<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 13, 1998.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MICROMUSE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 94-3288385
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
139 TOWNSEND STREET
SAN FRANCISCO, CALIFORNIA 94107
(415) 538-9090
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CHRISTOPHER J. DAWES
CHIEF EXECUTIVE OFFICER AND PRESIDENT
MICROMUSE INC.
139 TOWNSEND STREET
SAN FRANCISCO, CALIFORNIA 94107
(415) 538-9090
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
STEVEN M. SPURLOCK, ESQ. MARK A. BERTELSEN, ESQ.
ROBERT G. SPECKER, ESQ. JAMES N. STRAWBRIDGE, ESQ.
RICHARD R. HESP, ESQ. JON C. GONZALES, ESQ.
GUNDERSON DETTMER STOUGH WILSON SONSINI GOODRICH & ROSATI
VILLENEUVE FRANKLIN & HACHIGIAN, LLP PROFESSIONAL CORPORATION
155 CONSTITUTION DRIVE 650 PAGE MILL ROAD
MENLO PARK, CALIFORNIA 94025 PALO ALTO, CALIFORNIA 94304
(650) 321-2400 (650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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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>
<S> <C> <C> <C> <C>
PROPOSED PROPOSED
TITLE OF EACH CLASS MAXIMUM MAXIMUM
OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
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Common Stock, $0.01 par value.......... 3,450,000 $38.875 $134,118,750 $39,565
</TABLE>
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(1) Includes 450,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee, pursuant to Rule 457(c) under the Securities Act, based on
the average of the high and low prices for the Common Stock on the Nasdaq
National Market on July 9, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 13, 1998
3,000,000 Shares
LOGO
Common Stock
($.01 par value)
------------------
Of the shares of Common Stock, $.01 par value per share ("Common Stock"),
offered hereby (the "Offering"), 1,000,000 shares are being sold by Micromuse
Inc. ("Micromuse" or the "Company") and 2,000,000 shares are being sold by the
Selling Stockholders named herein under "Principal and Selling Stockholders."
The Company will not receive any of the proceeds of the shares sold by the
Selling Stockholders. The Company's Common Stock is listed on The Nasdaq Stock
Market's National Market ("NNM") under the symbol "MUSE." On July 10, 1998, the
reported last sale price of the Common Stock on the NNM was $36.75 per share.
See "Price Range of Common Stock."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 5 HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Per Share..................................... $ $ $ $
Total(2)...................................... $ $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company, estimated at
$ .
(2) Certain of the Selling Stockholders have granted the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase a
maximum of 450,000 additional shares of Common Stock to cover
over-allotments of shares. If the option is exercised in full, the total
Price to Public will be $ , Underwriting Discounts and Commissions
will be $ and Proceeds to Selling Stockholders will be $ .
The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that the shares of Common
Stock will be ready for delivery on or about , 1998, against payment in
immediately available funds.
CREDIT SUISSE FIRST BOSTON
NATIONSBANC MONTGOMERY SECURITIES LLC
SALOMON SMITH BARNEY
Prospectus dated , 1998.
<PAGE> 3
[ARTWORK]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS, PENALTY BIDS AND PASSIVE MARKET MAKING. SUCH ACTIVITIES, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. Except as
otherwise noted, all information in this Prospectus, including share and per
share information, assumes no exercise of the Underwriters' over-allotment
option.
THE COMPANY
Micromuse develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable Service Level
Management -- the effective monitoring and management of multiple elements
underlying an Information Technology infrastructure, including network devices,
computing systems and applications, and the mapping of these elements to the
business services they impact. The Company's Netcool product suite collects,
normalizes and consolidates high volumes of event information from heterogeneous
network management environments into an active database which de-duplicates and
correlates the resulting data in real-time, and then rapidly distributes
graphical views of the information to operators and administrators responsible
for monitoring service levels. Netcool's unique architecture allows for the
rapid, programmerless association of devices and specific attributes of those
devices to the business services they impact. This readily enables
administrators to create and modify their service views during systems
operations to monitor particular business services, rapidly identify which users
are affected by which network faults, pinpoint sources of network problems,
automate operator responses, facilitate problem resolution and report on the
results. The Company markets and distributes to customers through its own sales
force, OEMs, value added resellers and systems integrators. The Company has
distribution agreements with Bay Networks, Cisco Systems, CTC (Itochu),
Datacraft, Ericsson Data Services, N.E.T., and Vanstar. As of June 30, 1998, the
Company had over 150 customers operating in and serving a variety of industries.
Customers include AirTouch, America Online, AT&T Wireless, British
Telecommunications, Cable and Wireless, Cellular One, Deutsche Telekom, First
Data Resources, Genuity, GE Information Services, Global One, GTE
Internetworking, Merrill Lynch, MindSpring, Morgan Stanley, Netcom, Pacific
Bell, PSINet, Siemens, Southwestern Bell Internet Services, Unisource and
WorldCom/MFS/UUNet.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered................................ 3,000,000 shares (including 1,000,000 shares by the Company
and 2,000,000 shares by the Selling Stockholders)
Common Stock to be outstanding after the Offering... 15,979,945 shares(1)
Use of proceeds..................................... For working capital and other general corporate purposes.
Nasdaq National Market symbol....................... MUSE
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
--------------------------- ------------------
1995 1996 1997 1997 1998
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License................................................... $1,077 $3,374 $ 6,968 $ 3,991 $14,672
Maintenance and services.................................. 369 1,141 2,324 1,630 3,945
------ ------ ------- ------- -------
Total revenues...................................... 1,446 4,515 9,292 5,621 18,617
Gross profit................................................ 1,181 3,820 7,727 4,648 15,311
Net loss.................................................... $ (234) $ (236) $(7,876) $(5,029) $(1,738)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $23,503 $58,738
Working capital............................................. 40,306 75,541
Total assets................................................ 53,267 88,502
Total stockholders' equity.................................. 43,030 78,265
</TABLE>
- ---------------
(1) Based on the number of shares outstanding as of June 30, 1998. Assumes the
sale of 88,222 shares of Common Stock offered hereby by certain Selling
Stockholders upon the exercise of outstanding options. Excludes 1,598,709
shares of Common Stock issuable upon exercise of outstanding options as of
June 30, 1998, with a weighted average exercise price of $4.43 and 951,404
shares of Common Stock reserved for issuance under the Company's stock
plans. See "Management -- 1997 Stock Option/Stock Issuance Plan," and
"-- 1997 Employee Stock Purchase Plan".
(2) Adjusted to reflect the sale of 1,000,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $37.75 per share
(based on the average of the high and low per share sales price of the
Common Stock on July 10, 1998 as quoted on the Nasdaq National Market) and
after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, and the application of the net
proceeds therefrom, and adjusted to reflect the exercise of outstanding
options to purchase 88,222 shares of Common Stock by certain Selling
Stockholders. See "Capitalization."
3
<PAGE> 5
THE COMPANY
Micromuse develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable Service Level
Management ("SLM") -- the effective monitoring and management of multiple
elements underlying an Information Technology ("IT") infrastructure, including
network devices, computing systems and applications, and the mapping of these
elements to the business services they impact. The Company's Netcool product
suite collects, normalizes and consolidates high volumes of event information
from heterogeneous network management environments into an active database which
de-duplicates and correlates the resulting data in real time, and then rapidly
distributes graphical views of the information to operators and administrators
responsible for monitoring service levels. Netcool's unique architecture allows
for the rapid, programmerless association of devices and specific attributes of
those devices to the business services they impact. This readily enables
administrators to create and modify their service views during systems
operations to monitor particular business services, rapidly identify which users
are affected by which network faults, pinpoint sources of network problems,
automate operator responses, facilitate problem resolution and report on the
results.
IT has become increasingly mission critical for businesses as vital
communications, control and information services depend on reliable IT
performance. Effective, adaptable management of IT infrastructure is
particularly important for organizations in the business of providing network
services, such as telecommunications carriers and Internet Service Providers
("ISPs"). With SLM, network service providers can both manage their large
internal networks and offer additional network services to corporations that
require ongoing service guarantees, as set forth in their Service Level
Agreements ("SLAs"). The worldwide market for these services, known as Managed
Network Services or Network Operations Outsourcing, has grown rapidly as
corporations outsource the management and operation of their LANs and WANs to
service providers, and was estimated to be approximately $7.8 billion in 1997,
and projected to grow to approximately $14.7 billion in 2001, according to
International Data Corp ("IDC"). In the enterprise, SLM permits IT staffs to
guarantee network availability and performance, predict problems and maintain
SLA-defined service levels for mission critical services such as credit card
verification and electronic commerce.
Traditional solutions typically have been unable to deliver SLM cost
effectively. To capitalize on this opportunity, the Company's products have been
specifically designed to deliver SLM through ease of use and the efficient
management of complex, evolving and mission critical networks. The Company
believes that Netcool products provide customers a rapid return on investment by
offering: (i) cost-effective solutions with shorter implementation times and a
high level of configurability; (ii) efficient solutions that leverage customers'
existing network management products and services; and (iii) scalable solutions
that enable both the expansion and enhancement of current services as well as
the rapid deployment of new services to end-users.
The Company's initial target market has been organizations with large,
technically complex and heterogeneous networks, the majority of which have been
in the telecommunications, ISP and investment banking markets. The Company
markets and distributes to customers through its own sales force, OEMs, value
added resellers and systems integrators. The Company has distribution agreements
with Bay Networks, Cisco Systems, CTC (Itochu), Datacraft, Ericsson Data
Services, N.E.T., and Vanstar. As of June 30, 1998, the Company had over 150
customers operating in and serving a variety of industries. Customers include
AirTouch, America Online, AT&T Wireless, British Telecommunications, Cable and
Wireless, Cellular One, Deutsche Telekom, First Data Resources, Genuity, GE
Information Services, Global One, GTE Internetworking, Merrill Lynch,
MindSpring, Morgan Stanley, Netcom, Pacific Bell, PSINet, Siemens, Southwestern
Bell Internet Services, Unisource and WorldCom/MFS/UUNet.
Micromuse plc was incorporated in England in 1989 and in March 1997 became
a subsidiary of Micromuse Inc., a Delaware corporation formed in connection with
a corporate reorganization and relocation of the corporate headquarters to San
Francisco, California (the "Reorganization"). As used herein, the term
"Micromuse" or the "Company" refers to Micromuse Inc., Micromuse plc, and their
other subsidiaries, unless the context otherwise requires or unless otherwise
expressly stated. The Company's principal executive offices are located at 139
Townsend Street, San Francisco, California 94107, and its telephone number at
that address is (415) 538-9090.
4
<PAGE> 6
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information
contained in this Prospectus, should be considered carefully in evaluating the
Company and its business before purchasing shares of Common Stock offered
hereby. This Prospectus (including without limitation the following Risk
Factors) contains forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934) regarding the Company and its business, financial condition, results of
operations and prospects. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions or variations
of such words are intended to identify forward-looking statements, but are not
the exclusive means of identifying forward-looking statements in this
Prospectus. Additionally, statements concerning future matters such as the
development of new products, enhancements or technologies, possible changes in
legislation and other statements regarding matters that are not historical are
forward-looking statements.
Although forward-looking statements in this Prospectus reflect the good
faith judgment of the Company's management, such statements can only be based on
facts and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and actual results
and outcomes may differ materially from the results and outcomes discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include, but are not limited to, those
discussed below and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" as well as those discussed
elsewhere in this Prospectus. Readers are urged not to place undue reliance on
these forward-looking statements, which speak only as of the date of the
Prospectus. The Company undertakes no obligation to revise or update any
forward-looking statements in order to reflect any event or circumstance that
may arise after the date of the Prospectus.
LIMITED OPERATING HISTORY AS A SOFTWARE COMPANY; UNCERTAINTY OF FUTURE OPERATING
RESULTS
Although the Company began offering services for the network and systems
integration market in 1989, the Company first shipped its internally developed
software product, Netcool/OMNIbus, for the Service Level Management ("SLM")
market in January 1995. Accordingly, the Company has only a limited operating
history as a developer and provider of SLM software upon which an evaluation of
its business and prospects can be based. Since inception, the Company's software
business has incurred significant losses that were partially offset by profits
from the Company's systems integration business, which was divested in the
fourth quarter of fiscal 1997. Although the Company did not incur losses in the
fiscal quarter ended June 30, 1998, there can be no assurance that the Company
will be profitable in any period thereafter. The limited operating history of
the Company makes the prediction of future results of operations difficult if
not impossible, and the Company and its prospects must be considered in light of
the risks, costs and difficulties frequently encountered by emerging companies,
particularly companies in the competitive software industry. Although the
Company has achieved recent revenue growth, there can be no assurance that the
Company can generate substantial additional revenue growth on a quarterly or
annual basis, or that any revenue growth that is achieved can be sustained. In
addition, the Company has increased, and plans to increase further, its
operating expenses in order to develop new distribution channels, increase its
sales and marketing efforts, implement and improve its operational, financial
and management information systems, broaden its technical services and customer
support capabilities, fund higher levels of research and development and expand
its administrative resources in anticipation of future growth. To the extent
that increases in such expenses are not subsequently followed by increased
revenues, the Company's business, operating results and financial condition
would be materially adversely affected. In addition, in view of recent revenue
growth, the rapidly evolving nature of its business and markets and its limited
operating history in its current market, the Company believes that
period-to-period comparisons of financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance. As of June
30, 1998, the Company had accumulated net losses of $12.3 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
5
<PAGE> 7
VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY
The Company's quarterly operating results have fluctuated significantly in
the past, and will likely continue to fluctuate in the future, as a result of a
number of factors, many of which are outside the Company's control. These
factors include changes in the demand for the Company's software products and
services; the size and timing of specific sales; the timing of new hires; the
level of product and price competition that the Company encounters; changes in
the mix of, and lack of demand from, distribution channels through which
products are sold; the length of sales cycles; spending patterns and budgetary
resources of its customers on network management software solutions; the success
of the Company's new customer generation activities; introductions or
enhancements of products, or delays in the introductions or enhancements of
products, by the Company or its competitors; market acceptance of new products;
the Company's ability to anticipate and effectively adapt to developing markets
and rapidly changing technologies; the mix of products and services sold;
changes in the Company's sales incentives; changes in the renewal rate of
support agreements; the mix of international and domestic revenue; product life
cycles; software defects and other product quality problems; the Company's
ability to attract, retain and motivate qualified personnel; changes in the mix
of sales to new and existing customers; the extent of industry consolidation;
expansion of the Company's international operations; and general domestic and
international economic and political conditions. The timing of large individual
sales has been difficult for the Company to predict, and large individual sales
have, in some cases, occurred in quarters subsequent to those anticipated by the
Company. There can be no assurance that the loss or deferral of one or more
significant sales would not have a material adverse effect on the Company's
quarterly operating results. In addition, the Company's business has experienced
and may continue to experience significant seasonality. Historically, a
disproportionate amount of the Company's annual revenues have been generated by
sales of its products during the Company's fourth fiscal quarter. There can be
no assurance that this trend will not continue.
The Company typically realizes a significant portion of license revenue in
the last month of a quarter, frequently in the last weeks or even days of a
quarter. As a result, license revenue in any quarter is difficult to forecast
because it is substantially dependent on orders booked and shipped in that
quarter. Moreover, the Company's sales cycles, from initial evaluation to
delivery of software, vary substantially from customer to customer. In addition,
the Company's expense levels are based in part on its expectations of future
orders and sales, which, given the Company's limited operating history, are
extremely difficult to predict. A substantial portion of the Company's operating
expenses are related to personnel, facilities, and sales and marketing programs.
The level of spending for such expenses cannot be adjusted quickly and is,
therefore, relatively fixed in the short term. If revenue falls below the
Company's expectations in a particular quarter, the Company's operating results
could be materially adversely affected. See "-- Lengthy Sales Cycle."
Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from
quarter-to-quarter. As a result, quarter-to-quarter comparisons of operating
results are not necessarily meaningful or indicative of future performance.
Furthermore, the Company believes it is possible that in some future quarter the
Company's operating results will be below the expectations of public market
analysts or investors. In such event, or in the event that adverse conditions
prevail, or are perceived to prevail, with respect to the Company's business or
generally, the market price of the Company's Common Stock would likely be
materially adversely affected. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MANAGEMENT OF GROWTH; NEED TO IMPROVE FINANCIAL SYSTEMS AND CONTROLS
The Company has recently experienced a period of rapid revenue and customer
growth and a substantial expansion in the number of its personnel and in the
scope and the geographic area of its operations. The Company has grown from 92
employees on June 30, 1997 to 164 employees on June 30, 1998 and currently plans
to continue to recruit more staff. This growth has resulted in new and increased
responsibilities for management personnel and has placed and continues to place
a significant strain upon the Company's management, operating and financial
systems and resources. Moreover, members of the Company's management team,
including, without limitation, the Senior Vice President, Finance, Senior Vice
President, Sales and U.S. Controller have been in their current positions with
the Company for a limited period of time. To
6
<PAGE> 8
accommodate recent growth and to compete effectively and manage future growth,
if any, the Company will be required to continue to implement and improve a
variety of operational, financial and management information systems, procedures
and controls on a timely basis and to expand, train, motivate and manage its
work force. In particular, the Company will be required to improve its
accounting and financial reporting systems, which currently require substantial
management effort, and to successfully manage an increasing number of
relationships with customers, suppliers and employees. These demands will
require the addition of new management personnel, and the Company currently is
in the process of recruiting individuals to fill important management positions
such as Vice President, Marketing, a human resources director and managers for
research and development projects. Further, the Company will need to continue to
develop a U.S.-based financial and accounting system. The Company's future
success will depend to a significant extent on the recruitment and retention of
these key personnel, the implementation and improvement of operational,
financial and management systems and the ability of its current and future
executive officers to operate effectively, both independently and as a group.
There can be no assurance that the Company will be able to execute on a timely
and cost-effective basis all that is necessary to successfully manage any
growth, and any failure to do so could have a material adverse effect on the
Company's business, operating results or financial condition. See
"Business -- Employees."
NEED TO EXPAND AND IMPROVE PRODUCTIVITY OF SALES FORCE, TECHNICAL SERVICES AND
CUSTOMER SUPPORT ORGANIZATION
To increase market penetration, the Company continues to hire sales
personnel. Based on the Company's experience, it takes at least six months, if
not longer, for a salesperson to become fully productive. Although the Company
increased the size of its sales organization during the twelve-month period
ended June 30, 1998, the Company experienced difficulty in recruiting a
sufficient number of qualified sales people during the period. There can be no
assurance that the Company will be successful in recruiting additional sales
personnel or increasing the productivity of its sales personnel, and the failure
to do so could have a material adverse effect on the Company's business,
financial condition or results of operations. As a result of the recent
expansion of the installed base of Netcool/OMNIbus and the release of the
Company's Netcool/Reporter and Netcool/Internet Service Monitors, the demands on
the Company's technical services and customer support resources have grown
rapidly. See "-- Product Defects; Product Liability." The Company believes that
a high level of technical services, training and customer support is essential
to maintaining its competitive position. The Company will be required to
significantly expand its technical services and customer support organizations
if it is to achieve significant additional revenue growth. In addition, the
Company has recently redeployed personnel from its discontinued systems
integration business and other newly hired personnel and the Company expects
that increased resources will be spent on training and transitioning such
personnel. Competition for additional qualified technical personnel to perform
the required functions is intense. There can be no assurance that the Company's
technical services and customer support resources will be sufficient to manage
any future growth in the Company's business, and any failure of the Company to
expand its technical services and customer support organizations commensurate
with any expansion of the installed base of Netcool/OMNIbus or sales of
Netcool/Reporter or Netcool/Internet Service Monitors would have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business -- Technical Services" and "-- Customer Support."
