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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
 
x    Annual Report Pursuant To Section 13 or 15(d)
of The Securities Exchange Act of 1934
 
For the fiscal year ended June 30, 2002
 
OR
 
¨    Transition Report Pursuant To Section 13 or 15(d)
of The Securities Exchange Act of 1934
 
For the transition period from                         to                        
 
Commission File Number 000-26757
 
 
NetIQ CORPORATION
(Exact name of Registrant as specified in its charter)
 
Delaware
   
77-0405505
(State or other jurisdiction of
incorporation or organization)
   
(I.R.S. Employer
Identification No.)
 
3553 North First Street, San Jose, CA
   
95134
(Address of principal executive offices)
   
(Zip Code)
 
(408) 856-3000
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:    None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Title of each class
   
Name of each exchange
on which registered
Common Stock, $0.001 par value per share
   
NASDAQ National Stock Market
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
 
        As of August 31, 2002, the aggregate market value of Registrant’s voting stock held by non-affiliates was approximately $934,738,000 based upon the closing sales price of the Common Stock as reported on the Nasdaq National Stock Market on such date. Shares of Common Stock held by officers, directors and holders of more than ten percent of the outstanding Common Stock have been excluded from this calculation because such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.
 
As of August 31, 2002, the Registrant had outstanding 50,624,650 shares of Common Stock.
 
Certain sections of Registrant’s definitive Proxy Statement for the 2002 Annual Meeting of Stockholders to be held on November 14, 2002, are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated herein.
 

Table of Contents
NetIQ Corporation
 
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JUNE 30, 2002
 
         
Page
    
PART I
     
ITEM 1.
   
 
   
3
 
ITEM 2.
   
 
   
13
 
ITEM 3.
   
 
   
13
 
ITEM 4.
   
 
   
13
 
    
PART II
 
     
ITEM 5.

   
 
   
14
 
ITEM 6.
   
 
   
15
 
ITEM 7.

   
 
   
16
 
ITEM 7A.
   
 
   
37
 
ITEM 8.
   
 
   
37
 
ITEM 9.

   
 
   
37
 
    
PART III
 
     
ITEM 10.
   
 
   
38
 
ITEM 11.
   
 
   
38
 
ITEM 12.

   
 
   
38
 
ITEM 13.
   
 
   
39
 
ITEM 14.
   
 
   
39
 
    
 
PART IV
 
     
ITEM 15.
   
 
   
39
 
       
42
       
43

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The statements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, intentions, strategies, and expected operating results and financial condition. Forward-looking statements also include statements regarding events, conditions and financial trends that may affect our future plans of operations, business strategy, results of operations and financial position. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. These forward-looking statements are made in reliance upon the safe harbor provision of The Private Securities Litigation Reform Act of 1995. Factors that could cause or contribute to such differences include, but are not limited to, those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Factors That May Affect Future Operating Results” and elsewhere in this Annual Report on Form 10-K.
 
PART I
 
ITEM 1.     BUSINESS
 
Overview
 
NetIQ is a leading provider of enterprise systems management software solutions for managing, securing and analyzing the key components of corporate enterprise computing infrastructure—from back-end networks and servers to front-end applications and Web servers. Historically focused on Microsoft Windows applications management, we have become a leading provider of software to test, migrate, administer, monitor, secure and analyze complex, distributed Windows-centric computer systems. Our UNIX and Linux modules introduced in fiscal 2002 address our customers’ growing need to manage heterogeneous environments with cross-platform solutions, and enable them to manage more applications, servers and operating systems with our products.
 
Businesses rely on the proper functioning of their networks, operating systems, servers, applications, databases and hardware. Our comprehensive, integrated solutions address three broad areas that are critical in managing the performance, availability, security and utilization of this complex computing infrastructure:
 
 
•
Performance and Availability Management;
 
 
•
Security Management and Administration; and
 
 
•
Web Analytics.
 
We were founded in June 1995 and completed our initial public offering in July 1999 with a follow-on offering in December 1999. We acquired Mission Critical Software in May 2000 and WebTrends Corporation in March 2001. In September 2000 we entered into a licensing agreement with Microsoft Corporation whereby we granted to Microsoft a perpetual license to our Operations Manager product technology and source code for core operations management for $175.0 million that we are collecting quarterly through August 2003. For additional information on these events and other recent developments see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
NetIQ’s Markets and Products
 
Today’s business organizations are highly dependent on computer systems to conduct their business operations. The typical information technology environment is characterized by distributed information systems and networks that support multiple business-critical applications for financial reporting, human resources,

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enterprise resource planning, supply chain management, customer relationship management, and email, as well as industry specific applications. In addition to the internal networks connecting the employees of a business with these computing services in multiple business locations, the Internet has become an essential medium for connecting businesses with customers, suppliers and employees.
 
