shares of the Underwritten Stock
which represents the same proportion of the total number of shares of the
Underwritten Stock to be sold by each of the Company and the Selling
Securityholders pursuant to this Agreement as the number of shares of the
Underwritten Stock set forth opposite the name of such Underwriter in Schedule I
hereto represents of the total number of shares of the Underwritten Stock to be
purchased by all Underwriters pursuant to this Agreement, as adjusted by you in
such manner as you deem advisable to avoid fractional shares. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraphs (b) and (c) of this Section 3, the agreement of each
Underwriter is to purchase only the respective number of shares of the
Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for
the number of shares of the Stock agreed to be purchased by such Underwriter or
Underwriters, the Company or the Selling Securityholders shall immediately give
notice thereof to you, and the non-defaulting Underwriters shall have the right
within 24 hours after the receipt by you of such notice to purchase, or procure
one or more other Underwriters to purchase, in such proportions as may be agreed
upon between you and such purchasing Underwriter or Underwriters and upon the
terms herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-
defaulting Underwriters fail so to make such arrangements with respect to all
such shares and portion, the number of shares of the Stock which each non-
defaulting Underwriter is otherwise obligated to purchase under this
-6-
<PAGE>
Agreement shall be automatically increased on a pro rata basis to absorb the
remaining shares and portion which the defaulting Underwriter or Underwriters
agreed to purchase; provided, however, that the non-defaulting Underwriters
shall not be obligated to purchase the shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase if the aggregate number of such
shares of the Stock exceeds 10% of the total number of shares of the Stock which
all Underwriters agreed to purchase hereunder. If the total number of shares of
the Stock which the defaulting Underwriter or Underwriters agreed to purchase
shall not be purchased or absorbed in accordance with the two preceding
sentences, the Company and the Selling Securityholders shall have the right,
within 24 hours next succeeding the 24-hour period above referred to, to make
arrangements with other underwriters or purchasers satisfactory to you for
purchase of such shares and portion on the terms herein set forth. In any such
case, either you or the Company and the Selling Securityholders shall have the
right to postpone the Closing Date determined as provided in Section 5 hereof
for not more than seven business days after the date originally fixed as the
Closing Date pursuant to said Section 5 in order that any necessary changes in
the Registration Statement, the Prospectus or any other documents or
arrangements may be made. If neither the non-defaulting Underwriters nor the
Company and the Selling Securityholders shall make arrangements within the 24-
hour periods stated above for the purchase of all the shares of the Stock which
the defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company or the Selling Securityholders to any non-
defaulting Underwriter and without any liability on the part of any non-
defaulting Underwriter to the Company or the Selling Securityholders. Nothing in
this paragraph (b), and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
grants an option to the several Underwriters to purchase, severally and not
jointly, up to 600,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
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(b) The information set forth in the last paragraph on the front cover page
and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and you
on behalf of the respective Underwriters represent and warrant to the Company
that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have been
exercised not later than 7:00 A.M., San Francisco time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of Vinson & Elkins L.L.P., 2300 First City Tower, 1001 Fannin, Houston,
Texas 77002-6760, at 7:00 a.m., San Francisco time, on the fourth/2/ business
day after the date of this Agreement, or at such time on such other day, not
later than seven full business days after such fourth business day, as shall be
agreed upon in writing by the Company, the Selling Securityholders and you. The
date and hour of such delivery and payment (which may be postponed as provided
in Section 3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised after
7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Vinson & Elkins L.L.P., 2300
First City Tower, 1001 Fannin, Houston, Texas 77002-6760, at 7:00 a.m., San
Francisco time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order, and payment for the Stock purchased from the Selling
Securityholders shall be made to the Custodian, for the account of the Selling
Securityholders, in each case by wire transfer or by one or more certified or
official bank check or checks in same day funds. Such payment shall be made
upon delivery of certificates for the Stock to you for the respective accounts
of the several Underwriters against receipt therefor signed by you.