NEED TO EXPAND DISTRIBUTION CHANNELS; DEPENDENCE ON THIRD-PARTY RELATIONSHIPS
A key element of the Company's business strategy is to develop
relationships with leading network equipment and telecommunications providers
and to expand the third-party channel of distribution. The Company is currently
investing, and plans to continue to invest, significant resources to develop
these relationships and channels of distribution, which could adversely affect
the Company's ability to generate profits. Third-party distributors accounted
for approximately 11% and 22% of the Company's total revenues in fiscal 1997 and
the nine-month period ended June 30, 1998, respectively. There can be no
assurance that the Company will be able to attract additional distributors that
will be able to market the Company's products effectively. Many of the Company's
agreements with third-party distributors are nonexclusive, and many of the
companies with which the Company has agreements also have similar agreements
with the Company's competitors or potential competitors. The Company's
third-party distributors have significantly greater sales
7
<PAGE> 9
and marketing resources than the Company, and there can be no assurance that
their sales and marketing efforts will not conflict with the Company's direct
sales efforts. In addition, although sales through third-party distributors
result in reduced sales and marketing expense with respect to such sales, the
Company sells its products to third-party distributors at reduced prices,
resulting in lower gross margins on such third-party sales. The Company believes
that its success in penetrating markets for its SLM applications depends in
large part on its ability to maintain its current distribution relationships, in
particular, those with Cisco Systems ("Cisco") and Bay Networks ("Bay"), to
cultivate additional distribution relationships and to cultivate alternative
distribution relationships if distribution channels change. There can be no
assurance that network equipment and telecommunications providers and
distributors will not discontinue their relationships with the Company, compete
directly with the Company or form additional competing arrangements with the
Company's competitors or that the Company will be able to expand its
distribution relationships beyond what currently exists. See "Business -- Sales
and Marketing" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
EMERGING SERVICE LEVEL MANAGEMENT MARKET; DEPENDENCE ON TELECOMMUNICATIONS
CARRIERS AND OTHER SERVICE PROVIDERS; DEMAND FOR SLM PRODUCTS
The market for the Company's products is in an early stage of development.
Although the rapid expansion and increasing complexity of computer networks in
recent years and the resulting emergence of SLAs has increased the demand for
SLM software products, the awareness of and the need for such products is a
recent development. Because the market for these products is only beginning to
develop, it is difficult to assess the size of this market, the appropriate
features and prices for products to address this market, the optimal
distribution strategy and the competitive environment that will develop. Failure
of the SLM market to grow at anticipated rates or failure of the Company to
properly assess and address the demands from such market would have a material
adverse effect on the Company's business, operating results and financial
condition. Historically, in excess of 15% of the Company's software revenues
have been derived from sales to investment banks. However, as a result of the
Company's strategy to focus on telecommunications carriers, ISPs and other
providers of managed networks, the Company expects sales to investment banks to
comprise a decreasing portion of total revenues over the long-term. In excess of
50% of the Company's software revenues to date have been derived from the sale
of its products to telecommunications carriers that deliver advanced
communications services to their customers. In addition, these providers are the
central focus of the Company's sales strategy. There can be no assurance that
telecommunications carriers and other service providers will be able to market
their communications services successfully, that SLM will gain widespread market
acceptance or that telecommunications carriers and other service providers will
use the Company's products in the deployment of their services. Delays in the
introduction of advanced services, such as network management outsourcing,
failure of such services to gain widespread market acceptance or the decision of
telecommunications carriers and other service providers not to use the Company's
products in the deployment of these services would have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance the Company will be able to penetrate these markets
further. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Customers."
COMPETITION
The Company's products are designed for use in the evolving SLM and
enterprise network management markets. Competition in these markets is intense
and is characterized by rapidly changing technologies, new and evolving industry
standards, frequent new product introductions and rapid changes in customer
requirements. The Company's current and prospective competitors offer a variety
of solutions to address the SLM and enterprise network management markets and
generally fall within the following five categories: (i) customer's internal
design and development organizations that produce SLM and network management
applications for their particular needs, in some cases using multiple instances
of products from hardware and software vendors such as Sun Microsystems, Inc.
("Sun"), Hewlett-Packard Company ("HP") and Cabletron Systems, Inc.
("Cabletron"); (ii) vendors of network and systems management frameworks
including Computer Associates International, Inc. ("CA") and International
Business Machines Corporation ("IBM"); (iii) vendors of network and systems
management applications including HP, Sun and IBM;
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(iv) providers of specific market applications including Boole & Babbage, Inc.
("Boole & Babbage") and several smaller software vendors; and (v) systems
integrators which primarily provide programming services to develop customer
specific applications including TCSI Corporation (formerly Teknekron
Communications Systems, Inc.) and Objective Systems Integrators, Inc. ("OSI").
In the future, as the Company enters new markets, the Company expects that such
markets will have additional, market-specific competitors. In addition, because
there are relatively low barriers to entry in the software market, the Company
expects additional competition from other established and emerging companies.
Increased competition is likely to result in price reductions and may result in
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, operating results or financial
condition.
Many of the Company's existing and potential customers continuously
evaluate whether to design and develop their own network operations support and
management applications or purchase them from outside vendors. Sometimes these
customers internally design and develop their own software solutions for their
particular needs and therefore may be reluctant to purchase products offered by
independent vendors such as the Company. As a result, the Company must
continuously educate existing and prospective customers as to the advantages of
the Company's products versus internally developed network operations support
and management applications.
Many of the Company's current and potential competitors have longer
operating histories and have significantly greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and a larger
customer base, than the Company. As a result, they may be able to devote greater
resources to the development, promotion, sale and support of their products or
to respond more quickly to new or emerging technologies and changes in customer
requirements than the Company. Existing competitors could also increase their
market share by bundling products having management functionality offered by the
Company's products with their current applications. Moreover, the Company's
current and potential competitors may increase their share of the SLM market by
strategic alliances and/or the acquisition of competing companies. In addition,
network operating system vendors could introduce new or upgrade and extend
existing operating systems or environments that include management functionality
offered by the Company's products, which could render the Company's products
obsolete and unmarketable. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, operating results or financial condition. See
"Business -- Competition."
PRODUCT DEFECTS; PRODUCT LIABILITY
Software products as internally complex as Netcool/OMNIbus,
Netcool/Reporter and Netcool/Internet Service Monitors frequently contain errors
or defects, especially when first introduced or when new versions or
enhancements are released. Despite extensive product testing by the Company, the
Company has in the past released versions of Netcool/OMNIbus with defects and
has discovered software errors in certain of its products after their
introduction. For example, version 3.0 of Netcool/OMNIbus, released in 1996, had
a number of material defects. Netcool/Reporter, currently in its initial
release, has features and performance characteristics that have had limited
market appeal. Although the Company is currently devoting significant management
and technical resources to improve the features and performance of
Netcool/Reporter, the Company does not expect significant revenue contribution
from Netcool/Reporter for the foreseeable future. To the extent such efforts
continue to require the allocation of a significant portion of the Company's
technical personnel resources, or if the performance and features of
Netcool/Reporter are not improved, the Company could continue to experience
delays in or failure of market acceptance of Netcool/Reporter, or damage to the
Company's reputation or relationships with its customers, any of which could
have a material adverse effect on the Company's business, operating results or
financial condition. See "-- Need to Expand and Improve Productivity of Sales
Force, Technical Services and Customer Support Organization." Additionally,
there can be no assurance that, despite testing by the Company and by current
and potential customers, defects and errors will not be found in new versions or
enhancements of the Company's products after commencement of commercial
shipments which could have a material adverse effect upon the Company's
business, operating results or financial condition.
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Since the Company's products are used by its customers to monitor and
address network problems and avoid failures of the network to support critical
business functions, any design defects, software errors, misuse of the Company's
products, incorrect data from network elements or other potential problems
within or out of the Company's control that may arise from the use of the
Company's products could result in financial or other damages to the Company's
customers. Such customers could seek damages from the Company for any such
losses, which, if successful, could have a material adverse effect on the
Company's business, operating results or financial condition. Although the
Company maintains product liability insurance, there can be no assurance that
such insurance will adequately cover, if at all, any such claims. Further,
although the Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential claims as well
as any liabilities arising from such claims, such provisions may not effectively
protect the Company against such claims and the liability and costs associated
therewith. Accordingly, any such claim could have a material adverse effect upon
the Company's business, results of operations or financial condition. See
"Business -- Products and Technology" and "-- Research and Development."
LENGTHY SALES CYCLE
The Company's software is generally used for division- or enterprise-wide,
business-critical purposes and involves significant capital commitments by
customers. Potential customers generally commit significant resources to an
evaluation of available enterprise software and require the Company to expend
substantial time, effort and money educating them about the value of the
Company's solutions. Sales of the Company's software products often require an
extensive sales effort throughout a customer's organization because decisions to
license such software generally involve the evaluation of the software by a
significant number of customer personnel in various functional and geographic
areas, each often having specific and conflicting requirements. A variety of
factors, including actions by competitors and other factors over which the
Company has little or no control, may cause potential customers to favor a
particular supplier or to delay or forego a purchase. As a result of these and
other factors, the sales cycle for the Company's products is long, typically
about three to six months. As a result of the length of the sales cycle for its
software products, the Company's ability to forecast the timing and amount of
specific sales is limited, and the delay or failure to complete one or more
large license transactions could have a material adverse effect on the Company's
business, operating results or financial condition and cause the Company's
operating results to vary significantly from quarter to quarter. See
"-- Variability of Quarterly Operating Results; Seasonality," and
"Business -- Sales and Marketing."
DEPENDENCE ON KEY PERSONNEL
The Company's success is substantially dependent upon a limited number of
key management, sales, product development, technical services and customer
support personnel. The loss of the services of one or more of such key employees
could have a material adverse effect on the Company's business, financial
condition or results of operations. In particular, the Company would be
materially adversely affected if it were to lose the services of Christopher J.
Dawes, Chief Executive Officer of the Company, who has provided significant
leadership and direction to the Company since its inception. The Company does
not have employment contracts with any of its key personnel. In addition, the
Company's success will be dependent upon its continuing ability to attract,
train and retain additional highly qualified management, sales, product
development, technical services and customer support personnel. The Company has
at times and continues to experience difficulty in recruiting qualified
personnel. Because the Company faces intense competition in its recruiting
activities, there can be no assurance that the Company will be able to attract
and/or retain qualified personnel. Failure to attract and retain the necessary
qualified personnel on a timely basis could have a material adverse effect on
the Company's business, operating results or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PRODUCT CONCENTRATION
Other than discontinued operations, all of the Company's revenues have been
derived from licenses for its Netcool family of products and related
maintenance, training and consulting services. The Company currently expects
that Netcool/OMNIbus-related revenues will continue to account for all or
substantially all of the
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Company's revenues for the remainder of fiscal 1998 and for the foreseeable
future thereafter. Therefore, the Company's future operating results,
particularly in the near term, are significantly dependent upon the continued
market acceptance of Netcool/OMNIbus, improvements to Netcool/OMNIbus and new
and enhanced Netcool/OMNIbus applications. There can be no assurance that
Netcool/OMNIbus will continue to achieve market acceptance or that the Company
will be successful in developing, introducing or marketing improvements to
Netcool/OMNIbus or new or enhanced Netcool/OMNIbus applications. The life cycles
of Netcool/OMNIbus, including the Netcool/OMNIbus applications, are difficult to
estimate due in large part to the recent emergence of many of the Company's
markets, the effect of future product enhancements and competition. A decline in
the demand for Netcool/OMNIbus as a result of competition, technological change
or other factors would have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Products and Technology" and "-- Research and Development."
SALES CONCENTRATION
To date, a significant portion of the Company's revenues in any particular
period has been attributable to a limited number of customers. During the
quarter ended June 30, 1998, entities affiliated with WorldCom and entities
affiliated with British Telecommunications, accounted for approximately 17% and
8%, respectively, of the Company's total revenues. During the quarter ended
March 31, 1998, the Company did not have any customers that contributed over 10%
of total revenues. In addition, during the quarter ended December 31, 1997,
Deutsche Bank AG, an entity affiliated with Deutsche Bank Securities, an
underwriter in the Company's initial public offering, accounted for
approximately 30% of the Company's total revenues. In addition, America Online
accounted for 13% of total revenues in the quarter ended December 31, 1997. In
fiscal 1997, entities affiliated with WorldCom and entities affiliated with
British Telecommunications, accounted for 18% and 9%, respectively, of the
Company's total revenues. In addition, entities affiliated with British
Telecommunications accounted for 57% and 14% of the Company's total revenues for
fiscal 1995 and fiscal 1996, respectively. The Company expects that it will
continue to be dependent upon a limited number of customers for a significant
portion of its revenues in future periods. As a result of this concentration of
sales, the Company's business, operating results or financial condition could be
materially adversely affected by the failure of anticipated orders from
significant customers to materialize or by deferrals or cancellations of orders
by significant customers. In addition, there can be no assurance that revenue
from customers that have accounted for significant revenues in past periods,
individually or as a group, will continue, or if continued, will reach or exceed
historical levels in any future period. The terms of the Company's agreements
with its customers typically contain a one-time license fee and a prepayment of
one year of maintenance fees. The maintenance agreement is renewable annually at
the option of the customer and there are no minimum payment obligations or
obligations to license additional software. Therefore, there can be no assurance
that any of the Company's current customers will generate significant revenues
in future periods. For example, pre-existing customers may be part of, or become
part of, large organizations which standardize using a competitive product. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Sales and Marketing."
RISKS ASSOCIATED WITH INTERNATIONAL LICENSING AND OPERATIONS
License, maintenance and service revenue outside of the United States
accounted for 76%, 55% and 48% of the Company's total revenue in fiscal 1995,
1996 and 1997. The Company expects that international license, maintenance and
consulting revenue will continue to account for a significant portion of its
total revenue in future periods. Currency exchange fluctuations in countries in
which the Company licenses its products or conducts operations historically have
had, and in the future could continue to have, a material adverse effect on the
Company's business, operating results or financial condition by resulting in
pricing levels that are not competitive or expense levels that adversely impact
profitability. In such event, gains and losses on the conversion to United
States dollars of accounts receivable and accounts payable arising from
international operations may contribute to fluctuations in the Company's
operating results. The Company intends to enter into additional international
markets and to continue to expand its operations outside of the United States by
expanding its direct sale force and pursuing additional strategic relationships.
Such expansion will require significant management attention and expenditure of
significant financial resources and could adversely affect
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the Company's ability to generate profits. To the extent that the Company is
unable to establish additional foreign operations in a timely manner, the
Company's growth, if any, in international sales will be limited, and the
Company's business, operating results or financial condition could be materially
adversely affected. The Company maintains a significant portion of its
operations, including the bulk of its software development operations, in the
United Kingdom. The Company's international operations and revenue involve a
number of inherent risks, including longer receivables collection periods and
greater difficulty in accounts receivable collection, difficulty in staffing and
managing foreign operations, an even lengthier sales cycle than with domestic
customers, the impact of possible recessionary environments in economies outside
the United States, unexpected changes in regulatory requirements, including a
slowdown in the rate of privatization of telecommunications service providers,
reduced protection for intellectual property rights in some countries and
tariffs and other trade barriers. There can be no assurance that the Company
will be able to sustain or increase revenue derived from international licensing
and service or that the foregoing factors will not have a material adverse
effect on the Company's future international license, service and other revenue,
and, consequently, on the Company's business, operating results or financial
condition. The Company pays the expenses of its international operations in
local currencies and does not currently engage in hedging transactions with
respect to such obligations. In addition, sales in Europe and certain other
parts of the world typically are adversely affected in the quarter ending
September 30, as many customers reduce their business activities during the
summer months. If the Company's international sales become a greater component
of total revenue, these seasonal factors may have a more pronounced effect on
the Company's operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Customers" and
"-- Sales and Marketing."
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE; NEED TO MANAGE PRODUCT TRANSITIONS;
DEPENDENCE ON THIRD-PARTY SOFTWARE PLATFORMS
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, changing regulatory environments,
frequent new product introductions and rapid changes in customer requirements.
The introduction or announcement of products by the Company or its competitors
embodying new technologies and the emergence of new industry standards and
practices can render existing products obsolete and unmarketable. As a result,
the life cycles of the Company's products are difficult to estimate. The
Company's future success will depend on its ability to enhance its existing
products and to develop and introduce, on a timely and cost-effective basis, new
products and product features that keep pace with technological developments and
emerging industry standards and address the increasingly sophisticated needs of
its customers. Historically, the Company has used its close working relationship
with large customers to define its product development direction. There can be
no assurance that the Company will be successful in developing and marketing new
products or product features that respond to technological change or evolving
industry standards, that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of these
new products and features, or that its new products or product features will
adequately meet the requirements of the marketplace and achieve market
acceptance. In particular, the widespread adoption of the Telecommunications
Management Network ("TMN") architecture for managing telecommunications networks
would force the Company to adapt its products to such standard, and there can be
no assurance that this could be done on a timely or cost-effective basis, if at
all. In addition, to the extent that any product upgrade or enhancement requires
extensive installation and configuration, current customers may postpone or
forgo the purchase of new versions of the Company's products. If the Company is
unable, for technological or other reasons, to develop and introduce
enhancements of existing products or new products in a timely manner, the
Company's business, operating results and financial condition will be materially
adversely affected. In addition, there can be no assurance that the introduction
or announcement of new product offerings by the Company or one or more of its
competitors will not cause customers to defer licensing of existing Company
products. Any such deferment of purchases could have a material adverse effect
on the Company's business, operating results or financial condition.
The Company's products are designed to operate on a variety of hardware and
software platforms employed by its customers in their networks. The Company must
continually modify and enhance its products to keep pace with changes in
hardware and software platforms and database technology. As a result,
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uncertainties related to the timing and nature of new product announcements,
introductions or modifications by systems vendors, particularly Sun, IBM, HP,
Cabletron and Cisco and by vendors of relational database software, particularly
Oracle Corporation ("Oracle") and Sybase, Inc. ("Sybase"), could materially
adversely impact the Company's business, operating results or financial
condition. For example, the Company is currently modifying certain of its
products to operate with the Microsoft Windows NT operating system. The failure
of the Company's products to operate effectively across the various existing and
evolving versions of hardware and software platforms and database environments
employed by customers could have a material adverse effect on the Company's
business, operating results or financial condition. See "Business -- Research
and Development."
DEPENDENCE UPON PROPRIETARY TECHNOLOGY; RISK OF THIRD-PARTY CLAIMS OF
INFRINGEMENT
The Company's success and ability to compete is dependent in significant
part upon its proprietary software technology. The Company relies on a
combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its proprietary
rights. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. There can be
no assurance that the steps taken by the Company to protect its proprietary
technology will prevent misappropriation of such technology, and such
protections may not preclude competitors from developing products with
functionality or features similar to the Company's products. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries. While the Company believes that its products and
trademarks do not infringe upon the proprietary rights of third parties, there
can be no assurance that the Company will not receive future communications from
third parties asserting that the Company's products infringe, or may infringe,
the proprietary rights of third parties. The Company expects that software
product developers will be increasingly subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel, cause product
shipment delays or require the Company to develop non-infringing technology or
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the Company
or at all. In the event of a successful claim of product infringement against
the Company and failure or inability of the Company to develop non-infringing
technology or license the infringed or similar technology, the Company's
business, operating results or financial condition could be materially adversely
affected. See "Business -- Intellectual Property and Other Proprietary Rights."