The critical nature of these systems and their growing complexity has placed increasing pressure on systems managers to provide reliable and highly available operations. These infrastructures 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 can result in heavy penalties, including a loss of productivity and corporate revenue.
 
To keep these infrastructures running smoothly, companies have employed large departments of skilled systems managers and administrators. This approach has proven costly and ineffective, due to the scarcity and high cost of employing these highly skilled staff. To improve management efficiency and effectiveness, businesses are increasingly using systems management software solutions such as those offered by NetIQ. We offer products in the following three broad areas:
 
Performance and Availability Management.    The primary function of our performance and availability management software is to promptly identify and provide immediate notification of and automated response to system problems such as application failures, breaches in security, system software crashes, hardware failures, email response time, and insufficient capacity. Our software continually monitors the performance, responsiveness, and availability of systems and applications and evaluates the capabilities of network services so that systems administrators can plan and budget for additions, upgrades, and configuration changes.
 
Windows 2000/NT, UNIX, Linux, SQL, and Exchange Management.    Businesses are increasingly turning to the Windows 2000 and Windows NT operating systems as leading platforms for deploying their critical applications. However, many applications continue to run on UNIX and other non-Windows platforms, leading to the proliferation of complex, heterogeneous environments typically including multiple servers running multiple enterprise-wide applications, often from remote locations. The growth and deployment of systems and applications in highly complex computing environments have created a number of unique performance and systems management challenges. These challenges include basic tasks such as monitoring central processing unit utilization, memory, and disk-space availability, to complex tasks such as monitoring Internet traffic, email response times, and database performance. We offer the following products to address these challenges:
 
•
AppManager Suite is a comprehensive set of programs for managing, diagnosing, and analyzing the performance and availability of distributed Windows-based operating systems including Windows 2000, Windows NT and .NET. AppManager also supports server applications such as Exchange, SQL, Oracle, SAP R/3, Lotus Domino, BlackBerry, UNIX servers, and multiple web and database servers. AppManager’s agents run on the managed servers and applications while the management functions and configurations are defined from an operator console.
 
•
NetIQ Extended Management Pack (XMP) Modules for Microsoft Operations Manager 2000 (MOM) provide value-added management capabilities that enable MOM to manage non-Microsoft platforms and applications.
 
•
NetIQ AppAnalyzer for Exchange supplies comprehensive analytics about the use of Microsoft Exchange across the enterprise, including message traffic analysis, delivery times and content notification. Storage and usage reports generated by this product may be used to optimize performance, establish secure environments, and generate internal charge backs and cost allocations.
 
•
NetIQ SQL Management Suite is a set of comprehensive database management tools that may be used in production SQL database environments to rapidly diagnose and correct performance problems, as well as to monitor and manage hardware, operating system, and database configurations.

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Network Testing and VoIP Management.    Because network performance is essential to continuous, consistent, reliable availability of all critical services throughout the infrastructure, systems administrators routinely test the impact of new applications on the network to identify and correct potential network performance problems and continually monitor application performance across the network to ensure that user requirements and service levels are being met. Increasingly, companies are migrating voice communications onto existing Internet protocol (IP) based computer network infrastructures, a technology called voice over Internet protocol or VoIP. Pre-deployment tests of the network to predict performance and assess readiness and post-deployment monitoring to maintain consistent performance are critical for a smooth VoIP implementation and high quality operations. We offer the following Network Testing and VoIP Management solutions:
 
•
NetIQ Chariot measures and predicts end-to-end performance of networked applications. The detailed performance data enables users to optimize network performance, eliminate unnecessary upgrades and determines when network loads will necessitate new equipment. Using real-world application loads, Chariot generates application traffic to evaluate the effect changes will have on existing applications.
 
•
NetIQ VoIP Manager Suite is a comprehensive set of programs for pre-deployment testing and real-time monitoring, management and reporting of the performance and availability of a user’s entire VoIP environment. These programs enable the user to quickly diagnose problems with call quality, call system health, and network performance, and to automate problem management and response from a single console. VoIP Manager Suite modules and connectors also provide integration with many of the most common third party VoIP tools and utilities.
 
•
NetIQ Chariot VoIP Assessor predicts how well VoIP will work on a network prior to deployment by simulating VoIP traffic and producing in-depth reports, including executive summary and detail reports to help pinpoint where network improvements need to be made.
 