Certificates for the Stock to be delivered to you shall be registered in such
name or names and shall be in such denominations as you may request at least one
business day before the Closing Date, in the case of Underwritten Stock, and at
least one business day prior to the purchase thereof, in the case of the Option
Stock. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of Lewco Securities
Corporation, 2 Broadway, New York, New York 10004 on the business day prior to
the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York
time, on the business day preceding the date of purchase. It is understood that
you, individually and not on behalf of the Underwriters, may (but shall not be
obligated to) make payment to the Company and the Selling Securityholders for
shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Option Stock is
purchased for the
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/2/ This assumes that the transaction will be priced after the close of market
and that T+4 will apply to the transaction. If the pricing took place before or
during market hours (which will generally not be the case), the closing would be
three business days after pricing.
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<PAGE>
account of such Underwriter. Any such payment by you shall not relieve such
Underwriter from any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
Each of the Company and the Selling Securityholders respectively covenants
and agrees as follows:
(a) The Company will (i) prepare and timely file with the Commission under
Rule 424(b) a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A and (ii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of (i)
the request by the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company and
the Selling Securityholders will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be issued,
to obtain the withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each post-
effective amendment, if any, to the Registration Statement (together with, in
each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances
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<PAGE>
existing at the time it is delivered to a purchaser of the Stock, the Company
will forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended prospectus so that the Prospectus as so supplemented or
amended will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances existing at the time such Prospectus is delivered
to such purchaser, not misleading. If, after the initial public offering of the
Stock by the Underwriters and during such period, the Underwriters shall propose
to vary the terms of offering thereof by reason of changes in general market
conditions or otherwise, you will advise the Company in writing of the proposed
variation, and, if in the opinion either of counsel for the Company or of
counsel for the Underwriters such proposed variation requires that the
Prospectus be supplemented or amended, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus or an amended prospectus
setting forth such variation. The Company authorizes the Underwriters and all
dealers to whom any of the Stock may be sold by the several Underwriters to use
the Prospectus, as from time to time amended or supplemented, in connection with
the sale of the Stock in accordance with the applicable provisions of the
Securities Act and the applicable rules and regulations thereunder for such
period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company jointly and severally agrees to pay all costs and expenses
incident to the performance of its obligations under this Agreement, including
all costs and expenses incident to (i) the preparation, printing and filing with
the Commission and the National Association of Securities Dealers, Inc. ("NASD")
of the Registration Statement, any Preliminary Prospectus and the Prospectus,
(ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus
and
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<PAGE>
of the several documents required by paragraph (c) of this Section 6 to be so
furnished, (iii) the printing of this Agreement and related documents delivered
to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi) the
printing and issuance of stock certificates, including the transfer agent's
fees. The Selling Securityholders will pay any transfer taxes incident to the
transfer to the Underwriters of the shares the Stock being sold by the Selling
Securityholders. To the extent, if at all, that any of the Selling Stockholders
engage special counsel to represent such Selling Stockholders in connection with
this offering, the fees and expenses of such counsel shall be borne by such
Selling Stockholder.
(j) The Company and the Selling Securityholders jointly and severally agree
to reimburse you, for the account of the several Underwriters, for blue sky fees
and related disbursements (including counsel fees and disbursements and cost of
printing memoranda for the Underwriters) paid by or for the account of the
Underwriters or their counsel in qualifying the Stock under state securities or
blue sky laws and in the review of the offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are intended
to relieve the Underwriters from the payment of the expenses and costs which the
Company and the Selling Securityholders hereby agree to pay and shall not affect
any agreement which the Company and the Selling Securityholders may make, or may
have made, for the sharing of any such expenses and costs.
(l) The Company and each of the Selling Securityholders hereby agrees that,
without the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, the Company or such Selling Securityholder, as the case may be,
will not, for a period of 180 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (i) sell,
offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this
Agreement, (B) shares of Common Stock issued by the Company upon the exercise of
options granted under the stock option plans of the Company (the "Option Plans")
or upon the exercise of warrants outstanding as of the date hereof, all as
described in the section under the caption "Capitalization" in the Preliminary
Prospectus, and (C) options to purchase Common Stock granted under the Option
Plans.