RISKS ASSOCIATED WITH THIRD-PARTY LICENSES
The Company relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in the Company's products to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms or at all. Although the Company
believes that alternative software is available from other third-party
suppliers, the loss of or inability to maintain any of these software licenses
or the inability of the third parties to enhance in a timely and cost-effective
manner their products in response to changing customer needs, industry standards
or technological developments could result in delays or reductions in product
shipments by the Company until equivalent software could be developed internally
or identified, licensed and integrated, which would have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business -- Intellectual Property and Other Proprietary Rights."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such
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compliance. In the Company's standard license agreements, the Company warrants
to licensees that its software routines and programs are Year 2000 compliant
(i.e. that they accurately process date-related data within any century and
between two or more centuries). Although the Company believes its software
products are Year 2000 compliant, there can be no assurance that the Company's
software products contain all necessary software routines and programs necessary
for the accurate calculation, display, storage and manipulation of data
involving dates. If any of the Company's licensees experience Year 2000
problems, such licensee could assert claims for damages against the Company. Any
such litigation could result in substantial costs and diversion of the Company's
resources even if ultimately decided in favor of the Company. In addition, many
companies are expending significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase software products such as those offered by
the Company. The occurrence of any of the foregoing could have a material
adverse effect on the Company's business, operating results or financial
condition.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been and is likely to continue to
be highly volatile and may be significantly affected by factors such as actual
or anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, developments with respect to copyrights or proprietary rights,
adoption of new accounting standards affecting the software industry, general
market conditions and other factors. In addition, the stock market has from time
to time experienced significant price and volume fluctuations that have
particularly affected the market price for the common stock of technology
companies. These types of broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been initiated against such company. Such litigation
could result in substantial costs and a diversion of management's attention and
resources which could have a material adverse effect upon the Company's
business, operating results or financial condition. See "Price Range of Common
Stock."
GENERAL ECONOMIC AND MARKET CONDITIONS
Segments of the software industry have experienced significant economic
downturns characterized by decreased product demand, price erosion, work
slowdowns and layoffs. The Company's operations may in the future experience
substantial fluctuations from period to period as a consequence of general
economic conditions affecting the timing of orders from major customers and
other factors affecting capital spending. Although the Company has a diverse
client base, it has targeted certain vertical markets. Therefore, any economic
downturns in general or in the targeted vertical segments in particular would
have a material adverse effect on the Company's business, operating results and
financial condition.
CONTROL BY EXISTING STOCKHOLDERS; BENEFITS OF THE OFFERING TO CURRENT
STOCKHOLDERS
Immediately after the closing of this Offering, approximately 43% of the
outstanding Common Stock will be held by the directors and executive officers of
the Company, together with certain entities affiliated with them, assuming no
exercise of outstanding stock options. As a result, these stockholders, if
acting together, would be able to control substantially all matters requiring
approval by the stockholders of the Company, including the election of all
directors and approval of significant corporate transactions. See "Management --
Executive Officers and Directors," "Certain Transactions" and "Principal and
Selling Stockholders."
ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws and certain provisions of Delaware law could delay or make difficult
a merger, tender offer or proxy contest involving the Company. The authorized
but unissued capital stock of the Company includes 5,000,000 shares of preferred
stock. The Board of Directors is authorized to provide for the issuance of such
preferred stock in one or more series and to fix the designations, preferences,
powers and relative, participating, optional or other rights and restrictions
thereof. Accordingly, the Company may in the future issue a series of preferred
stock, without further stockholder approval, that will have preference over the
Common Stock with respect to the payment of dividends and upon liquidation,
dissolution or winding-up of the Company. See "Description of Capital
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Stock -- Preferred Stock." Further, Section 203 of the General Corporation Law
of the State of Delaware (as amended from time to time, the "DGCL"), which is
applicable to the Company, prohibits certain business combinations with certain
stockholders for a period of three years after they acquire 15% or more of the
outstanding voting stock of a corporation. In addition, the Restated Certificate
of Incorporation provides that the Board of Directors is divided into two
classes of directors with each class serving a staggered two-year term. The
classification of the Board of Directors has the effect of generally requiring
at least two annual stockholder meetings, instead of one, to replace a majority
of the Board members. Any of the foregoing could adversely affect holders of the
Common Stock or discourage or make difficult any attempt to obtain control of
the Company. See "Description of Capital Stock -- Anti-takeover Effects of
Provisions of the Certificate of Incorporation, Bylaws and Delaware Law."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock (including shares
issued upon the exercise of outstanding options) in the public market after this
Offering could materially adversely affect the market price of the Common Stock.
Such sales also might make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
the Company deems appropriate. See "Management -- Employee Benefit Plans,"
"Shares Eligible for Future Sale" and "Underwriting."
NO SPECIFIC USE OF PROCEEDS
The Company has not designated any specific use for the net proceeds from
the sale by the Company of the Common Stock offered hereby. The Company expects
to use the net proceeds for general corporate purposes, including working
capital to fund anticipated operating losses and capital expenditures. The
Company may, when the opportunity arises, use an unspecified portion of the net
proceeds to acquire or invest in complementary businesses, products and
technologies. From time to time, in the ordinary course of business, the Company
expects to evaluate potential acquisitions of such businesses, products or
technologies. However, the Company has no present understandings, commitments or
agreements with respect to any material acquisition or investment. Accordingly,
management will have significant flexibility in applying the net proceeds of
this Offering. The failure of management to apply such funds effectively could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Use of Proceeds."
DILUTION; POTENTIAL NEED FOR ADDITIONAL FINANCING; DIVIDEND POLICY
Investors participating in this Offering will incur immediate and
substantial dilution of pro forma net tangible book value per share of $32.85
from the assumed public offering price. To the extent outstanding options to
purchase the Company's Common Stock are exercised, there will be further
dilution. There can be no assurance that the Company will not require additional
funds to support its working capital requirements or for other purposes, in
which case the Company may seek to raise such additional funds through public or
private equity financing or from other sources. There can be no assurance that
such additional financing will be available or that, if available, such
financing will be obtained on terms favorable to the Company and would not
result in additional dilution to the Company's stockholders. The Company did not
pay or declare any cash dividends on the Common Stock or other securities during
fiscal 1996 or fiscal 1997 and does not anticipate paying cash dividends in the
foreseeable future. See "Dilution" and "Dividend Policy."
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<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,000,000 shares of Common
Stock to be sold by the Company in this Offering, at an assumed public offering
price of $37.75 per share, are estimated to be $35,024,000, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company will not receive any of the proceeds from the sale
of shares of Common Stock by the Selling Stockholders.
The principal purposes of the Offering are to increase the Company's equity
capital and to provide liquidity for certain of the Company's existing
stockholders.
The Company has no current specific plans for the net proceeds of this
Offering, but the Company expects to use the proceeds of the Offering for
working capital and general corporate purposes. The Company may also use a
portion of the net proceeds for possible acquisition of businesses, products and
technologies that are complementary to those of the Company. Although the
Company has not identified any specific businesses, products or technologies
that it may acquire, nor are there any current agreements or negotiations with
respect to any such transactions, the Company from time to time evaluates such
opportunities. Pending such uses, the Company plans to invest the net proceeds
in short-term, interest-bearing, investment-grade securities. See "Risk
Factors -- No Specific Use of Proceeds."
DIVIDEND POLICY
The Company did not declare or pay any cash dividends on its capital stock
during fiscal 1996 or fiscal 1997 and does not expect to do so in the
foreseeable future. The Company anticipates that all future earnings, if any,
generated from operations will be retained by the Company to develop and expand
its business. Any future determination with respect to the payment of dividends
will be at the discretion of the Board of Directors and will depend upon, among
other things, the Company's operating results, financial condition and capital
requirements, the terms of then-existing indebtedness, general business
conditions and such other factors as the Board of Directors deems relevant.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded publicly on the Nasdaq National
Market since February 13, 1998 under the symbol "MUSE." The Company's initial
public offering price was $12.00 per share. The following table sets forth for
the periods indicated the high and low closing prices of the Common Stock. Prior
to the Company's initial public offering, there was no established public
trading market for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
Year ending September 30, 1998
Fourth Quarter (through July 10, 1998).................... $ 41 1/8 $ 36 3/4
Third Quarter............................................. 40 13/16 21 1/2
Second Quarter (from February 13, 1998, the first trading
date).................................................. 26 5/8 18 7/8
</TABLE>
On July 10, 1998, the closing price of the Common Stock on the Nasdaq
National Market was $36.75 per share. As of June 30, 1998, there were
approximately 57 holders of record of the Common Stock.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998: (i) on an actual basis, (ii) on a pro forma basis to reflect the
exercise of outstanding options to purchase 88,222 shares of Common Stock by
certain Selling Shareholders immediately prior to the closing of this offering,
and (iii) on a pro forma basis as adjusted to reflect the sale of 1,000,000
shares of Common Stock offered by the Company hereby and the receipt of the
estimated net proceeds therefrom at an assumed public offering price of $37.75
per share and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company. See "Use of Proceeds." This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998(1)
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding........... $ -- $ -- $ --
Common stock, $0.01 par value, 60,000,000 shares
authorized, 14,891,723 shares issued and outstanding,
actual; 14,979,945 shares issued and outstanding, pro
forma; 15,979,945 shares issued and outstanding, pro
forma as adjusted...................................... 148 149 159
Additional paid-in capital................................ 55,455 55,665 90,679
Deferred compensation..................................... (173) (173) (173)
Cumulative translation adjustment......................... (100) (100) (100)
Accumulated deficit....................................... (12,300) (12,300) (12,300)
-------- ------- --------
Total stockholders' equity............................. $ 43,030 43,241 $ 78,265
-------- ------- --------
Total capitalization................................. $ 43,030 43,241 $ 78,265
======== ======= ========
</TABLE>
- ------------------------
(1) Excludes (i) 1,598,709 shares of Common Stock issuable upon exercise of
outstanding options as of June 30, 1998 with a weighted average exercise
price of $4.43 per share; and (ii) 951,404 shares reserved for issuance
under the Company's stock plans. See "Management -- 1997 Stock Option/Stock
Issuance Plan," and "-- 1997 Employee Stock Purchase Plan".
17
<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company on June 30, 1998,
after giving effect to the exercise of outstanding options to purchase 88,222
shares of Common Stock by certain Selling Stockholders, was $43,241,000, or
approximately $2.89 per share of Common Stock. "Net tangible book value"
represents the amount of tangible assets less total liabilities. Without taking
into account any other changes in the net tangible book value after June 30,
1998, other than to give effect to the receipt by the Company of the net
proceeds from the sale of the shares of Common Stock offered by the Company
hereby at an assumed public offering price of $37.75 per share and after
deducting underwriting discounts and estimated offering expenses payable by the
Company, the net tangible book value of the Company as of June 30, 1998 would
have been $78,265,000, or $4.90 per share. This represents an immediate increase
in net tangible book value of $2.02 per share to existing stockholders and an
immediate dilution in net tangible book value of $32.85 per share to purchasers
of Common Stock in the Offering. The per share dilution is illustrated in the
following table:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $37.75
Pro forma net tangible book value per share as of June 30,
1998................................................... $2.89
Increase per share attributable to new investors.......... 2.01
-----
Adjusted net tangible book value per share as of June 30,
1998(1)................................................... 4.90
------
Dilution per share to new investors......................... $32.85
======
</TABLE>
The following table summarizes as of June 30, 1998, the difference between
the existing stockholders and the purchasers of shares in the Offering (at an
assumed public offering price of $37.75 per share) with respect to the number of
shares of Common Stock purchased from the Company, the total cash consideration
paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 14,979,945 93.7% $ 62,465,000 62.3% $4.17
New investors(1)...................... 1,000,000 6.3 37,750,000 37.7 37.75
---------- ----- ------------ -----
Total....................... 15,979,945 100.0% $100,215,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing computations are based on the number of shares outstanding as
of June 30, 1998, and assume no exercise of the Underwriters' over-allotment
option or any exercise of outstanding stock options after June 30, 1998, except
the foregoing calculations give effect to the exercise of outstanding options to
purchase 88,222 shares of Common Stock by certain Selling Stockholders. As of
June 30, 1998, there were 1,598,709 shares of Common Stock issuable upon
exercise of outstanding options with a weighted average exercise price of $4.43
per share, and an additional 951,404 shares reserved for issuance under the
Company's stock plans. To the extent outstanding options are exercised, there
will be further dilution to new investors. See "Management -- 1997 Stock
Option/Stock Issuance Plan," and "-- 1997 Employee Stock Purchase Plan".
- ---------------
(1) Sales by Selling Stockholders in this Offering will reduce the number of
shares held by existing stockholders to 12,979,945, or approximately 81.2%
(12,529,945 shares or approximately 78.4% if the Underwriters'
over-allotment option is exercised in full), and will increase the number of
shares held by new investors to 3,000,000, or approximately 18.8% (3,450,000
shares or approximately 21.6% if the Underwriters' over-allotment option is
exercised in full) of the total number of shares of Common Stock to be
outstanding after this Offering.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data at September 30, 1996 and
1997 and for each of the years in the three-year period ended September 30, 1997
are derived from consolidated financial statements of the Company that have been
audited by KPMG Peat Marwick LLP ("KPMG"), independent auditors, and are
included elsewhere in this Prospectus. The consolidated balance sheet data at
September 30, 1995 is derived from the audited consolidated financial statements
of the Company that are not included herein. The consolidated statements of
operations data for the years ended September 30, 1993 and 1994 and the
consolidated balance sheet data at September 30, 1993 and 1994 are derived from
unaudited consolidated financial statements and are not included herein. The
consolidated statement of operations data for the nine months ended June 30,
1997 and 1998 and the consolidated balance sheet data at June 30, 1998 are
derived from unaudited consolidated financial statements included elsewhere in
this Prospectus. The historical results are not necessarily indicative of the
operating results to be expected in the future. The following selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
----- ----- ------ ------ -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License................................................... $ -- $ 111 $1,077 $3,374 $ 6,968 $ 3,991 $ 14,672
Maintenance and services.................................. -- 3 369 1,141 2,324 1,630 3,945
----- ----- ------ ------ -------- ------- --------
Total revenues...................................... -- 114 1,446 4,515 9,292 5,621 18,617
----- ----- ------ ------ -------- ------- --------
Cost of revenues:
License................................................... -- 61 163 311 523 324 945
Maintenance and services.................................. -- -- 102 384 1,042 649 2,361
----- ----- ------ ------ -------- ------- --------
Total cost of revenues.............................. -- 61 265 695 1,565 973 3,306
----- ----- ------ ------ -------- ------- --------
Gross profit................................................ -- 53 1,181 3,820 7,727 4,648 15,311
Operating expenses:
Sales and marketing....................................... -- 30 728 1,768 8,970 4,669 10,819
Research and development ................................. 224 318 708 1,582 2,042 1,282 3,804
General and administrative................................ 78 236 584 996 4,244 2,734 3,154
----- ----- ------ ------ -------- ------- --------
Total operating expenses............................ 302 584 2,020 4,346 15,256 8,685 17,777
----- ----- ------ ------ -------- ------- --------
Loss from operations........................................ (302) (531) (839) (526) (7,529) (4,037) (2,466)
Other income (expense):
Interest income........................................... -- -- -- 8 64 8 992
Interest expense.......................................... (17) (68) (106) (212) (1,268) (717) (4)
Other..................................................... -- -- -- 25 (200) (179) (210)
----- ----- ------ ------ -------- ------- --------
Loss before income taxes.................................... (319) (599) (945) (705) (8,933) (4,925) (1,688)
Income taxes................................................ -- -- -- 100 -- -- 50
----- ----- ------ ------ -------- ------- --------
Loss from continuing operations............................. (319) (599) (945) (805) (8,933) (4,925) (1,738)
Discontinued operations:
Income (loss) from discontinued operations................ 633 335 711 569 (104) (104) --
Gain on disposal of discontinued operations(1)............ -- -- -- -- 1,161 -- --
----- ----- ------ ------ -------- ------- --------
Net income (loss)........................................... $ 314 $(264) $ (234) $ (236) $ (7,876) $(5,029) $ (1,738)
Accretion on redeemable convertible preferred stock......... -- -- -- -- (755) (353) (1,334)
----- ----- ------ ------ -------- ------- --------
Net income (loss) applicable to holders of common stock..... $ 314 $(264) $ (234) $ (236) $ (8,631) $(5,382) $ (3,072)
===== ===== ====== ====== ======== ======= ========
Basic and diluted per share data:
Loss from continuing operations applicable to holders of
common stock............................................ $(0.11) (0.20) (0.17) (0.14) (1.52) (0.84) (0.29)
Net income (loss) applicable to holders of common stock... $0.11 (0.09) (0.04) (0.04) (1.35) (0.86) (0.29)
Shares used in per share calculations..................... 2,969 2,969 5,498 5,954 6,373 6,250 10,487
Cash dividends per share.................................... $ -- $ -- $ 0.01 $ -- $ -- $ -- $ --
===== ===== ====== ====== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------------------------------------------ ---------
1993 1994 1995 1996 1997 1998
------ ----- ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ -- $ 18 $ 12 $ 594 $13,741 $ 23,503
Working capital (deficiency)................................ (259) (453) (383) (847) 13,181 40,306
Total assets................................................ 4,375 4,492 5,767 9,107 22,740 53,267
Redeemable convertible preferred stock...................... -- -- -- -- 22,865 --
Total stockholders' equity (deficit)........................ 351 93 (203) (222) (7,234) 43,030
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed below and in
"Risk Factors" and "Business" as well as those discussed elsewhere in this
Prospectus.
OVERVIEW
Micromuse develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable Service Level
Management. The Company was founded in 1989 in London, England and historically
operated a systems integration business, reselling computer hardware and
software products and providing consulting services principally for managing
networks. Leveraging its expertise in network management and using funds
generated from the systems integration business, the Company developed its
Netcool/OMNIbus software, which the Company began shipping in January 1995. In
March 1997, the Company was reorganized in Delaware and relocated its
headquarters from London to San Francisco. In connection with the
Reorganization, the Company raised $4.9 million through the sale of equity
securities and arranged a $3.0 million credit facility. In September 1997, the
Company raised an additional $15.9 million through the sale of equity securities
and sold its systems integration business for approximately $400,000, net of
fees. In order to further the growth of the Netcool business, the Company
engaged in an initial public offering of Common Stock on February 12, 1998,
raising approximately $34.2 million, net of fees and expenses. With the proceeds
from the financings and the sale of the systems integration business, the
Company expanded operations and substantially increased development, sales and
administrative headcount for the Netcool business during the twelve month period
ended June 30, 1998, growing from 92 to 164 employees. To accommodate recent
growth and to compete effectively and manage future growth, if any, the Company
will be required to continue to implement and improve operational, financial and
management information systems, procedures and controls on a timely basis and to
expand, train, motivate and manage its work force. On March 31, 1998, the
Company announced the first customer shipment of Netcool/Reporter and
Netcool/Internet Service Monitors. Netcool/Reporter, currently in its initial
commercial release, has feature and performance characteristics that have had
limited market appeal. See "Risk Factors -- Management of Growth; Need to
Improve Financial Systems and Controls," "-- Need to Expand and Improve
Productivity of Sales Force, Technical Services and Customer Support
Organization" and "-- Product Defects; Product Liability."
The Company's consolidated financial statements have been restated to
reflect the discontinuation of the operations associated with the Company's
systems integration business. In connection with such sale, the Company was
indemnified by the purchaser for work-in-process under existing contracts,
warranty claims under completed contracts and maintenance agreements, but
retained liability for completed contracts. See Note 2 of Notes to Consolidated
Financial Statements for information concerning this restatement.