Security Management and Administration.    The volume, complexity, importance, and sensitivity of the data produced across the enterprise require sophisticated automated policies for administering and securing the computing infrastructure against internal and external threats. Businesses require administration products to manage the internal threats associated with misuse of access, user policies, directory services, corporate resources, and intellectual property. External threats are typically addressed with traditional perimeter-based products such as firewalls, intrusion detection, and anti-virus servers. Traditionally, security and administration have been addressed separately. However, systems management and security management are converging as enterprises seek to improve efficiency and effectiveness of managing and securing their environments and simultaneously to reduce their costs of operations. We offer the following products to address these challenges:
 
•
NetIQ Security Manager provides an advanced, central security console for real-time security event monitoring and automated response, host-based intrusion detection, event log consolidation, and security configuration management. Security Manager scales to thousands of servers and workstations, integrates with security solutions from third party vendors, and captures, consolidates, correlates, and manages security event information from a single console.
 
•
NetIQ Security Analyzer is a flexible, enterprise-scale vulnerability assessment product for Windows, Solaris, and Linux platforms. Security Analyzer identifies vulnerabilities, supplies detailed correction instructions, audits compliance with security policies, automatically identifies new vulnerabilities, and evaluates security advisory alerts generated by product vendors.
 
•
WebTrends Firewall Reporting Products supply firewall traffic reports identifying suspicious incoming or outgoing activity and are compatible with firewall products from more than 30 of the most popular third party firewall vendors.
 
•
NetIQ Administration Suite consists of a set of integrated products that provide secure distributed administration for Windows NT 4 and 2000/Active Directory, Exchange 5.5 and 2000, and other Windows resources. These products enable a user to more easily deploy products from multiple vendors; administer access, group policies, file and storage systems, and mailboxes; and configure hardware, networks, file systems, and security files.

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•
NetIQ Migration Suite is a comprehensive suite of configuration, consolidation and migration tools that accelerate the transition to Windows 2000/Active Directory or Exchange 2000 or between platforms while minimizing the impact on IT resources and end users.
 
Web Analytics.    In recent years, there has been a shift from building Web sites for consumer eCommerce to building external and internal Web sites for business eCommerce. As a result Web sites have become an integral part of a business’s overall strategy and facilitate communications with customers, vendors, employees, investors, and other constituents. Successful Web-based strategies require an understanding of how visitors inter act with the company’s Internet and intranet sites and how various online and offline initiatives translate into bottom line results. Businesses need a means of forecasting, tracking, and integrating historical visitor data with other corporate and market databases in order to optimize eCommerce revenue and return on their marketing investments. We offer the following products to address these challenges:
 
•
WebTrends Intelligence Suite provides a comprehensive view of Web visitor activity that can be used to interpret user experience, determine marketing effectiveness, understand how the visitor is using the site and analyze eCommerce performance. The suite includes a Web data warehouse, pre-defined and custom reports, tables and graphs, powerful analysis tools, and integration with content management systems.
 
•
WebTrends Reporting Center provides multiple users in a company access to custom reports, scenario analysis, and comparative reporting that can be used to make decisions about Web site design, content, and marketing campaigns.
 
•
WebTrends Live provides in-depth web traffic, visitor, eCommerce and marketing analysis through a web browser. NetIQ hosts the service so that customers can avoid the cost of acquiring their own hardware, software, and staff.
 
•
WebTrends Analysis Suite consists of web site management and log analysis tools that provide web traffic reporting and analysis, link analysis, proxy server analysis, streaming media analysis, and monitoring, alerting, and recovery of servers.
 
•
WebTrends Log Analyzer provides Web traffic reporting and activity information for small businesses with single-server Web sites.
 
Relationship with Microsoft
 
On September 25, 2000, we entered into a licensing agreement with Microsoft Corporation whereby we granted Microsoft a perpetual license to our Operations Manager product technology and source code for core operations management of Windows 2000 and Microsoft server applications. We expect to receive a total of $175.0 million in license fees over a three-year period starting November 2000. License revenue from the Microsoft agreement was $25.0 million in fiscal 2001 and $85.0 million in fiscal 2002. Revenue under this agreement is expected to be $60.0 million and $5.0 million in fiscal 2003 and 2004, respectively. Over the three-year period, Microsoft also agreed to spend $5.0 million per year and pay us an additional $5.0 million per year to market joint solutions of the parties. The $5.0 million paid to us is being recognized as a reduction of sales and marketing expenses as the related expenses are incurred.
 
Sales and Distribution
 
Our products are sold through the following:
 
 
•
our direct sales force, which includes an enterprise field sales and inside sales organization;
 
 
•
our reseller channel, which includes distributors, systems integrators, and value-added resellers; and
 
 
•
online from our Web site.