(m) The Company agrees to use its best efforts to cause all directors,
officers, and stockholders to agree that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will
not, for a period of 180 days following the commencement of the public offering
of the Stock by the Underwriters, directly or indirectly, sell, offer, contract
to sell, transfer the economic risk of ownership in, make any short sale, pledge
or otherwise dispose or transfer any shares of Common Stock or any securities
convertible into or
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<PAGE>
exchangeable or exercisable for or any other right to purchase or acquire Common
Stock, whether any such transaction described above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) of this Section 7, the
Company and the Selling Securityholders jointly and severally agree to indemnify
and hold harmless each Underwriter and each person (including each partner or
officer thereof) who controls any Underwriter within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Securities Exchange Act of
1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and the Company and the Selling Securityholders jointly and severally
agree to reimburse each such Underwriter and controlling person for any legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
and the Selling Securityholders contained in this paragraph (a) shall not apply
to any such losses, claims, damages, liabilities or expenses if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of any Underwriter for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, (2) the indemnity agreement contained in this paragraph (a)
with respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof, (3) each Selling
Securityholder, other than the Founder and the Significant Stockholders (herein
collectively called the Founding Selling Securityholders), shall only be liable
under this paragraph with respect to (A) information pertaining to such Selling
Securityholder furnished by or on behalf of such Selling Securityholder
expressly for use in any Preliminary Prospectus or the Registration Statement or
the
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Prospectus or any such amendment thereof or supplement thereto or (B) facts that
would constitute a breach of any representation or warranty of such Selling
Securityholder set forth in Section 2(b) hereof and (4) the Founder shall only
be liable under this paragraph with respect to (A) information pertaining to the
Founder furnished by or on behalf of the Founder expressly for use in any
Preliminary Prospectus or the Registration Statement or the Prospectus or any
such amendment thereof or supplement thereto, (B) facts that would constitute a
breach of any representation or warranty of the Founder set forth in Section
2(b) hereof, and (C) facts that would constitute a breach of any representation
or warranty of such Founder set forth in Section 2(c) hereof and (5) each of the
Significant Stockholders shall only be liable under this paragraph with respect
to (A) information pertaining to such Significant Stockholder furnished by or on
behalf of such Significant Stockholder expressly for use in any Preliminary
Prospectus or the Registration Statement or the Prospectus or any such amendment
thereof or supplement thereto, (B) facts that would constitute a breach of any
representation or warranty of such Significant Stockholder set forth in Section
2(b) hereof, and (C) facts that would constitute a breach of any representation
or warranty of such Significant Stockholder set forth in Section 2(d) hereof.