Other than discontinued operations, all of the Company's revenues have been
derived from licenses for its Netcool family of products and related
maintenance, training and consulting services. The Company currently expects
that Netcool-related revenues will continue to account for all or substantially
all of the Company's revenues for the remainder of fiscal 1998 and for the
foreseeable future thereafter. As a result, the Company's future operating
results are dependent upon continued market acceptance of its Netcool products
and enhancements thereto. See "Risk Factors -- Emerging Service Level Management
Market; Dependence on Telecommunications Carriers and Other Service Providers;
Demand for SLM Products," and "-- Product Concentration."
As of June 30, 1998, Micromuse had licensed its Netcool products to more
than 150 customers worldwide. Micromuse licenses its software through its direct
sales force, OEMs and value added resellers. License revenues from OEMs and
resellers accounted for approximately 12%, 8%, 11% and 22% of the
20
<PAGE> 22
Company's total license revenues for fiscal 1995, 1996, 1997 and the first nine
months of fiscal 1998 respectively. The Company's ability to achieve significant
additional revenue growth in the future will depend in large part on its success
in recruiting and training sufficient sales and technical services personnel,
maintaining its current distribution relationships and establishing additional
relationships with OEMs, resellers and systems integrators. For a discussion of
the risks associated with expanding distribution, see "Risk Factors -- Need to
Expand Distribution Channels; Dependence on Third-Party Relationships." As of
June 30, 1998, the Company had sold in excess of 65% of its software products to
telecommunications carriers and investment banks.
As a result of the Company's multinational operations and sales, the
Company's operating results are subject to significant fluctuations based upon
changes in the exchange rates of certain currencies, particularly the British
pound, in relation to the U.S. dollar. For example, the Company's United States
headquarters are located in San Francisco, California, while its principal
product development operations are located in London, England. As a result, a
substantial portion of the Company's costs and expenses are denominated in
currencies other than the U.S. dollar. For the year ended September 30, 1997,
license, maintenance and service revenue outside of the United States accounted
for 48% of the Company's total revenues. See Note 8 of Notes to Consolidated
Financial Statements. The Company does not currently engage in risk management
activities with respect to its foreign currency exposure. Although management
will continue to monitor the Company's exposure to currency fluctuations, there
can be no assurance that exchange rate fluctuations will not have a material
adverse effect on the Company's business and operating results. See "Risk
Factors -- Risks Associated with International Licensing and Operations."
Although the Company's revenues have increased in each of the last six
quarters, after giving effect to the restatement of the financial statements due
to the sale of the systems integration business, the Company incurred net losses
in each quarter from inception through the quarter ended June 30, 1998, with the
exception of the quarters ended September 30, 1996 and June 30, 1998, and had an
accumulated deficit of $12.3 million as of June 30, 1998. The Company's limited
operating history as a software developer, rapid expansion of operations and
headcount and the emerging nature of the market for SLM software make the
prediction of future operating results difficult. Accordingly, although the
Company has recently experienced revenue growth, such growth should not be
considered indicative of future revenue growth, if any, or of future operating
results. There can be no assurance that the Company's business strategies will
be successful or that the Company will be able to achieve profitability on a
quarterly or annual basis. See "Risk Factors -- Limited Operating History as a
Software Company; Anticipated Continuing Losses; Uncertainty of Future Operating
Results," "-- Variability of Quarterly Operating Results; Seasonality" and
"-- Management of Growth; Need to Improve Financial Systems and Controls."
21
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's consolidated
statement of operations as a percentage of total revenues, except as indicated,
for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
----------------------- ---------------
1995 1996 1997 1997 1998
AS A PERCENTAGE OF TOTAL REVENUES ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Revenues:
License......................................... 74.5% 74.7% 75.0% 71.0% 78.8%
Maintenance and services........................ 25.5 25.3 25.0 29.0 21.2
----- ----- ----- ------ -----
Total revenues............................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ------ -----
Cost of revenues:
License......................................... 11.3 6.9 5.6 5.8 5.1
Maintenance and services........................ 7.0 8.5 11.2 11.5 12.7
----- ----- ----- ------ -----
Total cost of revenues....................... 18.3 15.4 16.8 17.3 17.8
----- ----- ----- ------ -----
Gross profit................................. 81.7 84.6 83.2 82.7 82.2
Operating expenses:
Sales and marketing............................. 50.3 39.2 96.5 83.0 58.1
Research and development........................ 49.0 35.0 22.0 22.8 20.4
General and administrative...................... 40.4 22.1 45.7 48.6 17.0
----- ----- ----- ------ -----
Total operating expenses..................... 139.7 96.3 164.2 154.4 95.5
----- ----- ----- ------ -----
Loss from operations......................... (58.0) (11.7) (81.0) (71.7) (13.3)
Other income (expense)............................ (7.4) (3.9) (15.1) (15.8) 4.2
Loss before income taxes..................... (65.4) (15.6) (96.1) (87.5) (9.1)
Income taxes...................................... -- 2.2 -- -- 0.2
----- ----- ----- ------ -----
Loss from continuing operations.............. (65.4) (17.8) (96.1) (87.5) (9.3)
Income (loss) from discontinued operations........ 49.2 12.6 (1.1) (1.9) --
Gain on disposal of discontinued operations....... -- -- 12.4 -- --
Net loss..................................... (16.2) (5.2) (84.8) (89.4) (9.3)
----- ----- ----- ------ -----
Accretion on redeemable convertible preferred
stock........................................... -- -- (8.1) (6.3) (7.2)
----- ----- ----- ------ -----
Net loss applicable to holders of common stock.... (16.2)% (5.2)% (92.9)% (95.7)% (16.5)%
===== ===== ===== ====== =====
AS A PERCENTAGE OF RELATED REVENUES
Cost of license revenues.......................... 15.1 9.2 7.5 8.1 6.4
Cost of maintenance and services revenues......... 27.6 33.7 44.8 39.8 59.8
</TABLE>
Years Ended September 30, 1995, 1996 and 1997
Revenues. The Company's total revenues are derived from license revenues
for its Netcool family of products as well as associated maintenance, consulting
and training services revenues. License revenues are recognized upon the
acceptance of a purchase order and shipment of the software if no significant
obligations on the part of the Company remain and collection of the resulting
receivable is probable. Allowances for credit losses and for estimated future
returns are provided for upon shipment. Returns to date have not been material.
Maintenance revenues from ongoing customer support and product upgrades are
deferred and recognized ratably over the term of the maintenance agreement,
typically 12 months. Payments for maintenance fees (on initial order or on
renewal) are generally made in advance and are nonrefundable. Revenues for
consulting and training services are recognized as the services are performed.
See Note 1 of Notes to Consolidated Financial Statements. The Company has
recognized revenue, for all periods prior to and including September 30, 1997,
in accordance with American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") No. 91-1 entitled Software Revenue Recognition.
For the nine months ended June 30, 1998, the Company has recognized revenue in
accordance with AICPA SOP No. 97-2 entitled Software Revenue Recognition. There
was no material change to the Company's accounting for revenue as a result of
the adoption of AICPA SOP No. 97-2.
22
<PAGE> 24
The Company's total revenues increased from $1.4 million in fiscal 1995 to
$4.5 million in fiscal 1996 and to $9.3 million in fiscal 1997. License revenues
increased from $1.1 million in fiscal 1995 to $3.4 million in fiscal 1996 and to
$7.0 million in fiscal 1997, primarily as a result of an increase in the number
of product licenses sold and in average transaction size, reflecting increased
acceptance of Netcool/OMNIbus and expansion of the Company's direct sales
organization. Maintenance and services revenues increased from $369,000 in
fiscal 1995 to $1.1 million in fiscal 1996 and to $2.3 million in fiscal 1997,
as a result of providing maintenance and services to a larger installed base in
each successive year. The percentage of the Company's total revenues
attributable to software licenses has remained relatively constant at 75% in
each of fiscal 1995, 1996 and 1997. Maintenance and services revenues accounted
for 25% of total revenues in each of fiscal 1995, 1996 and 1997.
Revenues from U.S. operations grew from 24% of revenues in fiscal 1995 to
45% of revenues in fiscal 1996 and to 52% of revenues in fiscal 1997, reflecting
the Company's expansion of U.S. operations. International revenues include all
revenues other than from the United States. For a discussion of risks associated
with international sales see "Risk Factors -- Risks Associated with
International Licensing and Operations." See Note 8 of Notes to Consolidated
Financial Statements.
To date, the Company's revenues have resulted primarily from sales to the
telecommunications industry, ISPs and investment banks. License revenues from
telecommunications industry customers and ISPs accounted for 74%, 34% and 58% of
the Company's total license revenues in fiscal 1995, 1996 and 1997 respectively.
License revenues from investment banks accounted for 14%, 29% and 15% of total
license revenues in fiscal 1995, 1996 and 1997, respectively. In fiscal 1997,
entities affiliated with WorldCom and entities affiliated with British
Telecommunications, accounted for 18% and 9%, respectively, of the Company's
total revenue. In addition, entities affiliated with British Telecommunications
accounted for 57% and 14% of the Company's total revenues in fiscal 1995 and
fiscal 1996, respectively. See "Risk Factors -- Sales Concentration" and Note 9
of Notes to Consolidated Financial Statements.
Cost of Revenues. Cost of license revenues consists primarily of technology
license fees paid to third-party software vendors and the costs of software
media, packaging and production. Cost of license revenues decreased as a
percentage of license revenues from 15% in fiscal 1995 to 9% in fiscal 1996, and
to 8% in fiscal 1997, as a result of economies of scale.
Cost of maintenance and services revenues consists primarily of
personnel-related costs incurred in providing maintenance, consulting and
training to customers. Cost of maintenance and services revenues increased as a
percentage of maintenance and services revenues from 28% in fiscal 1995 to 34%
in fiscal 1996, and to 45% in fiscal 1997, principally due to increased
personnel, facilities and travel costs associated with growth in the customer
support and technical services organizations. The Company expects that cost of
maintenance and services will continue to increase in dollar amounts in future
periods as the Company continues to hire additional customer support and
technical services personnel and expands its maintenance consulting and training
activities.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries, commissions and bonuses earned by personnel engaged in
sales, technical presales and marketing activities as well as the costs of trade
shows, public relations, marketing materials and other marketing activities.
Sales and marketing expenses increased from $728,000 in fiscal 1995 to $1.8
million in fiscal 1996 and to $9.0 million in fiscal 1997. The increases in both
fiscal 1996 and fiscal 1997 reflected the hiring of additional personnel in
connection with the building of the Company's sales force. In addition, sales
and marketing expenses increased in fiscal 1997 due to increased technical staff
and marketing personnel, compensation expense related to bonus shares issued,
increased facilities costs and costs associated with expanded marketing
activities. Sales and marketing expenses represented 50%, 39% and 96% of total
revenues in fiscal 1995, 1996 and 1997, respectively. The Company expects that
sales and marketing expenses will continue to increase in absolute dollar
amounts in future periods as the Company continues to hire additional sales,
technical services and marketing personnel, to increase marketing activities and
to build its indirect sales channel. See Note 6 of Notes to Consolidated
Financial Statements.
23
<PAGE> 25
Research and Development Expenses. Research and development expenses
consist primarily of salaries and other personnel-related expenses and costs of
computer systems and software development tools. Research and development
expenses increased 123% from $708,000 in fiscal 1995 to $1.6 million in fiscal
1996 and 29% to $2.0 million in fiscal 1997. The increase in research and
development expenses in each year was primarily attributable to increased
personnel, additional facilities and an increase in the computer systems and
software development tools required by the additional personnel. In addition to
expanding its research and development facility in London, the Company
established a research and development team focused on application development
in its New York office in fiscal 1997. Research and development expenses
represented 49%, 35% and 22% of total revenue in fiscal 1995, 1996 and 1997,
respectively. The decrease as a percentage of total revenues was due to growth
in the Company's total revenues. The Company anticipates that it will commit
increasing resources to research and development in future periods to enhance
and extend its core technology and product line and, as a result, expects that
research and development expenses will increase in absolute dollars in future
periods. To date, all research and development costs have been expensed as
incurred. See Note 1 of Notes to Consolidated Financial Statements.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel costs for administration, finance, information
systems and human resources, as well as professional fees. General and
administrative expenses increased from $584,000 in fiscal 1995 to $996,000 in
fiscal 1996 and to $4.2 million in fiscal 1997. These increases in each year
were primarily due to increased staffing, facilities costs and associated
expenses necessary to manage and support the Company's increased scale of
operations and, in fiscal 1997, due to compensation expenses related to bonus
shares issued. General and administrative expenses as a percentage of total
revenues were 40% in fiscal 1995, 22% in fiscal 1996 and 46% in fiscal 1997. The
decrease of general and administrative expenses as a percentage of total
revenues from fiscal 1995 to 1996 was primarily attributable to growth in total
revenues. The increase in general and administrative expenses as a percentage of
total revenues from fiscal 1996 to fiscal 1997 was primarily attributable to
personnel-related costs and to the payment of professional fees for various
matters, including the Reorganization, associated with the transfer of the
Company's headquarters from London to San Francisco. The Company expects that
its general and administrative expenses will increase in absolute dollar amounts
as the Company expands its administrative staff, adds infrastructure and incurs
additional costs related to the growth of its business and related to being a
public company, such as expenses related to directors' and officers' insurance,
investor relations programs and increased professional fees. See Note 6 of Notes
to Consolidated Financial Statements.
Other Income (Expense). The increase in interest expense from fiscal 1996
to fiscal 1997 was primarily attributable to the imputed interest relating to
the issuance of a warrant to purchase shares of Series A Preferred Stock issued
in connection with the provision of a line of credit to the Company. See Note 6
of Notes to Consolidated Financial Statements.
Provision for Income Taxes. As of September 30, 1997, the Company had
approximately $2.4 million and $1.4 million of net operating loss carryforwards
for federal and state tax purposes. The federal net operating loss carryforwards
expire in 2012, and the state net operating loss carryforwards expire primarily
in 2002. Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss carryforwards in the event of an "ownership
change" as defined in Section 382 of the Internal Revenue Code. The Company has
not yet determined whether an ownership change occurred due to significant stock
transactions in each of the reporting years disclosed. If an ownership change
has occurred, utilization of the net operating loss carryforwards could be
significantly reduced. Additionally, loss carryforwards of either Micromuse Inc.
or Micromuse USA Inc. cannot be utilized against future profits generated by the
other company. As of September 30, 1997, the Company also had approximately $1.8
million and $200,000 of loss carryforwards in England and Australia,
respectively. The Company has provided a full valuation allowance on the
deferred tax asset, consisting primarily of net operating loss carryforwards,
because of uncertainty regarding its realizability. See Note 7 of Notes to
Consolidated Financial Statements.
Discontinued Operations. In July 1997, the Company adopted a formal plan to
discontinue its Systems Integration division based in England. In September the
Company sold the division for approximately $400,000 in cash, net of fees. The
disposition of the division in September 1997 has been accounted for as a
discontinued operation in accordance with Accounting Principles Board Opinion
No. 30 and prior period
24
<PAGE> 26
consolidated financial statements have been restated to reflect the
discontinuation of the Systems Integration business. Revenue from discontinued
operations was $16.6 million, $14.0 million and $15.7 million, respectively, in
fiscal 1995, 1996 and 1997. The income (loss) from discontinued operations of
$711,000, $569,000, and ($104,000) in fiscal 1995, 1996, and 1997, respectively,
represents the operation's operating income, net of taxes. The gain on disposal
of discontinued operations of $1.2 million in fiscal 1997 represents the gain on
disposal of the operation including net income from operations of $256,000 from
the measurement date to the disposal date. See Note 2 of Notes to Consolidated
Financial Statements.
Nine Months Ended June 30, 1997 and 1998
Revenues. Net revenues increased from $5.6 million for the nine month
period ended June 30, 1997 to $18.6 million for the nine month period ended June
30, 1998. License revenues increased from $4.0 million for the nine month period
ended June 30, 1997 to $14.7 million for the nine month period ended June 30,
1998, primarily as a result of an increase in the number of product licenses
sold and an increase in the average transaction size, reflecting increased
acceptance of Netcool/OMNIbus and expansion of the Company's direct sales
organization. Maintenance and services revenues increased from $1.6 million for
the nine month period ended June 30, 1997 to $3.9 million for the nine month
period ended March 31, 1998, as a result of providing maintenance and services
to a larger installed base of customers. The percentage of the Company's total
revenue attributable to license revenue increased from approximately 71% in the
nine month period ended June 30, 1997 to approximately 79% in the nine month
period ended June 30, 1998, due primarily to an increased focus by the Company
in generating license revenues.
Cost of Revenues. Cost of license revenues as a percentage of license
revenues decreased to 6% for the nine month period ended June 30, 1998 from 8%
for the nine month period ended June 30, 1997 due to economies of scale. Cost of
maintenance and services revenues increased as a percentage of maintenance and
services revenues to 60% for the nine month period ended June 30, 1998 from 40%
for the nine month period ended June 30, 1997 principally due to increased
personnel, facilities and travel costs associated with expanding the customer
support and technical services organizations.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$4.7 million for the nine month period ended June 30, 1997 to $10.8 million for
the nine month period ended June 30, 1998, primarily due to the increased
personnel costs associated with the expansion of the Company's sales and
technical services departments and increased facilities costs. Sales and
marketing expenses as a percentage of total revenues declined from 83% for the
nine month period ended June 30, 1997 to 58% for the nine month period ended
June 30, 1998 primarily due to net revenues increasing at a faster rate than
sales and marketing expenses and a decrease in compensation expense related to
the issuance of stock options in the later period.
Research and Development Expenses. Research and development expenses
increased from $1.3 million for the nine month period ended June 30, 1997 to
$3.8 million for the nine month period ended June 30, 1998 as a result of
increased personnel, additional facilities costs, and an increase in the
computer systems and software development tools required by the additional
personnel. Research and development costs as a percentage of total revenues
declined from 23% for the nine month period ended June 30, 1997 to 20% for the
nine month period ended June 30, 1998.
General and Administrative Expenses. General and administrative expenses
increased from $2.7 million for the nine month period ended June 30, 1997 to
$3.2 million for the nine month period ended June 30, 1998 primarily due to
increased personnel costs, professional fees and facilities costs associated
with the Company's increased scale of operations. General and administrative
expenses as a percentage of revenues declined from 49% for the nine month period
ended June 30, 1997 to 17% for the nine month period ended June 30, 1998 due to
the increase in total revenues.
Other Income (Expense). Other expense for the nine month period ended June
30, 1997 was $888,000 as compared with other income of $778,000 for the nine
month period ended June 30, 1998, primarily due to interest earned on the
proceeds from the Company's initial public offering during the period ended June
30, 1998 which offset imputed interest related to the issuance of a warrant to
purchase 1,500,000 shares of Series A Preferred Stock at a per share exercise
price of $2.00 (the "Series A Warrant").