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Our products are also co-marketed or integrated and sold with the offerings of certain strategic partners, which include Internet service providers, original equipment manufacturers, system integrators, and others. We intend to continue to pursue opportunities to increase our market penetration with a near term focus on expanding our international distributors and resellers.
 
Field and Inside Sales.    We market our software and services through our domestic field sales offices located in Atlanta, GA; Boca Raton, FL; Boston, MA; Chandler, AZ; Coon Rapids, MN; Dallas, TX; East Meadow, NY; Englewood, CO; Fairfax, VA; Ft. Lee, NJ; Houston, TX; Howell, MI; Kansas City, MO; Las Floras, CA; Los Angeles, CA; New York, NY; Noblesville, IN; Portland, OR; Raleigh, NC; River Edge, NJ; Rosemont, IL; San Jose, CA; and Fairfax, VA. Our international field offices are located in Hong Kong; Lyngby, Denmark; Madrid, Spain; Melbourne, Australia; Milan, Italy; Munich, Germany; Paris, France; Sao Paulo, Brazil; Seoul, South Korea; Singapore; Staines, United Kingdom; Stockholm, Sweden; Sydney, Australia; and Tokyo, Japan. Each of our field sales offices typically includes a territory manager and one or more systems engineers.
 
Typically, our field sales process includes an initial sales presentation in person or over the phone, a product demonstration, a product evaluation period, a closing meeting, and a purchasing process. Our sales process normally takes 30 to 180 days depending on the product, but this process can be longer for larger customers or enterprise-wide opportunities. A large majority of our sales are from repeat customers who often purchase additional software and our complementary products as their environments become more complex, their needs change, and as we introduce new products.
 
Our inside sales personnel complement our field sales organization by working with existing customers on add-on sales while prospecting and qualifying new potential opportunities. Our inside sales personnel also assist in sales lead qualification and distribute leads to the field sales organization or channel partners.
 
Value Added Resellers, System Integrators, Distributors and Original Equipment Manufacturers.    The NetIQ Authorized Reseller Program provides training, technical support, and priority communications, and facilitates joint sales and marketing activities with our sales partners. Our channel sales representatives focus on managing the sales activities of our regional channel partners and the branch sales offices of our national reseller partners. In fiscal 2002, FedTek Inc., Tech Data Product Management, Inc., Hewlett-Packard Company and Ingram Micro, Inc. represented our largest resellers. As of June 30, 2002, we had approximately 400 third party channel partners who resold our products and provided services to our customers worldwide. Our top ten resellers represented approximately 14% of our worldwide license revenue in fiscal 2002.
 
International Sales.    International sales represented 18%, 26%, and 23% of total revenue in fiscal 2002, 2001, and 1999, respectively. We anticipate that as we expand our international sales efforts, the percentage of revenue derived from international sources will increase. Currently, a majority of our international business is conducted in U.S. dollars. Our international operations are subject to a variety of risks—see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Operating Results” for more information regarding these risks.
 
Pricing.    We typically license our software to customers under non-exclusive, perpetual license agreements priced on a per-server or per-user basis. Our WebTrends Live hosted service is sold on a page-view basis and customers are charged based on usage. Original purchases of maintenance and renewal maintenance are priced at specified percentages of the related list prices or license fees as specified in the contract. Training and consulting services generally are billed on a time-incurred basis.
 
Our ability to increase our market share and sell our products in new markets depends on many factors including our relationships with multiple indirect marketing channels in the United States and internationally, competitive conditions, and changes in the way products are priced. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Operating Results” for more information regarding these risks.
 

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Marketing
 
Our marketing programs are designed to inform customers about the capabilities and benefits of our products. Our marketing efforts include participation in industry trade shows, technical conferences, technology seminars, preparation of competitive analyses, sales training, publication of technical and educational articles in industry journals, advertising, public relations, and analyst and press tours.
 
We often work with third parties to expand the market for our products. We have cooperative business relationships with developers of Windows and UNIX-based systems, including Dell Computer Corporation, Hewlett-Packard Company, International Business Machines Corporation, Microsoft Corporation, Oracle Corporation, Sun Microsystems, Inc., and Unisys Corporation. We have similar relationships with developers of applications and technologies, including Akamai Technologies, Inc., Check Point Software Technologies Ltd., Cisco Systems, Inc., Research in Motion Limited (RIM), Trend Micro Inc., and Veritas Software Company. As part of these relationships, we often cooperate in our engineering efforts and develop joint marketing programs with these partners. Other examples of our product-based relationships include Hewlett-Packard Company, whose service organization is a worldwide reseller of our AppManager product, Unisys Corporation, who bundles a portion of AppManager and resells other NetIQ products, and Akamai, who sells a web analytics hosted service based on our technology.
 