Each Founding Selling Securityholder shall not be subject to such limitations on
liability. The indemnity agreements of the Company and the Selling
Securityholders contained in this paragraph (a) and the representations and
warranties of the Company and the Selling Securityholders contained in Section 2
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholders from and against any
and all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The indemnity agreement of each
Underwriter contained in this paragraph (b) shall remain operative
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and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and (b) of
this Section 7 agrees that, upon the service of a summons or other initial legal
process upon it in any action or suit instituted against it or upon its receipt
of written notification of the commencement of any investigation or inquiry of,
or proceeding against, it in respect of which indemnity may be sought on account
of any indemnity agreement contained in such paragraphs, it will promptly give
written notice (herein called the Notice) of such service or notification to the
party or parties from whom indemnification may be sought hereunder. No
indemnification provided for in such paragraphs shall be available to any party
who shall fail so to give the Notice if the party to whom such Notice was not
given was unaware of the action, suit, investigation, inquiry or proceeding to
which the Notice would have related and was prejudiced by the failure to give
the Notice, but the omission so to notify such indemnifying party or parties of
any such service or notification shall not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party shall be entitled at its own expense to participate in the
defense of any action, suit or proceeding against, or investigation or inquiry
of, an indemnified party. Any indemnifying party shall be entitled, if it so
elects within a reasonable time after receipt of the Notice by giving written
notice (herein called the Notice of Defense) to the indemnified party, to assume
(alone or in conjunction with any other indemnifying party or parties) the
entire defense of such action, suit, investigation, inquiry or proceeding, in
which event such defense shall be conducted, at the expense of the indemnifying
party or parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided, however,
that (i) if the indemnified party or parties reasonably determine that there may
be a conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by such
indemnified party or parties participate in, but not conduct, the defense. If,
within a reasonable time after receipt of the Notice, an indemnifying party
gives a Notice of Defense and the counsel chosen by the indemnifying party or
parties is reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under paragraphs (a) through
(c) of this Section 7 for any legal or other expenses subsequently incurred by
the indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso to
the preceding sentence and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
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(d) If the indemnification provided for in this Section 7 is unavailable or
insufficient to hold harmless an indemnified party under paragraph (a) or (b) of
this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Securityholders on the one hand and the Underwriters on the other shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Stock received by the Company and the Selling
Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Securityholders will, without the
prior written consent of each Underwriter, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be
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sought hereunder (whether or not such Underwriter or any person who controls
such Underwriter within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
(f) The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties contained in Section 2 hereof
and under the indemnity and reimbursement agreements contained in the provisions
of this Section 7 and Section 11 hereof shall be limited to an amount equal to
the initial public offering price of the stock sold by such Selling
Securityholder to the Underwriters. The Company and the Selling Securityholders
may agree, as among themselves and without limiting the rights of the
Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
(g) Except as specifically set forth in this Article 7, the indemnification
obligations under this Article 7 shall apply notwithstanding the sole, joint or
concurrent negligence, strict liability or other fault of the indemnified party.
8. TERMINATION. This Agreement may be terminated by you at any time prior
to the Closing Date by giving written notice to the Company and the Selling
Securityholders if after the date of this Agreement trading in the Common Stock
shall have been suspended, or if there shall have occurred (i) the engagement in
hostilities or an escalation of major hostilities by the United States or the
declaration of war or a national emergency by the United States on or after the
date hereof, (ii) any outbreak of hostilities or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, calamity, crisis or change in economic or political conditions
in the financial markets of the United States would, in the Underwriters'
reasonable judgment, make the offering or delivery of the Stock impracticable,
(iii) suspension of trading in securities generally or a material adverse
decline in value of securities generally on the New York Stock Exchange, the
American Stock Exchange, or The Nasdaq Stock Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; provided, however, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
-16-
<PAGE>
9. CONDITION OF UNDERWRITERS' OBLIGATIONS. The obligations of the several
Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder and the
validity and form of the certificates representing the Stock, all corporate
proceedings and other legal matters incident to the foregoing, and the form of
the Registration Statement and of the Prospectus (except as to the financial
statements contained therein), shall have been approved at or prior to the
Closing Date by Vinson & Elkins L.L.P., counsel for the Underwriters.