25
<PAGE> 27
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly consolidated
statement of operations data for each quarter of the nine quarters in the period
ended June 30, 1998, as well as such data expressed as a percentage of the
Company's total revenues for the periods indicated. In the opinion of
management, this information has been presented on the same basis as the
consolidated financial statements appearing elsewhere in this Prospectus, and
all necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the unaudited
quarterly results when read in conjunction with the consolidated financial
statements of the Company and related notes thereto appearing elsewhere in this
Prospectus. The operating results for any quarter should not be considered
indicative of results of any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1997 1997 1997 1997 1998 1998
-------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License.................... $ 684 $1,720 $ 802 $ 1,095 $ 2,094 $ 2,977 $ 3,735 $ 4,914 $6,023
Maintenance and services... 322 518 424 616 590 694 1,094 1,281 1,570
------ ------ ------ ------- ------- ------- ------- ------- ------
Total revenues........... 1,006 2,238 1,226 1,711 2,684 3,671 4,829 6,195 7,593
------ ------ ------ ------- ------- ------- ------- ------- ------
Cost of revenues:
License.................... 54 132 61 108 155 199 315 312 318
Maintenance and services... 115 149 166 180 303 393 762 802 797
------ ------ ------ ------- ------- ------- ------- ------- ------
Total cost of revenues... 169 281 227 288 458 592 1,077 1,114 1,115
------ ------ ------ ------- ------- ------- ------- ------- ------
Gross profit................. 837 1,957 999 1,423 2,226 3,079 3,752 5,081 6,478
Operating expenses:
Sales and marketing........ 528 705 1,004 1,951 1,714 4,301 3,144 3,489 4,186
Research and development... 410 534 303 383 596 760 1,069 1,337 1,398
General and
administrative........... 272 439 467 1,553 714 1,510 892 1,011 1,251
------ ------ ------ ------- ------- ------- ------- ------- ------
Total operating
expenses............... 1,210 1,678 1,774 3,887 3,024 6,571 5,105 5,837 6,835
------ ------ ------ ------- ------- ------- ------- ------- ------
Income (loss) from
operations................. (373) 279 (775) (2,464) (798) (3,492) (1,353) (756) (357)
Other income (expense)....... (53) (31) 26 (450) (464) (516) 50 160 568
------ ------ ------ ------- ------- ------- ------- ------- ------
Income (loss) before income
taxes...................... (426) 248 (749) (2,914) (1,262) (4,008) (1,303) (596) 211
Income taxes................. 30 11 -- -- -- -- -- -- 50
------ ------ ------ ------- ------- ------- ------- ------- ------
Income (loss) from continuing
operations................. (456) 237 (749) (2,914) (1,262) (4,008) (1,303) (596) 161
Discontinued operations:
Income (loss) from
discontinued
operations............... 197 (57) (120) 18 (2) -- -- -- --
Gain on disposal of
discontinued
operations............... -- -- -- -- -- 1,161 -- -- --
------ ------ ------ ------- ------- ------- ------- ------- ------
Net income (loss)............ $ (259) $ 180 $ (869) $(2,896) $(1,264) $(2,847) $(1,303) $ (596) $ 161
Accretion on redeemable
convertible preferred
stock...................... -- -- -- (89) (264) (402) (890) (444) --
------ ------ ------ ------- ------- ------- ------- ------- ------
Net income (loss) applicable
to holders of common
stock...................... $ (259) $ 180 $ (869) $(2,985) $(1,528) $(3,249) $(2,193) $(1,040) $ 161
====== ====== ====== ======= ======= ======= ======= ======= ======
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
--------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1997 1997 1997 1997 1998 1998
-------- --------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License.................... 68.0% 76.9% 65.4% 64.0% 78.0% 81.1% 77.3% 79.3% 79.3%
Maintenance and services... 32.0 23.1 34.6 36.0 22.0 18.9 22.7 20.7 20.7
----- ----- ----- ------ ----- ------ ----- ------ -----
Total revenues........... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ------ ----- ------ ----- ------ -----
Cost of revenues:
License.................... 5.4 5.9 5.0 6.3 5.8 5.4 6.5 5.0 4.2
Maintenance and services... 11.4 6.7 13.5 10.5 11.3 10.7 15.8 13.0 10.5
----- ----- ----- ------ ----- ------ ----- ------ -----
Total cost of revenues....... 16.8 12.6 18.5 16.8 17.1 16.1 22.3 18.0 14.7
----- ----- ----- ------ ----- ------ ----- ------ -----
Gross profit................. 83.2 87.4 81.5 83.2 82.9 83.9 77.7 82.0 85.3
Operating expenses:
Sales and marketing........ 52.5 31.5 81.9 114.0 63.8 117.2 65.1 56.3 55.1
Research and development... 40.8 23.8 24.7 22.4 22.2 20.7 22.1 21.6 18.4
General and
administrative........... 27.0 19.6 38.1 90.8 26.6 41.1 18.5 16.3 16.5
----- ----- ----- ------ ----- ------ ----- ------ -----
Total operating
expenses............... 120.3 74.9 144.7 227.2 112.6 179.0 105.7 94.2 90.0
----- ----- ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations................. (37.1) 12.5 (63.2) (144.0) (29.7) (95.1) (28.0) (12.2) (4.7)
Other income (expense)....... (5.2) (1.4) 2.1 (26.3) (17.3) (14.1) 1.0 2.6 7.5
----- ----- ----- ------ ----- ------ ----- ------ -----
Income (loss) before income
taxes...................... (42.3) 11.1 (61.1) (170.3) (47.0) (109.2) (27.0) (9.6) 2.8
----- ----- ----- ------ ----- ------ ----- ------ -----
Income taxes................. 3.0 0.5 -- -- -- -- -- -- 0.7
----- ----- ----- ------ ----- ------ ----- ------ -----
Income (loss) from continuing
operations................. (45.3) 10.6 (61.1) (170.3) (47.0) (109.2) (27.0) (9.6) 2.1
Discontinued operations:
Income (loss) from
discontinued
operations............... 19.6 (2.6) (9.8) 1.0 (0.1) -- -- -- --
Gain on sale of
discontinued
operations............... -- -- -- -- -- 31.7 -- -- --
----- ----- ----- ------ ----- ------ ----- ------ -----
Net income (loss)............ (25.7) 8.0 (70.9) (169.3) (47.1) (77.5) (27.0) (9.6) 2.1
----- ----- ----- ------ ----- ------ ----- ------ -----
Accretion on redeemable
convertible preferred
stock...................... -- -- (5.2) (9.8) (11.0) (18.4) (7.2) --
----- ----- ----- ------ ----- ------ ----- ------ -----
Net income (loss) applicable
to holders of common
stock...................... (25.7)% 8.0% (70.9)% (174.5)% (56.9)% (88.5)% (45.4)% (16.8)% 2.1%
===== ===== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Revenues. The Company's total revenues have increased in each quarter
presented other than the quarter ended December 31, 1996. The increases have
been generally due to increased acceptance of the Company's Netcool products,
expansion of the Company's direct sales and technical pre-sales organizations,
increased transaction sizes and increased maintenance revenues reflecting the
growth in the installed base. The decrease in total revenues reflected in the
quarter ended December 31, 1996 was primarily attributable to the Company's
sales incentive program then in place, which encouraged fiscal year-end sales in
the preceding quarter. Due to a change in the Company's sales incentive program,
the Company did not experience a decrease in total revenues for the quarter
ended December 31, 1997. The Company expects fiscal year-end-related
fluctuations will also be reduced in future periods due to an anticipated
increase in the percentage of revenues through indirect channels, which are less
subject to year-end fluctuations. If the changes in the sales incentive program
do not continue to impact the sales process as reflected in the quarter ended
December 31, 1997 or the increased sales through indirect channels do not occur,
fluctuations in quarterly results for the final quarter of each fiscal year may
continue.
Operating Expenses. Operating expenses have generally increased in absolute
dollar amounts over the quarters shown due to the Company's increased staffing
in sales and marketing, product development and general and administrative
functions. Cost of revenues for maintenance and services decreased in absolute
dollars from $802,000 in the quarter ended March 31, 1998 to $797,000 for the
quarter ended June 30, 1998, due to improved productivity of technical service
personnel. In the quarter ended March 31, 1997, sales and marketing expenses
increased from the prior quarter due to compensation expenses related to shares
bonused and an increase in the number of sales and marketing personnel. General
and administrative expenses increased during the same quarter due to
compensation expenses related to bonus shares issued and
27
<PAGE> 29
professional fees associated with the Reorganization. In the quarter ended
September 30, 1997, sales and marketing expenses increased due to increased
commissions on higher bookings and a significant increase in the number of sales
and marketing personnel. General and administrative expenses increased in the
same quarter due to increased professional fees. In the quarters ended December
31, 1997, March 31, 1998, and June 30, 1998, sales and marketing expenses were
less in absolute dollar amounts than those in the quarter ended September 30,
1997 due to reduced expenses associated with reduced rates of hiring. General
and administrative expenses in the same three quarters fell in absolute dollar
amounts due to a reduction in professional fees. The Company's total operating
expenses as a percentage of total revenues for the quarter ended September 30,
1996 were lower than the preceding or following periods presented as a result of
the substantial increase in total revenues during the quarter primarily
attributable to the Company's sales incentive program then in place, which
encouraged fiscal year-end sales. The Company's operating expenses represented a
higher percentage of total revenues in the quarters ended December 31, 1996,
March 31, 1997, and September 30, 1997 than in the quarter ended June 30, 1997
as a result of: (i) greater growth in revenues during the quarter ended June 30,
1997; (ii) slower growth in personnel-related expenses during the quarter ended
June 30, 1997; and (iii) professional fees paid related to various matters,
including the Company's Reorganization, during the quarters ended December 31,
1996, March 31, 1997, and September 30, 1997.
Other Income (Expense). Interest expense in the quarters ended March 31,
1997, June 30, 1997 and September 30, 1997 increased primarily due to the
imputed interest related to the issuance of the Series A Warrant and due to
greater borrowings under a credit facility the Company maintained with National
Westminster Bank.
FACTORS AFFECTING QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated significantly in
the past, and will likely continue to fluctuate in the future, as a result of a
number of factors, many of which are outside the Company's control. These
factors include changes in the demand for the Company's software products and
services; the size and timing of specific sales; the timing of new hires; the
level of product and price competition that the Company encounters; changes in
the mix of, and lack of demand from, distribution channels through which
products are sold; the length of sales cycles; spending patterns and budgetary
resources of its customers on network management software solutions; the success
of the Company's new customer generation activities; introductions or
enhancements of products, or delays in the introductions or enhancements of
products, by the Company or its competitors; market acceptance of new products;
the Company's ability to anticipate and effectively adapt to developing markets
and rapidly changing technologies; the mix of products and services sold;
changes in the Company's sales incentives; changes in the renewal rate of
support agreements; the mix of international and domestic revenue; product life
cycles; software defects and other product quality problems; the Company's
ability to attract, retain and motivate qualified personnel; changes in the mix
of sales to new and existing customers; the extent of industry consolidation;
expansion of the Company's international operations; and general domestic and
international economic and political conditions. The timing of large individual
sales has been difficult for the Company to predict, and large individual sales
have, in some cases, occurred in quarters subsequent to those anticipated by the
Company. There can be no assurance that the loss or deferral of one or more
significant sales would not have a material adverse effect on the Company's
quarterly operating results. In addition, the Company's business has experienced
and may continue to experience significant seasonality. Historically, a
disproportionate amount of the Company's annual revenues have been generated by
sales of its products during the Company's fiscal fourth quarter. There can be
no assurance that this trend will not continue.
The Company typically realizes a significant portion of license revenue in
the last month of a quarter, frequently in the last weeks or even days of a
quarter. As a result, license revenue in any quarter is difficult to forecast
because it is substantially dependent on orders booked and shipped in that
quarter. Moreover, the Company's sales cycles, from initial evaluation to
delivery of software, vary substantially from customer to customer. In addition,
the Company's expense levels are based in part on its expectations of future
orders and sales, which, given the Company's limited operating history, are
extremely difficult to predict. A substantial portion of the Company's operating
expenses are related to personnel, facilities, and sales and marketing
28
<PAGE> 30
programs. This level of spending for such expenses cannot be adjusted quickly
and is, therefore, relatively fixed in the short term. If revenue falls below
the Company's expectations in a particular quarter, the Company's operating
results could be materially adversely affected. See "Risk Factors -- Lengthy
Sales Cycle."
In the Company's standard license agreements, the Company warrants to
licensees that its software routines and programs are Year 2000 compliant (i.e.
that they accurately process date-related data within any century and between
two or more centuries). Although the Company believes its software products are
Year 2000 compliant, there can be no assurance that the Company's software
products contain all necessary software routines and programs necessary for the
accurate calculation, display, storage and manipulation of data involving dates.
If any of the Company's licensees experience Year 2000 problems, such licensee
could assert claims for damages against the Company. Any such litigation could
result in substantial costs and diversion of the Company's resources even if
ultimately decided in favor of the Company. In addition, many companies are
expending significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase software products such as those offered by the Company.
The occurrence of any of the foregoing could have a material adverse effect on
the Company's business, operating results or financial condition. See "Risk
Factors -- Year 2000 Compliance."
Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from quarter to
quarter. As a result, quarter-to-quarter comparisons of operating results are
not necessarily meaningful or indicative of future performance. Furthermore, the
Company believes it is possible that in some future quarter the Company's
operating results will be below the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail, or
are perceived to prevail, with respect to the Company's business or generally,
the market price of the Company's Common Stock would likely be materially
adversely affected. See "Risk Factors -- Variability of Quarterly Operating
Results; Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through an initial
public offering of its Common Stock, bank debt, private sales of preferred
equity securities totaling $20.8 million, cash generated from discontinued
operations and capital equipment lease lines. In April 1996, the Company issued
and sold notes convertible to Series A Preferred Stock in the aggregate
principal amount of $1,000,000. The notes were repaid without conversion to
Series A Preferred Stock. In March 1997, the Company sold shares of Series B
Preferred Stock for an aggregate of $4.9 million and entered into a credit
agreement (the "Credit Agreement") that provided the Company with a $3.0 million
revolving credit line that terminated upon the closing of the Company's initial
public offering. In connection with the Credit Agreement, the Company issued a
warrant to purchase shares of Series A Preferred Stock for an aggregate exercise
price of $3.0 million that was exercised by means of a net issuance immediately
prior to the closing of the Company's initial public offering. During fiscal
1997, the Company had borrowed and repaid a total of $1.0 million under the
Credit Agreement and there was no balance outstanding thereunder as of December
31, 1997. In September 1997, the Company sold shares of Series C Preferred Stock
for an aggregate of $15.9 million. In November 1997, the Company repurchased
shares of Common Stock for $5.0 million. In February 1998, the Company sold
shares of Common Stock in its initial public offering generating net proceeds of
$34.2 million. As of June 30, 1998, the Company had $23.5 million in cash and
cash equivalents and $20.3 million in marketable securities. See "Certain
Transactions" and Notes 4, 6 and 11 of Notes to Consolidated Financial
Statements.
Net cash used in operating activities in fiscal 1995 was primarily
attributable to a net loss and increases in accounts receivable and prepaid
expenses and other current assets. Net cash provided by operating activities in
fiscal 1996 was primarily attributable to growth in accounts payable and
deferred revenue, as well as the non-cash nature of depreciation and
amortization, which more than offset a net loss and growth in accounts
receivable and prepaid expenses and other current assets. Net cash used in
operating activities in fiscal 1997 was primarily attributable to a net loss of
$7.9 million. Net cash generated by operating activities in the nine months
ended June 30, 1998 was primarily attributable to an increase in accrued
expenses and deferred
29
<PAGE> 31
expenses as well as a decrease in accounts receivable and the related party
loan, offset by a net loss of $1.7 million.
Cash flows used in investing activities in each of fiscal 1995, 1996 and
1997 were attributable to capital expenditures. Net cash provided by financing
activities was primarily attributable to proceeds from a bank overdraft and
short-term notes in fiscal 1995, fiscal 1996 and to proceeds from the issuance
of redeemable convertible preferred stock in fiscal 1997. In the nine months
ended June 30, 1998, net cash generated by financing activities was attributable
to the Company's sale of Common Stock in its initial public offering with net
proceeds of $34.2 million.
As of June 30, 1998, the Company's principal commitments consisted of
obligations under operating leases. See Note 10 of Notes to Consolidated
Financial Statements.
The Company believes that the net proceeds received by the Company from
this offering, together with its current cash balances, its capital equipment
lease facility and the cash flows generated by operations, if any, will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for the next 12 months. Thereafter, if cash generated from
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may seek to sell additional equity or convertible debt securities or
obtain credit facilities. The sale of additional equity or debt securities could
result in additional dilution to the Company's stockholders. A portion of the
Company's cash may be used to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies. From time to
time, in the ordinary course of business, the Company evaluates potential
acquisitions of such businesses, products or technologies. The Company has no
current plans, agreements or commitments, and is not currently engaged in any
negotiations with respect to any such transaction.
YEAR 2000 COMPLIANCE AND EURO CONVERSION
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Further, various European states have planned the introduction of a single
currency (known as the Euro) in January 1999. The introduction of the Euro may
result in complex conversion calculations. The Company is currently in the
process of conducting a review of its internal information systems to identify
systems that could be affected by such Year 2000 and Euro conversion
requirements. Further, to accommodate its recent growth, the Company will be
required to continue to implement and improve a variety of operational,
financial and management information systems, procedures and controls on a
timely basis. In particular, the Company will be required to improve its
accounting and financial reporting systems, which currently require substantial
management effort and will be required to implement a U.S.-based financial and
accounting system. The Company expects to incur internal staff costs as well as
consulting and other expenses related to these requirements, including Year 2000
and Euro conversion requirements. The Company cannot estimate the amount of
costs that will be associated with implementing these improvements and changes.
While the Company currently expects that such improvements and changes will not
pose significant operational problems, delays in the implementation or
modification of the Company's information systems could have a material adverse
effect on the Company's business, results of operations and financial condition.
30
<PAGE> 32
BUSINESS
Micromuse develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable Service Level
Management ("SLM") -- the effective monitoring and management of multiple
elements underlying an Information Technology ("IT") infrastructure, including
network devices, computing systems and applications, and the mapping of these
elements to the business services they impact. The Company's Netcool product
suite collects, normalizes and consolidates high volumes of event information
from heterogeneous network management environments into an active database which
de-duplicates and correlates the resulting data in real time, and then rapidly
distributes graphical views of the information to operators and administrators
responsible for monitoring service levels. Netcool's unique architecture allows
for the rapid, programmerless association of devices and specific attributes of
those devices to the business services they impact. This readily enables
administrators to create and modify their service views during systems
operations to monitor particular business services, rapidly identify which users
are affected by which network faults, pinpoint sources of network problems,
automate operator responses, facilitate problem resolution and report on the
results.
The Company's initial target market has been organizations with large,
technically complex and heterogeneous networks, the majority of which have been
in the telecommunications, Internet Service Provider and investment banking
markets. The Company markets and distributes to these potential customers
through its own sales force, OEMs, value added resellers and systems
integrators. The Company has distribution agreements with Bay Networks, Cisco
Systems, CTC (Itochu), Datacraft, Ericsson Data Services, N.E.T., and Vanstar.
As of June 30, 1998, the Company had over 150 customers operating in and serving
a variety of industries. Customers include AirTouch, America Online, AT&T
Wireless, British Telecommunications, Cable and Wireless, Cellular One, Deutsche
Telekom, First Data Resources, Genuity, GE Information Services, Global One, GTE
Internetworking, Merrill Lynch, MindSpring, Morgan Stanley, Netcom, Pacific
Bell, PSINet, Siemens, Southwestern Bell Internet Services, Unisource and
WorldCom/MFS/UUNet.
INDUSTRY BACKGROUND
IT has become increasingly mission critical for businesses as vital
communications, control and information services depend on reliable IT
performance. As a result, corporate management is increasingly requiring that IT
staffs meet pre-defined availability and performance levels for computing
processes, commonly known as service level agreements ("SLAs"). At the same
time, efficient management of IT infrastructure has become more difficult as
corporations have migrated from mainframe-based to distributed, client/server
computing environments resulting in complex and heterogeneous computing systems,
applications and networks. The advent of the Internet, intranets and extranets
has exacerbated this problem by increasing corporate reliance on IT while
accelerating the adoption of client/server distributed computing and adding
equipment complexities such as remote access technologies. In addition,
corporations must address rapid and unpredictable change in technology, in the
composition of their networks and in the demands of the business environment. As
a result, the ability to manage complex, growing and rapidly changing IT
environments cost-effectively is becoming a key driver of business performance
and, in some cases, a basis of competitive advantage.