We have a range of relationships with systems integration and consulting organizations that may recommend or sell NetIQ products to their customers or where we cooperate in serving joint customers. Examples of these relationships include Avanade Inc., Electronic Data Systems Corp., Hewlett-Packard Services, IBM Global Services, and Siemens AG.
 
Customer Support
 
Customers typically purchase one year of product software maintenance and support with each new product license. Thereafter, customers may purchase software updates, maintenance releases, and technical support for an annual maintenance renewal fee. Our technical support organization provides ongoing technical support for our customers and for prospective customers during a pre-sales evaluation period. We offer tiered technical support services (including 24 hours a day, seven days a week) via our Internet site, telephone, e-mail, and fax.
 
Our professional services group provides product training, consulting, and implementation services to assist customers in maximizing the benefits from use of our products. Our training courses focus on the implementation, administration and use of our products. Training is provided on a periodic basis at our facilities in Houston, TX, Portland, OR, San Jose, CA, and Staines, United Kingdom; at the offices of NetIQ partners; and at customer sites. Additionally, our professional services group provides training to NetIQ partners to assist them in providing NetIQ products-related services and support to customers.
 
Research and Development
 
Our research and development organization is responsible for the design, development, and release of our products. This group is organized into product management, development, quality assurance, documentation, and localization disciplines. Members from each discipline form separate product teams that work closely with sales, marketing, and customer support to better understand market needs and user requirements. Additionally, we have a well-developed information feedback loop with our customers designed to enable us to respond to and address their changing system and systems management requirements. We also purchase or license third-party technology to shorten the time to market without compromising our competitive position or product quality. The focus of our research and development efforts is to bring new products and services as well as new versions of existing products to market quickly in order to keep pace with the rapid evolution of computer and Internet technologies and increasing customer demands. During fiscal 2002, 2001, and 2000, research and development expense was $61.0 million, $39.6 million, and $10.1 million, respectively, representing 22%, 24%, and 21%, respectively, of total revenue in each of those years.

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Competition
 
The markets we address are rapidly evolving and highly competitive, and we expect competition in our markets to persist and intensify. New products are frequently introduced and existing products are continually enhanced. We believe the key criteria our customers apply when evaluating our products compared to our competition include functionality, performance, reliability, ease of installation and use; price and total cost of ownership of our products relative to those of our competitors; and the quality of our support and service. We may not be able to compete successfully against current and/or future competitors and such inability would materially and adversely affect our business, future quarterly and annual operating results and financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Operating Results” for more information regarding these risks.
 
Existing Competition.    We currently face competition from a number of sources, including:
 
 
•
Customers’ internal information technology departments that develop or integrate system and application monitoring tools for their particular needs;
 
 
•
Application vendors who bundle management solutions with their products;
 
 
•
Providers of network and systems management framework products such as Computer Associates International, Inc., Hewlett-Packard Company, and International Business Machines Corporation;
 
 
•
Providers of performance and availability management solutions such as BMC Software, Inc., Concord Communications, Inc., and Precise Software Solutions, Ltd.;
 
 
•
Vendors of Internet servers, operating systems, and networking hardware. In particular, Microsoft Corporation, Oracle Corporation, Sun Microsystems, Inc., and others that bundle systems management solutions with their products;
 
 
•
Providers of administration products such as Quest Software, Inc. and BindView Corporation;
 
 
•
Providers of security solutions such as Internet Security Systems, Inc., Network Associates Technology, Inc., Symantec Corporation, and BindView Corporation;
 
 
•
Providers of hosted web analytics solutions such as WebSideStory, Inc.;
 
 
•
Providers of eBusiness intelligence solutions such as Accrue Software and the NetGenesis products from SPSS, Inc.; and
 
 
•
Web management service providers and vendors, such as consulting firms, web design firms, Internet audit firms, site management vendors, Internet service providers, and independent software vendors.
 
Intellectual Property
 
Our success is dependent in part upon proprietary technology. We rely primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures, and contractual provisions to protect our intellectual property rights in our technology. These laws and procedures provide only limited protection. We have 13 US patents either granted or allowed and 17 patent applications pending. There is no assurance that our patent applications will result in issued patents or that our issued patents will be upheld if challenged. While we seek protection for our intellectual property rights in certain countries outside the US where we do business, effective protection for our intellectual property rights may not be available in every country in which we market our products or services.
 
We license technology from third parties for products and certain components of our products. We intend to continue to license technology from third parties to enhance our products and build our product portfolio.
 