(c) You shall have received from Wilson Sonsini Goodrich & Rosati,
Professional Corporation, counsel for the Company and the Selling
Securityholders, an opinion, addressed to the Underwriters and dated the Closing
Date, covering the matters set forth in Annex A hereto, and if Option Stock is
purchased at any date after the Closing Date, additional opinions from each such
counsel, addressed to the Underwriters and dated such later date, confirming
that the statements expressed as of the Closing Date in such opinions remain
valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are not any franchises, contracts, leases or other documents which are
required to be filed as exhibits to the Registration Statement which have not
been filed as required, (vii) the representations and warranties of the Company
and the Selling Securityholders herein are true and correct in all material
respects as of the Closing Date or any later date on which Option Stock is to be
purchased, as the case may
-17-
<PAGE>
be, and (viii) there has not been any material change in the market for
securities in general or in political, financial or economic conditions from
those reasonably foreseeable as to render it impracticable in your reasonable
judgment to make a public offering of the Stock, or a material adverse change in
market levels for securities in general (or those of companies in particular) or
financial or economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date on
which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from Ernst & Young LLP, a letter or letters,
addressed to the Underwriters and dated the Closing Date and any later date on
which Option Stock is purchased, confirming that they are independent public
accountants with respect to the Company within the meaning of the Securities Act
and the applicable published rules and regulations thereunder and based upon the
procedures described in their letter delivered to you concurrently with the
execution of this Agreement (herein called the Original Letter), but carried out
to a date not more than three business days prior to the Closing Date or such
later date on which Option Stock is purchased (i) confirming, to the extent
true, that the statements and conclusions set forth in the Original Letter are
accurate as of the Closing Date or such later date, as the case may be, and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of the Original Letter or
to reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company or any of its subsidiaries which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Stock or
the purchase of the Option Stock as contemplated by the Prospectus.
(g) You shall have received from Ernst & Young LLP a letter stating that
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's financial statements as at September 30, 1999, did not disclose
any weakness in internal controls that they considered to be material
weaknesses.
(h) You shall have been furnished evidence in usual written or telegraphic
form from the appropriate authorities of the several jurisdictions, or other
evidence satisfactory to you, of the qualification referred to in paragraph (f)
of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, and stockholders agreements, in form reasonably
satisfactory to Hambrecht & Quist LLC, stating
-18-
<PAGE>
that without the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, such person or entity will not, for a period of 180 days following
the commencement of the public offering of the Stock by the Underwriters,
directly or indirectly, (i) sell, offer, contract to sell, make any short sale,
pledge, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in whole or
in part, any of the economic consequences or ownership of Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Vinson & Elkins L.L.P., counsel for the Underwriters,
shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company or the
Selling Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby; provided, however,
that the Company and the Selling Shareholders shall not in any event be liable
to any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by the Underwriters of the Stock.
10. CONDITION OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; provided, however, that in the event of any such termination
the Company agrees to indemnify and hold harmless the Underwriters from all
costs or expenses incident to the
-19-
<PAGE>
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement, the Company agrees to reimburse
on a quarterly basis the Underwriters for all reasonable legal and other
expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 13939 Northwest Freeway, Houston,
Texas 77040, Attention: Stephen E. Odom; and if to the Selling
Securityholders, shall be mailed, telegraphed or delivered to the Selling
Securityholders in care of Thomas P. Bernhardt at 13939 Northwest Freeway,
Houston, Texas 77040. All notices given by telegraph shall be promptly
confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraphs (l), (m) and (n) of Section 6 hereof shall be
of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
-20-
<PAGE>
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
Please sign and return to the Company and to the Selling Securityholders in care
of the Company the enclosed duplicates of this letter, whereupon this letter
will become a binding agreement among the Company, the Selling Securityholders
and the several Underwriters in accordance with its terms.
Very truly yours,
Mission Critical Software, Inc.