The importance of effective, adaptable management of IT infrastructure is
particularly acute for organizations in the business of providing network
services, such as telecommunications carriers and ISPs. The size and complexity
of public networks has grown rapidly in response to the explosion of data
traffic caused by the Internet, intranets and extranets. Service providers now
must manage voice, data and video traffic over wireline or wireless
architectures by integrating numerous proprietary, legacy and emerging
technologies, such as ATM, CDMA, Frame Relay, GSM, IP, ISDN, SNA, SONET/SDH,
TDM, WDM, X.25 and xDSL, across vast geographies. At the same time, deregulation
and privatization have produced an environment of intense competition in these
markets. For example, fierce competition in the Internet access market has
forced ISPs to offer customers low, flat-rate, unlimited usage programs. In this
new environment, service providers are seeking to maximize profits and
differentiate themselves based on the breadth, quality, flexibility and cost of
their services. One method of differentiation used by service providers is the
ability to offer customized SLAs, guaranteeing the customer end-to-end service
availability and performance.
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<PAGE> 33
Service Level Management ("SLM") is the effective monitoring and management
of multiple elements underlying an IT infrastructure, including network devices,
computing systems and applications, and the mapping of these elements to the
SLAs they impact. Efficient SLM allows service providers to associate these
elements with the services specified in SLAs and to maximize utilization of
their IT infrastructures. With SLM, network service providers can both manage
their large internal networks and offer additional network services to
corporations that require ongoing service guarantees. The worldwide market for
these services, known as Managed Network Services or Network Operations
Outsourcing, has grown rapidly as corporations outsource the management and
operation of their LANs and WANs to service providers, and was estimated to be
approximately $7.8 billion in 1997, and projected to grow to approximately $14.7
billion in 2001, according to IDC. In the enterprise, SLM permits IT staffs to
guarantee network availability and performance, perform capacity planning,
predict problems and maintain SLA-defined service levels for mission critical
services such as Wall Street trading, credit card verification and electronic
commerce. Cost-effectively delivering the services specified in SLAs through the
management of IT infrastructure is the goal of SLM.
Effective SLM requires:
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------
COLLECTION OF DATA MANAGEMENT OF SERVICES MANAGEMENT OF CHANGE
- --------------------------------------------------------------------------------------------
- Collect data in real time - Map and associate elements - Adapt service profiles to
to services changes in IT or business
priorities during systems
operations
- Collect data from every - Create service profiles - Enable rapid provision of
element and management customized to SLAs new services
platform in an IT
infrastructure
- Process high volume of - Centralized monitoring of - Integrate new IT elements
data elements affecting seamlessly into profiles
services
- Filter redundancies - Remotely diagnose and - Scale operations to meet
resolve service impact network and business
demands
- --------------------------------------------------------------------------------------------
</TABLE>
Software solutions that deliver these benefits can provide customers rapid
return on investment ("ROI") on their SLM software purchases by enabling
reductions in the cost of management and ownership of these systems, as well as
by generating additional financial returns from existing IT infrastructures.
Traditional solutions typically have been unable to deliver SLM cost
effectively. Historically, communications providers have designed internal
network management systems based on proprietary applications. It has proven
difficult to integrate new technologies into these proprietary solutions, and
such systems often require costly development teams to maintain and update. In
addition, some organizations have used multiple third-party domain-based
management systems to monitor and manage all the elements that comprise a
service. However, since these systems only provide component-level views of a
portion of the IT infrastructure, they are unable to provide a comprehensive
view of all of the elements that may affect the services being offered. More
recently, third parties have designed operations support and network management
systems to integrate all the various components of a service. However, these
systems frequently require long development cycles and extensive consulting
projects to implement and therefore hinder an organization's ability to adapt
rapidly to changes in their business environment. As a result, these
applications have generally proved either to be incapable of providing the level
of aggregation necessary for end-to-end SLA compliance, incapable of monitoring
the technical complexity and volume of events produced by complex and
heterogeneous networking environments, or too cumbersome to allow service
providers to cope with the increasing rate at which network services must be
deployed. The result has been the inability of such traditional approaches to
deliver SLM cost effectively. Moreover, corporate management, confronted with
environments of rapid change and intense competition, is increasingly demanding
end-to-end SLM solutions that deliver rapid ROI.
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<PAGE> 34
THE MICROMUSE SOLUTION
Micromuse develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable SLM. The
Company's Netcool product suite collects, normalizes and consolidates high
volumes of event information from heterogeneous network management environments
into an active database which de-duplicates and correlates the resulting data in
real time, and then rapidly distributes graphical views of the information to
operators and administrators responsible for monitoring service levels.
Netcool's unique architecture allows for the rapid, programmerless association
of devices and specific attributes of those devices to the business services
they impact. This readily enables administrators to create and modify their
service views during systems operations to monitor particular business services,
rapidly identify which users are affected by which network faults, pinpoint
sources of network problems, automate operator responses, facilitate problem
resolutions and report on the results.
The Company's products are specifically designed for ease of use and
configuration and for the efficient management of and rapid deployment in
complex, evolving, large scale mission critical networks. In addition, service
providers can also use Netcool to remotely manage customer IT infrastructures
and provide their customers with views of the status of their IT environments.
The Company believes that Netcool products provide customers a rapid ROI by
offering: (i) cost-effective solutions with shorter implementation times and a
high level of configurability; (ii) efficient solutions that leverage customers'
existing network management products and services; and (iii) scalable solutions
that enable both the expansion and enhancement of current services as well as
the rapid deployment of new services to end users.
The Netcool product suite has the following features designed to enable the
cost-effective delivery of Service Level Management:
Efficient Management of Heterogeneous IT Infrastructure Elements. The
Company's Netcool suite of products utilizes sophisticated software agent
technology to gather event information from network devices and network
management platforms regardless of the transmission technology, management
protocols or media used in the network. After receiving all this data, Netcool's
object-oriented, memory-resident, active database technology automatically
normalizes and consolidates all events, de-duplicates repeated events and then
correlates the remaining information. Netcool enables the easy association of
events with services, and its sophisticated filtering capabilities allow
operators to focus on mission critical services and elements of the network.
Operators can manage their entire network and related services though Netcool's
common user interface. This approach to network management helps to protect a
customer's investment in their current systems. In addition, Netcool helps to
increase the efficiency of operators by minimizing the volume and complexity of
data generated from a customer's entire network and by allowing additional
underlying technologies to be implemented on the network without costly operator
training.
Rapid Deployment and Adaptability to Evolving IT Infrastructure. Due to its
unique design, the limited amount of programming necessary to install and
configure the product, and the extensive range of pre-existing Probes, Netcool
can be typically implemented in a matter of weeks into complex networking
environments. Netcool allows network administrators to quickly obtain an
enterprise-wide view of their networks and to manage fault data
"out-of-the-box." In addition, new Probes can be developed and deployed quickly
during systems operation, which allows for rapid and easy configuration of
Netcool to meet new or changing network environments. Furthermore, Netcool can
easily adapt existing associations to changes in network elements or business
priorities. These features allow customers to rapidly expand, scale and adapt to
their evolving networks without losing management control.
Programmerless Configuration and Ease of Use. Netcool's object-oriented
design enables programmerless configuration of the product through familiar
"drag-and-drop" principles and graphical user interfaces. As a result, network
administrators are easily able to create, modify and monitor specific views of
the status of any segment of the network during systems operation. Such rapid
configuration allows service providers to quickly introduce network services and
provision customized SLAs. Netcool's rapid installation and ease of
configuration minimizes the need for users to seek outside consultation.
33
<PAGE> 35
Scalability Across Customer IT Infrastructure. Netcool's advanced
architecture allows customers to scale their networks without impairing their
ability to monitor and manage their networks. Netcool's scalability addresses
network management needs relating to performance, capacity, geography and
corporate structure, and is the reason many of the world's largest
telecommunications carriers and ISPs have selected Netcool as their management
platform. For example, one Netcool customer uses Netcool to manage in excess of
250,000 network devices.
Rapid Return on Investment. Netcool's products, which are designed for
rapid deployment and implementation, can provide a rapid ROI to customers.
Netcool products are generally operational in a matter of weeks. For example, a
leading ISP implemented Netcool throughout its U.S. network operating center in
one week. In addition, Netcool leverages existing infrastructure investment by
providing a common user interface that can be implemented alongside existing
management products such as HP OpenView, IBM NetView, Microsoft Windows NT,
Seagate Nervecenter Pro and Sun SunNet Manager, as well as tightly integrating
helpdesk products from companies like Remedy Corporation into the SLM
environment. Finally, Netcool products reduce the number of network operations
personnel required to effectively manage an enterprise-wide distributed network.
For example, Netcool permitted MindSpring to double the number of subscribers it
serves and the number of network devices it manages without increasing network
operations personnel.
STRATEGY
Micromuse's objective is to maintain its leadership position in the market
for Service Level Management software solutions. In order to achieve this
objective, Micromuse must be successful in its pursuit of the following
strategies:
- Maintain Focus on Telecommunications Carriers, ISPs and Other Providers
of Managed Network Services. Telecommunications carriers, ISPs and other
network service providers operate some of the largest, most complex and
fastest growing IT infrastructures in the world. The Company originally
developed Netcool to deliver SLM to these service providers. As a result,
these organizations can use Netcool both to manage their own highly
complex networks and to remotely manage customer LAN and WAN IT
infrastructures and provide their customers with views of the status of
their IT environments. With many large organizations outsourcing network
services and requiring more sophisticated SLAs, the Company believes that
continuing to target MNS providers, including telecommunications
carriers, ISPs, systems integrators and outsourcers, can accelerate
expansion of the Company's existing customer base. In addition, the
Company believes that the size, performance requirements and evolving
nature of these companies' IT infrastructures will provide direction for
the Company's future products and SLM solutions.
- Expand Global Distribution Channels. The Company believes that Netcool's
ease of operation, design, adaptability and pricing make it well suited
for resale through indirect channels. Accordingly, the Company has
complemented its direct sales effort with a dedicated indirect sales
force which focuses on distribution relationships with selected OEMs,
value added resellers, and systems integrators and intends to expand
these channels. The Company has entered into distribution agreements with
Bay Networks, Cisco Systems, CTC (Itochu), Datacraft, Ericsson Data
Services, N.E.T. and Vanstar Corporation. In addition, the Company
intends to expand its direct sales force, currently located in San
Francisco; Atlanta; Boston; Chicago; Dallas; Los Angeles; New York;
Scottsdale, Arizona; Vienna, Virginia; Washington, D.C.; London and
Sydney.
- Increase Penetration of Existing Customer Base. The Company has
historically generated a majority of its software revenue from sales to
repeat customers. Opportunities to increase sales to existing customers
include: (i) expansion of initial Netcool deployments; (ii) sales of new
products to current Netcool users; and (iii) the adoption of Netcool to
manage networks of other departments or subsidiaries of existing
customers. The Company's current customer base includes organizations
with large, fast growing IT infrastructures that present significant
additional opportunity to the Company.
34
<PAGE> 36
- Extend Technical Leadership. Netcool contains a real-time,
object-oriented, memory-resident, active database optimized for the
collection and processing of event information from hundreds of thousands
of computing devices. All data de-duplication, correlation and response
automation occur within the Netcool active database. This design allows
customers to collect and process all the information in their networks
rapidly and then view only the necessary subset of that information
needed to manage a particular SLA during systems operation. In addition,
the Netcool architecture attaches descriptive information to network
events which readily enables the association of these events with
multiple services. The Company believes that these technical advantages
provide customers with critical, real-time information about their
networks and services and allow them to implement Netcool faster than
competing products. The Company plans to leverage this key technical
advantage into the development of new products through its internal
research and development efforts and partnerships with leading research
institutes such as Cambridge University Centre for Communication Systems
Research.
- Leverage and Enhance Core Customer Relationships. The Company has
historically developed, and plans to continue to develop, its products in
close cooperation with its key customers. This is designed to enable the
Company to deliver timely solutions that effectively fulfill market
requirements in rapidly changing technology and business environments.
For example, the Company worked with a service provider to offer a
customer network management service by implementing Netcool to deliver
views of the customer's managed network directly to the customer and to
associate customer circuit information with events. In addition to these
types of efforts, the Company plans to continue its annual user groups
and customer support programs in an effort to continue to further
understand market requirements.
- Leverage Third-Party Applications. The Company plans to enhance the
functionality of its products by continuing to develop interfaces to
complementary third-party software applications. These applications
include helpdesk systems from Remedy and Peregrine, standard relational
database management systems, the performance management systems of
Concord Communications and Kaspia Systems, and the network management
application of Seagate Software. In addition, the Company intends to
further integrate the Netcool product suite with other broadly-deployed
management platforms such as HP OpenView, Sun SunNet Manager, IBM NetView
and Seagate NerveCenter Pro.
PRODUCTS AND TECHNOLOGY
Micromuse provides a suite of software products that enable SLM. The
Company's Netcool SLM solution includes Netcool/OMNIbus and its components for
event management, Netcool/Reporter for service level reporting, Netcool/Internet
Service Monitors for the proactive management of internet services, and
associated related technical services. Netcool/OMNIbus collects, consolidates,
de-duplicates and correlates information from a wide range of network management
platforms and devices and then presents user-configurable views of subsets of
network data. Netcool/Reporter uses this data to provide real-time and
historical reporting. Netcool/Internet Service Monitors collect response and
availability data from several frequently implemented Internet/Intranet services
and forward this information to Netcool/OMNIbus for integration with other
service data. Since customers can quickly associate each network element (a
network device, computing system or application) with a particular service,
Netcool products enable companies to efficiently set up, monitor, manage and
report on SLAs. Netcool/Reporter, currently in its initial commercial release,
has features and performance characteristics that have had limited market
appeal. See "Risk Factors -- Product Defects; Product Liability."
35
<PAGE> 37
An illustration of the architecture of Netcool is set forth below:
[DIAGRAM OF NETCOOL ARCHITECTURE]
Netcool/OMNIbus
Netcool/OMNIbus is based on a three-tier, client/server architecture and is
the core application of the product suite. Netcool/OMNIbus consists of four
components: Netcool/OMNIbus Probes, the Netcool/ OMNIbus ObjectServer,
Netcool/OMNIbus Desktops, and Netcool/OMNIbus Gateways. Probes collect event
information from existing network management systems, as well as event messages
from network devices, computing systems, applications or legacy systems. The
Probes then normalize and feed this event data into the ObjectServer, an
object-oriented, memory-resident active database. At the ObjectServer, the event
data is de-duplicated, correlated and associated with other event data. By
manipulating the data in the ObjectServer through the Desktops, users can design
customized views of event data to monitor segments of the network or services
that span the entire network. Gateways permit data to be shared between multiple
ObjectServers for load balancing or fail-over facilities, exported to common
relational database management systems (Oracle or Sybase) for historical service
level views, or integrated with other applications such as Remedy's helpdesk
application.
Probes
Probes are the first tier of Netcool's three-tier architecture. Probes are
primarily passive software interfaces that collect network event data (including
messaged network data such as faults, alerts, and traps) from elements on the
network or from domain-based network management systems. These Probes can
collect information presented from either management platforms and devices
(e.g., HP OpenView, Cabletron SPECTRUM, Cisco StrataView Plus, and Newbridge
46020) and standard protocols such as screen oriented ASCII character streams,
application log files (e.g., syslog) TL1, SMNP, or any other method of
management information provision. They recognize Management Information Base
("MIB") information from switches and routers from leading vendors, including
Bay Networks, Cabletron, Cisco, 3Com and N.E.T. Probes use rules and lookup
tables to categorize and add information to events. As a result, network data
collected by the Probes is normalized into a common alert format and then passed
to the ObjectServer.
36
<PAGE> 38
The Company has developed 41 pre-built Probes, and a Probe development kit
is available for customers to build probes for specialized in-house or legacy
systems. The following table lists Micromuse's existing Probes:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
NETCOOL PROBES
- -------------------------------------------------------------------------------------------------------------------
Agile ATM Switch HP IT/Operations IBM NetView/6000 V3.31 RoboMon Element
Management Center v.3.x Informix Table Manager Probe
Ascom TimePlex HP OpenView KBU Fivemere Sun Solstice Enterprise
TimeView/2000 IT/Operations Microsoft Windows NT Manager
BMC Patrol Probe Center v.4.x Event Log Sun Solstice SNM 2.3
Cabletron SPECTRUM HP OpenView NNM Modular Probe Sybase Table
Cisco StrataView v8.x v.3.31 NET IDNX Telematics Switch
DEC VAX OPCOM HP OpenView NNM NET Open/5000 TN-MS
DEC VAX VCS v.4.x Netlabs (DiMONS 2G) Trapd (SNMP) Probe
Ericsson ACP1000 HP OpenView NNM Newbridge 46020 Unix Multiplex
Ericsson MD110 v.5.x Nortel DMS Probe Server
Fibermux LightWatch HTTPD Common Oracle Table Unix Syslog Probe
Generic Probe Log Format Ping Probe
GPT EM-OS HTTPD Server Error Log
Heartbeat Probe
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
ObjectServer
The ObjectServer, which is the second tier of Netcool's three-tier
architecture, is a real-time, object-oriented, memory-resident, active database
which stores and manages all the collected network events. The ObjectServer
consolidates, associates and de-duplicates normalized data from the Probes,
converting events, such as faults and alarms, into event objects that can be
easily manipulated to create associations and filters. The active components of
the ObjectServer include its de-duplication capability and its ability to
correlate event objects with other event objects, make decisions on information,
automate operator responses and facilitate problem resolution. The ObjectServer,
which has been designed and optimized for handling large volumes of events
messages, can process hundreds of alarms per second and can collect data from
multiple Probes concurrently. The ObjectServer architecture also permits
multiple authenticated users to view all the events throughout the enterprise.
In addition, since one network fault can impact several locations in a
distributed environment and can therefore trigger multiple events, the
ObjectServer is designed to automatically de-duplicate repeated events so that
network operators can easily identify the root cause. The Company believes that
the ObjectServer architecture provides the Company with a competitive advantage
in both the speed with which it collects network events and the ability to
associate event information with the services it manages.
Desktops
A Desktop, the third tier in Netcool's three-tier architecture, is an
integrated suite of software tools designed for use by operators and
administrators to create filters, customize views of network event data, monitor
several services simultaneously, and automatically resolve service problems.
Network operators can quickly build filters by responding to simple onscreen
queries about user preferences. They can also associate events with services
through the use of simple "drag-and-drop" technology that automatically creates
the Boolean logic and SQL required to retrieve the data from the ObjectServer.
In this way, non-programmers can manipulate the data in the ObjectServer to
custom-design views of event data. In addition, each operator can use Desktops
to resolve element problems directly or automate responses to common network
problems when critical thresholds are reached.
Operators can use Desktops to monitor services through either EventLists,
the EventList Console or ObjectiveView. The EventList presents a configurable
spreadsheet-like view of the de-duplicated faults and acts as the primary
interface through which operators access problem resolution tools. The EventList
Console depicts a concise view of the EventLists for several services while the
ObjectiveView provides a graphical view of the network or services which depend
upon it. Administrators can use Desktops to configure the
37
<PAGE> 39
ObjectServer and the operator's desktop environments. Desktops run on multiple
computing platforms, including UNIX/Motif, Microsoft Windows NT, or Web browsers
via Java applications.