We are not aware that any of our products infringe any valid and enforceable intellectual property rights of third parties and we have not received notice that any of our products infringe on the intellectual property of any

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third party. However, 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 claim brought against us by a third party, with or without merit, could result in costly and time-consuming litigation, divert management’s attention and resources, and cause product delays or lost sales. Any such infringement claim could also require us to enter into royalty or licensing agreements that may not be available on terms acceptable to us, if at all. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Operating Results” for more information regarding these risks.
 
Employees
 
As of June 30, 2002, we had 1,253 employees, 493 of whom were in sales and marketing, 423 in research and development, 180 in customer support, and 157 in finance and administration. None of our employees is represented by a collective bargaining agreement. We have not experienced any work stoppages and consider our relations with our employees to be good. For a discussion of our need to attract and retain additional qualified personnel, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Operating Results” for more information regarding these risks.
 
Executive Officers
 
The following table sets forth information regarding our executive officers as of June 30, 2002.
 
Name
   
Age
   
Position
Charles M. Boesenberg*
   
54
   
President, Chief Executive Officer, and Chairman of the Board of Directors
James A. Barth
   
59
   
Senior Vice President, Finance and Administration, and Chief Financial Officer
Glenn S. Winokur
   
43
   
Chief Operating Officer
Richard M. Schell
   
52
   
Chief Technology Officer and General Manager, Performance and Availability Management
Betsy E. Bayha
   
51
   
Vice President, General Counsel and Secretary
Flint J. Brenton
   
46
   
Senior Vice President and General Manager, Security Management and Administration
Thomas R. Kemp
   
36
   
Senior Vice President, Corporate Strategy and Development
Mark P. Marron
   
41
   
Senior Vice President, Worldwide Sales
Daniel J. Meub
   
49
   
Senior Vice President and General Manager, Web Analytics
Richard J. Pleczko
   
44
   
Senior Vice President, Marketing
*
Appointed as Chairman of the Board effective August 1, 2002
 
Charles M. Boesenberg was named Chairman of the Board of Directors in August 2002 and joined NetIQ as President and Chief Executive Officer in January 2002. Prior to joining NetIQ, he was President of Post PC Ventures, a management and investment group. From December 1998 to February 2000, Mr. Boesenberg served as President and Chief Executive Officer of Integrated Systems, Inc., a provider of embedded systems software. Before joining Integrated Systems, Mr. Boesenberg was President and Chief Executive Officer of Magellan Corporation, which was the surviving corporation of a merger with Ashtech, Inc., a position that he assumed in January 1995 with Ashtech. Magellan specializes in satellite navigation and communication products. Mr. Boesenberg has held senior executive positions with a number of leading high-technology companies including International Business Machines Corporation and Apple Computer, Inc. Mr. Boesenberg served as a member of the Board of Directors of Symantec Corporation, a provider of Internet security technology, from

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June 1994 until September 12, 2002, but did not participate in Symantec Corporation board meetings after assuming his position with NetIQ. Mr. Boesenberg currently serves as a member of the Board of Directors of Epicor Software, a provider of client/server financial accounting systems. Mr. Boesenberg holds a B.S. in mechanical engineering from the Rose Hulman Institute of Technology and a M.S. in business administration from Boston University.
 
James A. Barth was named Senior Vice President, Finance and Administration, and Chief Financial Officer of NetIQ in November 2001, and for the period November 2000 to November 2001 he served as Senior Vice President, Finance, Chief Financial Officer and Secretary of NetIQ. From March 1999 to November 2000, he served as Vice President, Finance, Chief Financial Officer, and Secretary of NetIQ. From November 1997 until March 1999, Mr. Barth served as the Vice President, Chief Financial Officer and Secretary of Interlink Computer Sciences, a developer of enterprise networking software designed for the IBM mainframe platform. From October 1994 to November 1997, Mr. Barth served as Executive Vice President, Chief Financial Officer and Secretary of MagiNet, a provider of interactive entertainment and information systems. Mr. Barth also served as the Chief Financial Officer of Rational Software from July 1982 to March 1994. Mr. Barth holds a B.S. in business administration from the University of California at Los Angeles and is a certified public accountant.
 
Glenn S. Winokur was named Chief Operating Officer of NetIQ in July 2001. Prior to this time, he served as NetIQ’s Senior Vice President, Worldwide Sales since November 2000 and as Vice President, Worldwide Sales since October 1999. Prior to his promotion to Vice President, Worldwide Sales, Mr. Winokur served as NetIQ’s Vice President, Sales since May 1997 and from May 1996 to April 1997, Mr. Winokur served as NetIQ’s Director of Sales. From March 1994 to May 1996, Mr. Winokur served as Regional Sales Manager at Compuware. Mr. Winokur has a B.S. in business administration and marketing from the University of Illinois.
 