By _________________________________
Michael S. Bennett
President & CEO
Selling Securityholders:
By ________________________________
[Attorney-in-Fact]
-21-
<PAGE>
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
Hambrecht & Quist LLC
By ____________________________________
Cristina Morgan, Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
-22-
<PAGE>
SCHEDULE I
UNDERWRITERS
NUMBER OF
SHARES TO BE
UNDERWRITERS PURCHASED
- ----------------------------------------------------------------------------
-23-
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
NUMBER OF
NAME OF SELLING SHARES TO BE
SECURITYHOLDERS SOLD
- ----------------------------------------------------------
-24-
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION
OF
WILSON SONSINI GOODRICH & ROSATI,
PROFESSIONAL CORPORATION
COUNCIL FOR THE COMPANY
AND THE SELLING SECURITYHOLDERS
(i) Each of the Company and its subsidiaries has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified as a foreign corporation
and in good standing in each state of the United States of America in which its
ownership or leasing of property requires such qualification (except where the
failure to be so qualified would not have a material adverse effect on the
business, properties, financial condition or results of operations of the
Company and its subsidiaries taken as a whole), and has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement; all the issued and outstanding capital stock of
each of the subsidiaries of the Company has been duly authorized and validly
issued and is fully paid and nonassessable, and is owned by the Company free and
clear of all liens, encumbrances and security interests, and to the best of such
counsel's knowledge, no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in such
subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, $0.001 par value, of which there are outstanding
15,507,567, including the Underwritten Stock and such additional number of
shares, if any, as may have been issued after September 30, 1999 and prior to
the Closing Date, pursuant to the Company's 1997 Stock Option Plan, as amended;
proper corporate proceedings have been taken validly to authorize such
authorized capital stock; all of the outstanding shares of such capital stock
(including the Underwritten Stock and the shares of Option Stock issued, if any)
have been duly and validly issued and are fully paid and nonassessable; any
Option Stock purchased after the Closing Date, when issued and delivered to and
paid for by the Underwriters as provided in the Underwriting Agreement, will
have been duly and validly issued and be fully paid and nonassessable; and no
preemptive rights of, or rights of refusal in favor of, stockholders exist with
respect to the Stock, or the issue and sale thereof, pursuant to the Certificate
of Incorporation or Bylaws of the Company and, to the knowledge of such counsel,
there are no contractual preemptive rights that have not been waived, rights of
first refusal or rights of co-sale which exist with respect to the Stock being
sold by the Selling Securityholders or the issue and sale of the Stock;
(iii) the Registration Statement has become effective under the Securities
Act and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and no
-25-
<PAGE>
proceedings for that purpose have been instituted or are pending or contemplated
by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(v) such counsel have no reason to believe that the Registration Statement
(except as to the financial statements and schedules and other financial and
statistical data contained or incorporated by reference therein, as to which
such counsel need not express any opinion or belief) at the Effective Date
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus (except as to the financial statements
and schedules and other financial and statistical data contained or incorporated
by reference therein, as to which such counsel need not express any opinion or
belief) as of its date or at the Closing Date (or any later date on which Option
Stock is purchased), contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(vi) the information required to be set forth in the Registration Statement
in answer to Items 9, 10 (insofar as it relates to such counsel) and 11(c) of
Form S-1 is to the best of such counsel's knowledge accurately and adequately
set forth therein in all material respects or no response is required with
respect to such Items, and, the description of the Company's stock option plans
and the options granted and which may be granted thereunder and the options
granted otherwise than under such plans set forth in the Prospectus accurately
and fairly presents in all material respects the information required to be
shown with respect to said plans and options to the extent required by the
Securities Act and the rules and regulations of the Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(viii) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
(ix) the issue and sale by the Company of the shares of Stock sold by the
Company as contemplated by the Underwriting Agreement will not conflict with, or
result in a breach of, the Certificate of Incorporation or Bylaws of the Company
or any of its subsidiaries or any agreement or instrument known to such counsel
to which the Company or any of its subsidiaries is a party included as an
exhibit to the Registration Statement or any applicable law or regulation, or so
far as is known to such counsel, any order, writ, injunction or decree, of any
jurisdiction, court or governmental instrumentality;
(x) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
-26-
<PAGE>
(xi) good and marketable title to the shares of Stock sold by the Selling
Securityholders under the Underwriting Agreement, free and clear of all liens,
encumbrances, equities, security interests and claims, has been transferred to
the Underwriters who have severally purchased such shares of Stock under the
Underwriting Agreement, assuming for the purpose of this opinion that the
Underwriters purchased the same in good faith without notice of any adverse
claims;
(xii) based insofar as factual matters with respect to the stock to be
sold by the Selling Securityholders are concerned solely upon certificates of
the Selling Securityholders, the accuracy of which such counsel have no reason
to question, no consent, approval, authorization or order of any court or
governmental agency or body is required by the Company for the consummation of
the transactions contemplated in the Underwriting Agreement, except such as have
been obtained under the Securities Act and such as may be required under state
securities or blue sky laws in connection with the purchase and distribution of
the Stock by the Underwriters;
(xiii) the Stock sold by the Selling Securityholders and the Stock issued
and sold by the Company will have been duly authorized for listing on the Nasdaq
National Market upon official notice issuance;
____________________________________
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or of the States of California or
Texas, and upon the corporation laws of the State of Delaware upon opinions of
local counsel satisfactory in form and scope to counsel for the Underwriters.