Gateways
Gateways are interfaces to other Micromuse products or to third-party
applications that allow sharing of Netcool event data. For example, multiple
Netcool ObjectServers can share data using a Gateway to offer customers
load-balancing and fail-over facilities. In addition, event data can be exported
through Gateways to databases such as Oracle or Sybase for historical analysis
and reporting or to trouble-ticketing packages such as Remedy's help desk
application.
Netcool/Reporter
Netcool/Reporter is a Java-based application that generates reports on the
real-time and historical availability of network services, applications,
business processes or any customer-defined grouping of IT resources (both
physical and logical). Netcool/Reporter is designed to leverage archived data
from service profiles created within Netcool/OMNIbus, and to allow operators to
report on SLA compliance. Netcool/ Reporter can produce availability data in
several graphical formats, including spreadsheets, 2D or 3D charts, and billing
forms. Netcool/Reporter provides both Service Level Reports and generic reports.
Service Level Reports allow operators to define individualized service levels by
designing their own report metrics. They can also be tailored to precisely match
the service level availability criteria described by SLAs. Generic reports are
pre-configured reports that use event time and frequency categories as the
primary variables. Netcool/Reporter, currently in its initial commercial
release, has features and performance characteristics that have had limited
market appeal. Although the Company is currently devoting significant management
and technical resources to improve the features and performance of
Netcool/Reporter, the Company does not expect significant revenue contribution
from Netcool/Reporter for the foreseeable future. To the extent such efforts
continue to require the allocation of a significant portion of the Company's
technical personnel resources, or if the performance and features of
Netcool/Reporter are not improved, the Company could continue to experience
delay in or failure of market acceptance of Netcool/Reporter, or damage to the
Company's reputation or relationships with its customers, any of which could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors -- Product Defects, Product Liability."
Netcool/Internet Service Monitors
Netcool/Internet Service Monitors, which became available on March 31,
1998, are software applications that collect and analyze real-time response and
availability data about internet services including HTTP (Web servers), FTP
(file transfer), SMTP and POP3 (e-mail), NNTP (news), DNS (directory services),
and RADIUS (dial-in security and accounting). Netcool/Internet Service Monitors
collect response and availability data, compare it with user-defined threshold
levels, and then forward fault information to Netcool/OMNIbus when thresholds
are exceeded. The resulting information can be combined with other network fault
data to provide companies with detailed information about services that
incorporate Internet-based elements. Netcool/Internet Service Monitors can be
configured through the World Wide Web through an HTML interface and are designed
to integrate easily with networks managed by Netcool/OMNIbus.
38
<PAGE> 40
The following table summarizes the Netcool product suite:
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
DATE OF
NETCOOL PRODUCT INTRODUCTION DESCRIPTION
- --------------------------------------------------------------------------------------------------------
NETCOOL/OMNIBUS OBJECTSERVER
ObjectServer Solaris1 1994 Real-time, object-oriented,
ObjectServer Solaris 2.x 1994 memory-resident, active database system
ObjectServer HP-UX9.x 1994 that stores and manages all collected
ObjectServer HP-UX10.x 1995 network events.
ObjectServer AIX 4.x PowerPC 1997
ObjectServer Microsoft 1998*
Windows NT
- --------------------------------------------------------------------------------------------------------
NETCOOL/OMNIBUS DESKTOPS
X11/Motif Desktop 1994 Integrated suite of software tools that
Java EventList Desktop 1996 creates filters and customized views of
Microsoft Windows NT Desktop 1997 network event data, monitors several
services simultaneously and
automatically resolves service problems.
- --------------------------------------------------------------------------------------------------------
NETCOOL/OMNIBUS GATEWAYS
Remedy ARS 1994 Interfaces to other Micromuse products
Sybase RDBMS 10.x/11.x 1994 or third-party applications that allow
ObjectServer 1994 sharing of Netcool event data.
SNMP Trap Forwarder 1995
Oracle RDBMS 7.x, 8.x 1997
File/Socket 1997
Peregrine ServiceCenter 1998
- --------------------------------------------------------------------------------------------------------
NETCOOL/OMNIBUS PROBES
Basic Probes 1994-1997 Software that collects network event
Generic Probe 1996 data from network element devices or
Probe Development Kit 1994 from network management systems.
- --------------------------------------------------------------------------------------------------------
NETCOOL/REPORTER 1998 A Java-based application that uses
information stored by Netcool/OMNIbus to
generate reports on the real-time and
historical availability of networks or
other services. See "Risk
Factors -- Product Defects; Product
Liability."
- --------------------------------------------------------------------------------------------------------
NETCOOL/INTERNET SERVICE MONITORS 1998 Software that collects and analyzes
real-time response and availability data
about Internet services.
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Expected to become commercially available in the fourth quarter of fiscal
1998.
Product Pricing
At least one Probe, ObjectServer, and Desktop are required for
Netcool/OMNIbus to operate. Netcool/ Reporter is sold as an add-on feature to
Netcool/OMNIbus. Customers can choose the particular configuration of Probes,
ObjectServers, Desktops, and Gateways required for their existing network
configuration. The list price in the United States for each ObjectServer is
$25,000, each Probe, Gateway and Desktop is $7,500, and the list price for
Netcool/Reporter is $15,000. Netcool/Internet Service Monitors are priced at
$20,000 for the suite of seven monitors or $7,500 per monitor. Fees for
implementations of Netcool/OMNIbus typically range from $40,000 to $1.0 million.
39
<PAGE> 41
CUSTOMERS
Micromuse sells its products to organizations with large and medium-size
networks, as well as network service providers which include telecommunications
carriers, ISPs, systems integrators and outsourcers. The Company's products are
used by a diverse set of customers in a variety of industries. As of June 30,
1998, the Company had over 150 customers in the following 9 countries: the
United States, Canada, the United Kingdom, Australia, Germany, Italy, Mexico,
the Netherlands and South Africa.
The following is a list of customers that have purchased in excess of
$100,000 of the Company's Netcool family of products and services:
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Telecommunications Internet Service Providers Investment Banking
British Telecommunications America Online Bear Stearns
BT MNS Big Planet Deutsche Bank
BT Australia Genuity Merrill Lynch
BT Labs GTE Internetworking Morgan Stanley
BT North America INSL Salomon Smith Barney
BT Syncordia MindSpring
Cable and Wireless Netcom
CableTel (NTL) PSINet Commercial
Concert Southwestern Bell Internet
Deutsche Telekom Services Automobile Association (U.K.)
GEIS UUNet Chrysler
Infonet City of Edmonton
Ionica Cellular First Data Resources
MFS Communications First Union Bank
Multisys AT&T Wireless Instinet
Pacific Bell AirTouch J.C. Penney
Primus Cellular One Kaiser Permanente
Racal Communications Hutchinson Orange PCS Kohl's
TCI Xypoint LSI Logic
TMI National Institute of Health
Vyvx Communications Equipment Nationwide Building Society
WorldCom Royal Automobile Club
Ascom Timeplex Tenneco
Bay Networks TRW
Cisco
Ericsson
Motorola
N.E.T.
Siemens
- ----------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 42
SELECTED CUSTOMER APPLICATIONS
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
CUSTOMER APPLICATION
- --------------------------------------------------------------------------------------------------
MANAGED NETWORK SERVICE PROVIDER GEIS is a managed network services provider that maintains a
(GEIS) chain of support centers in locations around the world,
including the Netherlands, Hong Kong and Maryland. The
worldwide GEIS network comprises a variety of technologies,
including Cisco router-based IP, Telematics-based X.25,
Stratacom-based frame relay, and GEIS' own proprietary
network. By installing Netcool, GEIS was able to win the
business of a large, multinational conglomerate that
required a secure view of the entire virtual private network
("VPN") being provided by GEIS. Netcool made this possible
via its ability to easily append information to events and
associate them with specific customers, and to support a
firewalled Netcool system at the customer site.
- --------------------------------------------------------------------------------------------------
INTERNET SERVICE PROVIDER MindSpring, a leading ISP focusing on delivering outstanding
(MINDSPRING) service and support to its customers, offers local Internet
service in more than 360 locations throughout the United
States and has over 350,000 customers. MindSpring uses
Netcool to provide next-generation management of the e-
mail, Internet access, and Web hosting services at its
state-of-the-art Network Operations Center ("NOC"). To
manage these services, Netcool is used in conjunction with
Seagate's NerveCenter application to collect data from over
30,000 modems, 500 terminal servers, 100 UNIX servers of
various types, 75 hubs and switches, and 75 Cisco routers.
Netcool assimilates the information from these diverse
components and presents them as distinct service views.
Since installing Netcool in January 1997, MindSpring has
significantly increased the network infrastructure it
maintains (increasing from 7,500 managed devices to over
30,000) and the customers it serves (100,000 to over
350,000) without increasing the network operations staff.
The entire operation is efficiently managed by only 6
network administrators.
- --------------------------------------------------------------------------------------------------
</TABLE>
SALES AND MARKETING
The Company markets its software and services primarily through its direct
sales organization in San Francisco; Atlanta; Boston; Chicago; Dallas; Los
Angeles; New York; Scottsdale, Arizona; Vienna, Virginia; Washington, D.C.;
London and Sydney. Additionally, the Company has a growing channel organization
and expects to generate an increasing percentage of total sales through its
OEMs, value added resellers and systems integrators. As of June 30, 1998, the
Company's sales organization consisted of 35 individuals. Six members of the
sales organization work exclusively with the OEMs, value-added resellers and
systems integrators in both a sales and a channel marketing capacity.
Typically, the sales process will include an initial sales presentation, a
product demonstration, at times a proof of concept evaluation, a closing meeting
and a purchase process. The sales process typically takes 90 to 180 days.
Companies often purchase Netcool products to manage their internal data network
initially and upon its demonstrated effectiveness subsequently make additional
and larger purchases. A majority of the Company's sales are from repeat
customers who generally purchase additional software as their networks expand,
or as additional sites within a customer learn of the services provided by, and
the benefits of, Netcool.
The Company has a number of marketing programs designed to inform potential
customers about the capabilities and benefits of the Company's products. The
Company's marketing efforts include technical leadership, participation in
industry trade shows, technical conferences and technology seminars, preparation
of competitive analyses, sales training, publication of technical and
educational articles in industry journals and advertising. As of June 30, 1998,
the Company's marketing organization employed 7 people.
Although the Company increased the size of its sales organization during
the twelve-month period ended June 30, 1998, the Company experienced difficulty
in recruiting a sufficient number of qualified sales people during that period.
If the Company is to achieve significant revenue growth in the future, it must
both train successfully the members of its existing sales force and recruit
additional sales personnel. Competition for
41
<PAGE> 43
such persons is intense, and there can be no assurance that the Company will be
able to either retain and adequately train its current sales force or attract
qualified sales personnel in the future. During the last fiscal year, the
Company hired a Senior Vice President, Sales, who is expected to be heavily
involved, among other things, in the recruitment of additional sales personnel.
Consequently, the Company is expected to have additional management capacity to
assist in the recruitment of additional sales personnel. If the Company is
unable to hire such people on a timely basis, the Company's business, operating
results or financial condition could be adversely affected. See "Risk
Factors -- Need to Expand and Improve Productivity of Sales Force, Technical
Services and Customer Support Organization."
To achieve significant growth in revenues in the future the Company must
continue to expand its network of distribution partners. The Company's network
of distribution partners currently includes VARs, systems integrators and OEM
partners, including Bay, Cisco, CTC (Itochu), Datacraft, Ericsson Data Services,
N.E.T., and Vanstar Corporation. Such partners license the Company's products at
a discount to list price for re-licensing and may provide training, support and
technical and customer services to the end users of the Company's products. At
times, members of the Company's technical services organization will assist a
channel partner with training and technical support. The Company offers a
comprehensive channel partnering program consisting of training, certification,
technical support, priority communications regarding upcoming activities and
products, and joint sales and marketing activities. The Company also has a joint
marketing program with Concord Communications. There can be no assurance that
the Company will be able to continue to attract and retain VARs, systems
integrators and OEMs or that such organizations will be able to market and sell
the Company's products effectively. In addition, there can be no assurance that
the Company's existing or future channel partners will continue to represent the
Company's products. See "Risk Factors -- Need to Expand Distribution Channels;
Dependence on Third-Party Relationships."
Because the Company first sold its software in the United Kingdom and was
previously domiciled in London, sales of its software outside of the United
States (i.e., "international sales") have historically comprised a significant
portion of the Company's total revenue. International sales accounted for 76%,
55%, and 48% of total revenues in fiscal 1995, 1996, and 1997, respectively. The
Company believes that a majority of these international sales were made to
customers in the United Kingdom and Europe. While the Company believes that
there are significant opportunities in the United Kingdom and Europe, it expects
international revenues from the United Kingdom and Europe as a percentage of
total revenues to decline in future quarters as the Company more fully exploits
opportunities in the United States and in the Pacific Rim. See "Risk
Factors -- Risks Associated with International Licensing and Operations."
TECHNICAL SERVICES
The Company's technical services organization provides customers with a
full range of support services including pre-sales demonstrations, evaluations,
implementations, consulting services, training and ongoing technical support. In
addition, the technical services organization serves a variety of internal
functions, including drafting support and training documentation, product
management, product testing, research and development related to specific
customer industries. The Company believes that superior technical services and
support is critical to customer satisfaction and the development of customer
relationships. As of June 30, 1998, there were 43 individuals in the Company's
technical services organization. Members of the technical services organization
work closely with the Company's direct sales representatives and channel
partners to provide the following services to customers:
- Pre-Sales Technical Support Technical services personnel will often
accompany sales representatives to a customer site to provide a technical
overview and demonstration of the product or to educate customers about
the Company's products. In addition, they may help specify and implement
a small evaluation test environment at a customer site for more detailed
customer review of the product.
- Post-Sales Technical Support and Consulting Technical services personnel
will also assist end-users with the implementation and use of the
Company's products. In some cases, the Company's technical services
personnel will be engaged for limited post-sales consulting, which may
include on-site custom Probe development, implementation of the Company's
products or project management. After full
42
<PAGE> 44
implementation, ongoing customer support obligations are transferred to
the Company's customer support organization, although technical services
personnel may be engaged for further support.
- Education and Training The technical services organization offers product
training to customers and product training and certification to channel
partners. The Company offers operator, administrator and advanced
administrator training classes.
The recent growth of the Company and the expansion of the customer base of
Netcool has increased the demands on its technical services organization.
Competition for qualified technical personnel is intense. There can be no
assurance that the current resources in the Company's technical services
organization will be sufficient to manage any future growth in the Company's
business. Failure of the Company to expand its technical services organization
at least commensurate with the expansion in the installed base of Netcool
products would have a material adverse effect on the Company's business,
operating results and financial condition. See "Risk Factors -- Need to Expand
and Improve Productivity of Sales Force, Technical Services and Customer Support
Organization" and "-- Dependence on Key Personnel."
CUSTOMER SUPPORT
The customer support organization is responsible for providing ongoing
technical support for the Company's customers after implementation of the
product and for training the next generation of the Company's software engineers
and technical services personnel. Based on feedback by customers, the Company
believes that the quality and responsiveness of its customer support
organization provides it with a significant competitive advantage. As of June
30, 1998, the Company employed 17 customer support personnel.
For an annual fee, a customer will receive toll-free telephone and email
support, as well as new releases of the Company's products. The Company offers
two support packages to its customers: 8 hours a day, 5 days a week support or
24 hours a day, 7 days a week support. While support personnel generally answer
the technical support calls and resolve most problems over the phone, Micromuse
will deploy any one of its more than 43 technical support personnel in the event
that an on-site visit is necessary.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends in large part on its
ability to continue to enhance existing products and develop new products that
maintain technological competitiveness and deliver rapid ROI to its customers.
The Company has historically developed and expects to continue to develop its
products in conjunction with its existing and potential customers. Extensive
product development input is obtained through customers, through the Company's
monitoring of end-user needs and changes in the marketplace and through
partnerships with leading research institutes such as Cambridge University
Centre for Communication Systems Research.
The Company's research and development organization is composed of two
related engineering groups. The core technology group is responsible for the
enhancement of Netcool/OMNIbus, including its real-time technologies and the
exploration of new directions and applications of the Company's core
ObjectServer, Probe, Gateway and Desktop technologies. The application
development group is responsible for designing and developing off-the-shelf
products which leverage the technologies developed by the core technology group.
While both groups work closely with customers, the application development group
depends on customer contact and partnerships for the rapid development of new
SLM products. Both research and development groups work closely with the
Company's technical services organization and its marketing organization to
incorporate customer feedback and market requirements into their product
development agendas.
The Company has made and intends to continue to make substantial
investments in research and development. The Company's total expenses for
research and development for fiscal 1995, 1996, 1997 and the nine months ended
June 30, 1998 were $708,000, $1.6 million, $2.0 million and $3.8 million,
respectively. Since the Company anticipates that it will continue to commit
substantial resources to research and development in the future, product
development expenses are expected to increase in absolute dollars in future
43
<PAGE> 45
periods. To date, the Company's development efforts have not resulted in any
capitalized software development costs. As of June 30, 1998, the Company's
research and development organization consisted of 35 people.
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, changing regulatory environments,
frequent new product introductions and rapid changes in customer requirements.
The introduction or announcement of products by the Company or its competitors
embodying new technologies and the emergence of new industry standards and
practices can render existing products obsolete and unmarketable. As a result,
the life cycles of the Company's products are difficult to estimate. The
Company's future success will depend on its ability to enhance its existing
products and to develop and introduce, on a timely and cost-effective basis, new
products and product features that keep pace with technological developments and
emerging industry standards and that address the increasingly sophisticated
needs of its customers. There can be no assurance that the Company will be
successful in developing and marketing new products or product features that
respond to technological change or evolving industry standards, that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and features, or
that its new products or product features will adequately meet the requirements
of the marketplace and achieve market acceptance. In particular, the widespread
adoption of the TMN architecture for managing telecommunications networks would
force the Company to adapt its products to such standard, and there can be no
assurance that this could be done on a timely or cost-effective basis, if at
all. In addition, to the extent that any product upgrade or enhancement requires
extensive installation and configuration, current customers may postpone or
forgo the purchase of new versions of the Company's products. If the Company is
unable, for technological or other reasons, to develop and introduce
enhancements of existing products or new products in a timely manner, the
Company's business, operating results and financial condition will be materially
adversely affected. See "Risk Factors -- New Products and Rapid Technological
Change; Need to Manage Product Transitions; Dependence on Third-Party Software
Platforms." In addition, software products as complex as those offered by the
Company may contain defects or failures when introduced or when new versions or
enhancements are released. For example, Netcool/Reporter, currently in its
initial commercial release, has features and performance characteristics that
have had limited market appeal. Although the Company is currently devoting
significant management and technical resources to improve the features and
performance of Netcool/Reporter, the Company does not expect significant revenue
contribution from Netcool/Reporter for the foreseeable future. To the extent
such efforts continue to require the allocation of a significant portion of the
Company's technical personnel resources, or if the performance and features of
Netcool/Reporter are not improved, the Company could continue to experience
delay in or failure of market acceptance of Netcool/Reporter, or damage to the
Company's reputation or relationships with its customers, any of which could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors -- Product Defects; Product Liability."