Richard M. Schell joined NetIQ as Chief Technology Officer and General Manager, Performance and Availability Management in June 2002. From February 2001, to June 2002, Dr. Schell was self-employed. Dr. Schell served as the Chief Executive Officer of iSharp, a provider of hosted solutions to monitor and administer site infrastructure performance, from September 1999 to February 2001, when the company filed for bankruptcy protection. From October 1994 to February 1998, he served as Senior Vice President, Product Development, at Netscape Communications, a provider of open client, server and integrated applications software. Dr. Schell has served on the Board of Directors of McAfee.com, a provider of computer security software, since September 1999. He holds an A.B., M.S. and a Ph.D. in computer science from the University of Illinois.
 
Betsy E. Bayha joined NetIQ as Vice President, General Counsel and Secretary in November 2001. Prior to joining NetIQ, Ms. Bayha was in private practice representing high technology corporations for more than 20 years. Ms. Bayha was a partner at General Counsel Associates from November 1994 through October 2001. From December 1986 through October 1994, Ms. Bayha was a partner at the international law firm of Coudert Brothers. Prior to 1986, Ms. Bayha held various positions with private law firms. Ms. Bayha holds a J.D. from Harvard Law School, a M.A. in public administration from The Ohio State University and a B.A. in economics from Oakland University.
 
Flint J. Brenton was named Senior Vice President and General Manager, Security Management and Administration of NetIQ Corporation in February 2000 and served as Senior Vice President of Worldwide Engineering of NetIQ from November 2000 to February 2000. From August 1999 to October 2000, Mr. Brenton served as Vice President of Worldwide eCommerce at Compaq Computer Corporation. From 1996 to 1999, Mr. Brenton served as Director of Product Development at BMC Software. From 1995 to 1996, Mr. Brenton served as General Manager at I-NET, Inc. From 1984 to 1994, Mr. Brenton held various executive and management positions with International Business Machines Corporation. Mr. Brenton holds a B.S. in accounting from Mount Union College and a Masters in business and public management from Rice University.

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Thomas R. Kemp was named Senior Vice President of Corporate Strategy and Development in July 2002. Since joining NetIQ in January of 1996 as a founding team member, Mr. Kemp has held various management positions at NetIQ. From January 2002 to June 2002, he served as Senior Vice President and General Manager of Performance and Availability Management. From November 2000 to December 2001, Mr. Kemp served as Senior Vice President of Products, and from June 2000 to October 2000, he was Vice President of Products. From May 1997 to May 2000, Mr. Kemp served as Vice President of Marketing, from January 1996 until April 1997, he served as Director of Products of NetIQ. From April 1995 to August 1993, he held various management positions at Compuware Corporation, a provider of software tools and professional services to boost business productivity. From July 1992 to July 1993, Mr. Kemp served as Manager of System Engineers at EcoSystems until its sale to Compuware. Prior to July 1992, he held various consulting and marketing positions at Oracle Corporation, a database management company. Mr. Kemp holds a B.S. in computer science and history from the University of Michigan.
 
Mark P. Marron joined NetIQ as Senior Vice President, Worldwide Sales in August 2001. Prior to joining NetIQ, from 1999 to August 2001, Mr. Marron served as General Manager Worldwide Channel Sales for Computer Associates International Inc., an enterprise software company. From 1997 to 1999, he served as Senior Vice President of Channel Sales and Operations for Europe, Middle East and Africa; from 1993 to 1997, he served as Senior Vice President of Channel Sales for U.S.; and from 1991 to 1993, he served as Vice President of Telesales at Computer Associates International, Inc. From 1989 to 1991 he served as District Sales Manager/Account Manager at On-Line Software International, and from 1988 to 1989, he was National Account Manager at Information Sciences, Inc. Mr. Marron holds a B.S. in computer science from Montclair State University.
 
Daniel J. Meub was named Senior Vice President and General Manager, Web Analytics in February 2002. He served as Senior Vice President eServices of NetIQ after WebTrends Corporation was acquired in March 2001. At WebTrends, he served as Chief Operating Officer from February 2000 to March 2001, Senior Vice President of Marketing and Sales from April 1999 to February 2000, and Vice President of Marketing from December 1998 to April 1999. From December 1996 to October 1998, Mr. Meub served as the President and Chief Executive Officer of Adaptive Solutions Inc., a supplier of forms processing software and imaging solutions for the health care and governmental markets, which filed a voluntary petition for bankruptcy protection. From January 1995 to November 1996, Mr. Meub served as the Executive Vice President of Marketing and Product Development of Now Software Inc., a supplier of time management and utility software. Mr. Meub has served in a variety of sales and marketing roles since 1976. Mr. Meub holds a B.A. from Stanford University and an M.B.A. from Northwestern University.
 