Copies of any opinions so relied upon shall be delivered to the Representative
and to counsel for the Underwriters and the foregoing opinion shall also state
that counsel knows of no reason the Underwriters are not entitled to rely upon
the opinions of such local counsel.
In rendering its opinion with respect to matters concerning the Selling
Securityholders, such counsel may rely without further inquiry upon counsel for
and factual representation of the Selling Securityholders, provided that such
counsel shall also state that they know of no reason the Underwriters are not
justified in relying upon such counsel or representation.
Such counsel will not be required to opine on matters related to any
subsidiary of the Company that is incorporated, domiciled or otherwise operated
outside of the United States.
-27-
<PAGE>
EXHIBIT 5.1
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
8911 CAPITAL OF TEXAS HIGHWAY, SUITE 3350
AUSTIN, TEXAS 78759
TELEPHONE 512-338-5400 FACSIMILE 512-338-5499
WWW.WSGR.COM
October 25, 1999
Mission Critical Software, Inc.
13939 Northwest Freeway
Houston, Texas 77040
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the the Registration Statement on Form S-1 (File No. 333-
) to be filed by you with the Securities and Exchange Commission on
October 25, 1999 (the "Registration Statement") in connection with the
registration under the Securities Act of 1933, as amended, of 4,600,000 shares
(including shares issuable upon exercise of the underwriters' over-allotment
option) of Common Stock of Mission Critical Software, Inc.(the "Shares"). As
your counsel in connection with this transaction, we have examined the
proceedings proposed to be taken in connection with such sale and issuance of
the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
various states, where required, the Shares when issued and sold in the manner
referred to in the Registration Statement will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction
Name of Incorporation
-------- ----------------
Mission Critical Software--North America, Inc. Delaware
Mission Critical Software--U.K., Ltd. England and Wales
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 7, 1999, except for Note 14, as to which the date
is August 4, 1999, in the Registration Statement (Form S-1) and related
Prospectus of Mission Critical Software, Inc. for the registration of shares of
its common stock.
/s/ ERNST & YOUNG LLP
Austin, Texas
October 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1999 AND JUNE 30, 1999 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE YEAR ENDED JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 JUN-30-1999
<CASH> 62,187 11,031
<SECURITIES> 0 0
<RECEIVABLES> 3,715 3,694
<ALLOWANCES> 395 395
<INVENTORY> 0 0
<CURRENT-ASSETS> 65,818 15,088
<PP&E> 4,459 3,121
<DEPRECIATION> 1,137 1,073
<TOTAL-ASSETS> 69,700 17,786
<CURRENT-LIABILITIES> 13,576 10,912
<BONDS> 0 0
0 13,179
0 0
<COMMON> 14 3
<OTHER-SE> 55,641 (7,224)
<TOTAL-LIABILITY-AND-EQUITY> 69,700 17,786
<SALES> 0 0
<TOTAL-REVENUES> 9,020 4,665
<CGS> 346 322
<TOTAL-COSTS> 7,888 4,310
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 9 19
<INCOME-PRETAX> 1,198 76
<INCOME-TAX> 180 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,018 (188)
<EPS-BASIC> .10 (.07)
<EPS-DILUTED> .06 (.07)
</TABLE>