Richard J. Pleczko was named Senior Vice President of Marketing in November 2000 and served as NetIQ’s Vice President of Marketing after Mission Critical was acquired in May 2000. Prior to the merger in May 2000, he served as Mission Critical’s Vice President of Marketing and Product Management beginning December 1998. From May 1998 to December 1998, Mr. Pleczko served as Senior Vice President of Worldwide Marketing at Platinum Technology, a software company. From April 1985 until May 1998, Mr. Pleczko served in various managerial positions, including Senior Vice President, Marketing and Product Development, with Learmonth & Burchett, a leading provider of software development tools.

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ITEM 2.     PROPERTIES
 
Our corporate and administrative headquarters and certain research and development and sales and marketing personnel are located at the 85,000 square foot facility that we own in San Jose, California.
 
We lease the properties in the following locations to house our research and development and sales and marketing personnel:
 
Location
   
Area leased (sq. feet)
   
Lease expiration
Houston, Texas
   
111,000
   
September 2004 and October 2004
Portland, Oregon
   
100,000
   
January 2004 and December 2006
Santa Clara, California
   
32,000
   
June 2003
Research Triangle Park, North Carolina
   
23,000
   
July 2004
Staines, United Kingdom
   
11,000
   
March 2005
 
Our current facilities are in good condition and are expected to be adequate to meet our needs for the next 12 months. For additional information regarding our obligations under leases, see Note 11 to the Consolidated Financial Statements.
 
ITEM 3.     LEGAL PROCEEDINGS
 
We currently have no material legal proceedings.
 
ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
Not applicable.

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PART II
 
ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
Our Common Stock is traded on the Nasdaq National Stock Market under the trading symbol “NTIQ”. The following table presents the range of high and low closing prices for our common stock for the two years ended June 30, 2002:
 
    
Year Ended June 30,
    
2002
   
2001
    
High
   
Low
   
High
   
Low
Fourth Quarter
   
$
24.52
   
$
19.15
   
$
36.010
   
$
14.750
Third Quarter
   
$
37.23
   
$
20.27
   
$
81.125
   
$
18.625
Second Quarter
   
$
37.05
   
$
23.32
   
$
109.375
   
$
46.375
First Quarter
   
$
39.75
   
$
20.10
   
$
67.938
   
$
42.000
 
The approximate number of record holders of the shares of our common stock was 189 as of August 31, 2002, which does not include stockholders whose shares are held in trust by other entities. The actual number of stockholders is greater than this number of holders of record. Based on the number of annual reports requested by brokers, we estimate that we have approximately 14,000 beneficial owners of our common stock.
 
We have never declared or paid any cash dividends on shares of our common stock and do not expect to do so in the foreseeable future. We anticipate that all future earnings, if any, generated from operations will be retained to develop and expand our business. Any future decision to pay cash dividends will depend on our growth, profitability, financial condition and other factors the Board may deem relevant.
 
Recent Sales of Unregistered Securities
 
During the quarter ended March 31, 2002, we issued a warrant to purchase 140,000 shares of common stock at $21.81 per share to Heidrick & Struggles, Inc., a consulting firm, in connection with the search for the Company’s new chief executive officer. The warrant was valued at $1.5 million using the Black-Scholes pricing model with the following assumptions: contractual life of 16 months, risk free interest rate of 3.87%, volatility of 111%, and no dividends during the contractual term. No shares have been issued pursuant to the warrant. The issuance of this warrant was deemed exempt from registration under the Securities Act, in reliance on Section 4(2) thereof, as transactions not involving a public offering.
 
Use of Proceeds
 
Not applicable.

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ITEM 6.     SELECTED FINANCIAL DATA
 
The following selected historical consolidated financial data should be read in conjunction with our Consolidated Financial Statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included elsewhere in this Annual Report on Form 10-K.
 
    
Year Ended June 30,
  
    
2002
     
2001
     
2000
     
1999
     
1998
  
    
(In thousands, except per share data)
  
Consolidated Statements of Operations Data:
                                             
Software license revenue
   
$
207,848
 
   
$
125,670
 
   
$
37,235
 
   
$
18,433
 
   
$
6,603
 
Service revenue
   
 
70,391
 
   
 
41,267
 
   
 
10,685
 
   
 
3,136
 
   
 
467
 
    
  
  
  
  
Total revenue
   
 
278,239
 
   
 
166,937
 
   
 
47,920