COMPETITION
The Company's products are designed for use in the evolving SLM and
enterprise network management markets. Competition in these markets is intense
and is characterized by rapidly changing technologies, new and evolving industry
standards, frequent new product introductions and rapid changes in customer
requirements. The Company's current and prospective competitors offer a variety
of solutions to address the SLM and enterprise network management markets and
generally fall within the following five categories: (i) customer's internal
design and development organizations that produce SLM and network management
applications for their particular needs, in some cases using multiple instances
of products from hardware and software vendors such as Sun, HP and Cabletron;
(ii) vendors of network and systems management frameworks including Computer
Associates and IBM; (iii) vendors of network and systems management applications
including HP, Sun and IBM; (iv) providers of specific market applications
including Boole & Babbage and several smaller software vendors; and (v) systems
integrators who primarily provide programming services to develop customer
specific applications including TCSI and OSI. In the future, as the Company
enters new markets, the Company expects that such markets will have additional,
market-specific competitors. In addition, because there are relatively low
barriers to entry in the software market, the
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<PAGE> 46
Company expects additional competition from other established and emerging
companies. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
the Company's business, operating results or financial condition.
Many of the Company's existing and potential customers continuously
evaluate whether to design and develop their own network operations support and
management applications or purchase them from outside vendors. These customers
internally design and develop their own software solutions for their particular
needs and therefore may be reluctant to purchase products offered by independent
vendors such as the Company. As a result, the Company must continuously educate
existing and prospective customers as to the advantages of the Company's
products versus internally developed network operations support and management
applications.
Many of the Company's current and potential competitors have longer
operating histories and have significantly greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and a larger
customer base, than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion, sale and support of
their products than the Company. Existing competitors could also increase their
market share by bundling products having management functionality offered by the
Company's products with their current applications. Moreover, the Company's
current and potential competitors may increase their share of the SLM market by
strategic alliances and/or the acquisition of competing companies. In addition,
network operating system vendors could introduce new, or upgrade and extend
existing, operating systems or environments that include management
functionality offered by the Company's products, which could render the
Company's products obsolete and unmarketable. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results or financial
condition. See "Risk Factors -- Competition."
The principal competitive factors affecting the market for the Company's
software are price/performance, functionality and speed of implementation. The
Company currently believes it presently competes favorably with respect to each
of these factors. However, the Company's market is still evolving, and there can
be no assurance that the Company will be able to compete successfully against
current and future competitors and the failure to do so successfully will have a
material adverse effect upon the Company's business operating results and
financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in significant
part upon its proprietary software technology. The Company relies on a
combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its proprietary
rights. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. There can be
no assurance that the steps taken by the Company to protect its proprietary
technology will prevent misappropriation of such technology, and such
protections may not preclude competitors from developing products with
functionality or features similar to the Company's products. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries. While the Company believes that its products and
trademarks do not infringe upon the proprietary rights of third parties, there
can be no assurance that the Company will not receive future communications from
third parties asserting that the Company's products infringe, or may infringe,
the proprietary rights of third parties. The Company expects that software
product developers will be increasingly subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel, cause product
shipment delays or require the Company to develop non-infringing technology or
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the Company
or at all. In the event of a successful claim of product infringement against
the Company and failure
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<PAGE> 47
or inability of the Company to develop non-infringing technology or license the
infringed or similar technology, the Company's business, operating results or
financial condition could be materially adversely affected.
The Company relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in the Company's products to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms or at all. Although the Company
believes that alternative software is available from other third-party
suppliers, the loss of or inability to maintain any of these software licenses
or the inability of the third parties to enhance in a timely and cost-effective
manner their products in response to changing customer needs, industry standards
or technological developments could result in delays or reductions in product
shipments by the Company until equivalent software could be developed internally
or identified, licensed and integrated, which would have a material adverse
effect on the Company's business, operating results and financial condition. See
"Risk Factors -- Dependence upon Proprietary Technology; Risk of Third-Party
Claims of Infringement."
EMPLOYEES
As of June 30, 1998, the Company had 164 employees, including 35 engaged in
research and development activities, 42 in sales and marketing, 43 in technical
services, 27 in administration and finance and 17 in customer support. None of
the Company's employees is represented by a collective bargaining agreement, nor
has the Company experienced work stoppages. The Company believes that its
relations with its employees are good.
The Company believes that its future success will depend in large part on
its ability to attract and retain highly-skilled managerial, sales, technical
services, customer support and product development personnel. The Company has at
times experienced and continues to experience difficulty in recruiting qualified
personnel. Competition for qualified personnel in the software industry is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. Failure to attract and retain key
personnel could materially adversely affect on the Company's business, operating
results or financial condition. See "Risk Factors -- Management of Growth; Need
to Improve Financial Systems and Controls," "-- Need to Expand and Improve
Productivity of Sales Force, Technical Services and Customer Support
Organization" and "-- Dependence on Key Personnel."
FACILITIES
The Company's headquarters are located in 11,235 square feet of office
space in San Francisco, under a lease that expires on April 2002. The Company's
principal product development operations are located in approximately 16,085
square feet of office space in London. Approximately 7,210 square feet of this
office space is leased pursuant to a lease that expires on December 2002. The
remaining 8,875 square feet of office space is leased pursuant to a lease that
expires on March 2007. The Company also maintains offices in New York City,
Chicago, Dallas and Sydney. During fiscal 1997 the Company's aggregate annual
lease payments were $538,000. The Company believes that its current facilities
are adequate for its needs through the next twelve months, and that, should it
be needed, suitable additional space will be available to accommodate expansion
of the Company's operations on commercially reasonable terms, although there can
be no assurance in this regard. See Note 10 of Notes to Consolidated Financial
Statements.
LITIGATION
The Company is not a party to any material legal proceeding.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of June 30, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Christopher J. Dawes................... 38 President, Chief Executive Officer and Chairman of
the Board of Directors
Stephen A. Allott...................... 39 Senior Vice President, Finance
David N. Dorrance...................... 37 Senior Vice President, Sales
Peter Shearan.......................... 34 Senior Vice President, Technical Services
Timothy J. Tokarsky.................... 34 Vice President, Application Development
Mark J. Peach.......................... 39 Vice President, Core Technology
Helen M. Fairclough.................... 36 Vice President, Operations
Angela Dawes(3)........................ 36 Director of Sales, Western Region; Director
Michael E.W. Jackson(1)(2)............. 48 Director
David C. Schwab(1)(2).................. 40 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Stock Option Committee
Christopher J. Dawes has served as President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since its inception. Mr. Dawes
has also been a director of Micromuse plc, a subsidiary of the Company
("Micromuse plc") since its inception. Prior to co-founding the Company, Mr.
Dawes served as Sales Manager at Computer Associates International, Inc.
("Computer Associates") from June 1988 to September 1989. Mr. Dawes is a
graduate of Electrical and Electronic Engineering from the University of
Adelaide, South Australia.
Stephen A. Allott has served as the Company's Senior Vice President,
Finance since September 1997. From June 1997 to September 1997, Mr. Allott
served as Vice President, Global Telco Industry. From April 1996 to September
1997, Mr. Allott served as Managing Director, Micromuse Europe. From September
1995 to April 1996 he served as the Company's Business Development Director. Mr.
Allott has also been a director of Micromuse plc since March 1996. Prior to
joining the Company, Mr. Allott served as a strategy consultant with McKinsey &
Company from September 1990 to September 1995. From May 1988 to September 1990,
Mr. Allott served as United Kingdom legal counsel for Sun Microsystems, UK. Mr.
Allott received his M.A., Law from Trinity College, Cambridge and was called to
the English Bar at Gray's Inn.
David N. Dorrance has served as the Company's Senior Vice President, Sales
since June 1997. Prior to joining the Company, Mr. Dorrance served as Head of
United Kingdom Oracle Applications Group for Deloitte & Touche Consulting Group
from March 1996 to June 1997. From September 1993 to May 1995, Mr. Dorrance
served as a sales manager at Sybase, Inc. ("Sybase"). From November 1989 to
September 1993, Mr. Dorrance served as Director N.A. Sales and as a director of
SQL Solutions following its acquisition by Sybase. Mr. Dorrance received his
B.S. in Computer Science from the University of California at Santa Barbara and
an M.S. in Economics from the University of Oxford.
Peter Shearan has served as the Company's Senior Vice President, Technical
Services since April 1998. From February 1996 to March 1998, Mr. Shearan served
as the Company's Vice President, Technical Services. From November 1995 to
February 1996, Mr. Shearan served as Senior Consultant in the Company's Netcool
Business Development department. Prior to joining the Company, Mr. Shearan
served as a systems manager for British Telecommunications from June 1984 to
November 1995. Mr. Shearan received his Qualifications in Computer Science from
Southbank University, London.
Timothy J. Tokarsky has served as the Company's Vice President, Application
Development since February 1997. Prior to joining the Company, Mr. Tokarsky
served as Vice President Distributed Systems
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Management for Merrill Lynch & Co., Inc. from June 1995 to February 1997. From
January 1994 to June 1995, Mr. Tokarsky served as Architect, Global Distributed
Systems Monitoring for Goldman Sachs & Co. From May 1993 to January 1994, Mr.
Tokarsky served as a system administrator for Standard and Poor's Rating
Services. From October 1992 to May 1993, Mr. Tokarsky served as a system
administrator for First Boston Corp. Mr. Tokarsky received his B.Sc. in
Geophysics from McGill University.
Mark J. Peach has served as the Company's Vice President, Core Technology
since December 1996. From June 1994 to December 1996, Mr. Peach served as an
original architect and developer of Netcool/OMNIbus. Prior to joining the
Company, Mr. Peach served as Principal PreSales Engineer for Sun Microsystems,
Inc. and SunConnect from December 1989 to May 1994. Mr. Peach received his B.Sc.
in Mathematical Engineering from Loughborough University.
Helen M. Fairclough has served as the Company's Vice President, Operations
since November 1995. From June 1994 to November 1995, Ms. Fairclough served as
the Company's Manager, Operations. Prior to joining the Company, Ms. Fairclough
served as Business Operations Manager for Cap Gemini, PLC from October 1991 to
June 1994. Ms. Fairclough received her B.Sc. in Resource Sciences/Geology from
Kingston University and is a Member of The Chartered Institute of Secretaries
and Administrators.
Angela Dawes has been a director of the Company since September 1997. Mrs.
Dawes has also served as Director of Sales, Western Region since January 1997.
From July 1996 to January 1997, Mrs. Dawes served in various capacities within
the Company's sales department, most recently as Eastern Region Director of
Sales. From April 1993 to July 1996, Mrs. Dawes served as the Company's
Strategic Accounts Manager. Ms. Dawes has also been a director of Micromuse plc
since its inception. Prior to joining the Company, Mrs. Dawes served at Computer
Associates in various capacities.
Michael E.W. Jackson has been a director of the Company since July 1998.
Mr. Jackson has also been a director of Micromuse plc since March 1994. Mr.
Jackson has been Chairman of Elderstreet Investments, a venture capital and
investment house since 1990. Since January 1998, Mr. Jackson has served as
Deputy Chairman of British Thornton Holdings plc. Mr. Jackson has also served as
a non-executive director for Hat Pin plc since June 1996 and Spargo Consulting
plc since May 1994. Mr. Jackson has also served as a director of Sage Group plc,
an accounting software company, since July 1984 and as non-executive chairman
since September 1997. Mr. Jackson received his LLB in Law from Cambridge
University.
David C. Schwab has been a director of the Company since December 1996. Mr.
Schwab has been a general partner of Sierra Ventures since June 1996. Prior to
joining Sierra Ventures, Mr. Schwab co-founded Scopus Technology, Inc., a
client-server software systems company, and served in various capacities from
August 1991 to June 1996, most recently as Vice President of Sales. Mr. Schwab
received his B.A. in Systems Engineering from University of California San
Diego, an M.S. and ENG. in Aerospace Engineering from Stanford University, and
an MBA from Harvard Business School.
BOARD COMPOSITION
The Board of Directors is currently comprised of four directors. The terms
of office of the Board of Directors are divided into two classes: Class I, whose
term will expire at the next annual meeting of stockholders, and Class II, whose
term will expire at the subsequent annual meeting of stockholders. The Class I
directors are Angela Dawes and David C. Schwab and the Class II directors are
Christopher J. Dawes and Michael E.W. Jackson. At each annual meeting of
stockholders the successors to directors whose term will then expire will be
elected to serve from the time of election and qualification until the second
annual meeting following election. This classification of the Board of Directors
may have the effect of delaying or preventing changes in control or management
of the Company.
Each officer is elected by and serves at the discretion of the Board of
Directors. Each of the Company's officers and directors, other than non-employee
directors, devotes substantially full time to the affairs of the Company. The
Company's non-employee directors devote such time to the affairs of the Company
as is necessary to discharge their duties. Christopher J. Dawes and Angela
Dawes, each a director of the Company,
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are married. There are no other family relationships among any of the directors,
officers or key employees of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee reviews, acts on and reports to the Board of Directors
with respect to various auditing and accounting matters, including the selection
of the Company's independent accountants, the scope of the annual audits, fees
to be paid to the independent accountants, the performance of the Company's
independent accountants and the accounting practices of the Company.
The Compensation Committee establishes salaries, incentives and other forms
of compensation for officers and other employees of the Company and administers
the incentive compensation and benefit plans of the Company.
The Stock Option Committee has the authority to grant up to 7,000 options
to new, non-officer employees of the Company.
DIRECTOR COMPENSATION
Directors receive no cash remuneration for serving on the Board of
Directors but are reimbursed for reasonable expenses incurred by them in
attending meetings of the Board of Directors and Audit Committee. On July 15,
1997, the Company issued to each of Jeffrey M. Drazan, a former director of the
Company, and David C. Schwab 60,000 shares of Common Stock pursuant to the
Company's 1997 Stock Option/Stock Issuance Plan. Non-employee directors may also
receive periodic option grants under the Company's 1997 Stock Option/Stock
Issuance Plan. See "-- 1997 Stock Option/Stock Issuance Plan" and Note 6 of
Notes to Consolidated Financial Statements.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation limits the liability of
its directors for monetary damages arising from a breach of their fiduciary duty
as directors, except to the extent otherwise required by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has also entered into indemnification agreements with its
officers and directors containing provisions that may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee is an officer or employee
of the Company. No interlocking relationship exists between the Company's Board
or Compensation Committee and the board of directors or compensation committee
of any other company, nor has such an interlocking relationship existed in the
past.
49
<PAGE> 51
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and the four other most highly
compensated officers whose salary and bonus for the fiscal year ended September
30, 1997 exceeded $100,000 (collectively, the "Named Executive Officers"), for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal year ended September 30, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------
AWARDS
------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
--------------------------- --------- -------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Christopher J. Dawes.......................... $187,500 $157,495 $35,514(1) 0 $8,093(2)
President and Chief Executive Officer
Stephen A. Allott............................. 161,581 -- -- 19,033 --
Senior Vice President, Finance
Mark J. Peach................................. 108,614 -- 10,541(3) 15,320 --
Vice President, Core Technology
Peter Shearan................................. 110,597 -- 12,123(4) 44,440 --
Senior Vice President, Technical Services
Timothy J. Tokarsky........................... 108,814 -- -- 77,000 --
Vice President, Application Development
</TABLE>
- ---------------
(1) Includes $14,162 car allowance, $6,530 payment for a golf club membership
and $12,975 payment for accounting fees.
(2) Company's contributions made to the Company's pension plan which is a
defined contribution plan. These contributions were paid in British pounds
sterling and have been translated into United States dollars solely for the
convenience of the reader at L1.00=$1.62, based on the New York foreign
exchange selling rate at 4:00 p.m. Eastern time on September 30, 1997 as
reported in the Wall Street Journal.
(3) Includes $8,694 car allowance.
(4) Includes $9,919 car allowance.
50
<PAGE> 52
OPTION GRANTS
The following table contains information concerning the stock option grants
made to each of the Named Executive Officers in the fiscal year ended September
30, 1997. No stock appreciation rights were granted to these individuals during
such year.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANT REALIZABLE
---------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK
UNDERLYING OPTIONS PRICE APPRECIATION
OPTIONS GRANTED EXERCISE FOR OPTION TERM(3)
GRANTED TO EMPLOYEES IN PRICE EXPIRATION ------------------
NAME (#) 1997(1) ($/SH)(2) DATE 5%($) 10%($)
---- ---------- --------------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Christopher J. Dawes............... 0 -- -- -- -- --
Stephen A. Allott.................. 18,033(4) 1.98% $2.50 03/09/04 $18,353 $ 42,771
500(4) .05 2.50 05/18/04 509 1,186
500(4) .05 2.50 06/30/04 509 1,186
Mark J. Peach...................... 14,820(4) 1.63 2.50 05/18/04 15,083 35,150
500(4) .05 2.50 06/30/04 509 1,186
Peter Shearan...................... 43,940(4) 4.82 2.50 05/18/04 44,720 104,217
500(4) .05 2.50 06/30/04 509 1,186
Timothy J. Tokarsky................ 77,000(4) 8.45 2.50 03/09/04 78,367 182,628
</TABLE>
- ---------------
(1) Based on an aggregate of 911,196 options granted in fiscal 1997.
(2) The exercise price per share of options granted represented the fair market
value of the underlying shares of Common Stock on the dates the respective
options were granted as determined by the Company's Board of Directors. The
Company's Common Stock was not traded publicly at the time of the option
grants to the Named Executive Officers. The exercise price may be paid in
cash, in shares of the Company's Common Stock valued at fair market value on
the exercise date or through a cashless exercise procedure involving a
same-day sale of the purchased shares. The Company may also finance the
option exercise by loaning the optionee sufficient funds to pay the exercise
price for the purchased shares.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
7-year option term will be at the assumed 5% or 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants made to
the executive officers.
(4) Each of the options is immediately exercisable, but any shares purchased
under the options are subject to vesting requirements and may be repurchased
by the Company at the original exercise price paid per share upon the
optionee's cessation of service prior to vesting in such shares. The
repurchase right lapses with respect to 25% of the option shares upon
completion of one year of service from the vesting commencement date and the
balance in a series of equal monthly installments over the next 36 months of
service thereafter. The holder of purchased shares, whether or not subject
to the Company's repurchase right, is entitled to vote all such shares. The
option shares will vest immediately upon an acquisition of the Company by
merger or asset sale, unless the Company's repurchase right with respect to
the unvested option shares is assigned to the acquiring entity. Each option
has a maximum term of seven years, subject to earlier termination in the
event of the optionee's cessation of employment with the Company.
51
<PAGE> 53
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning the year-end number
and value of unexercised options with respect to each of the Named Executive
Officers. No options and no stock appreciation rights were exercised by the
Named Executive Officers in fiscal year 1997, and no stock appreciation rights
were outstanding at the end of that year.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
AT FY-END(#)(1) AT FY-END($)(2)
---------------------- ----------------------
NAME VESTED UNVESTED VESTED UNVESTED
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Christopher J. Dawes.................................... 0 0 -- --
Stephen A. Allott....................................... 65,604 19,033 $320,804 $ 74,800
Mark J. Peach........................................... 67,700 15,320 306,024 60,208
Peter Shearan........................................... 9,769 62,715 52,104 249,942
Timothy J. Tokarsky..................................... 0 77,000 -- 302,610
</TABLE>
- ---------------
(1) Each of the options listed in the table is immediately exercisable, but any
shares purchased under the options will be subject to vesting requirements
and may be repurchased at the original exercise price per share upon the
optionee's cessation of service prior to vesting in such shares.
(2) Based on the fair market value of the Company's Common Stock at fiscal year
end (September 30, 1997) ($6.43 per share), as determined by the Company's
Board of Directors less the exercise price payable for such shares.
EMPLOYEE BENEFIT PLANS
1997 Stock Option/Stock Issuance Plan
In March 1997, the Company's Board of Directors adopted the Company's 1997
Stock Option/Stock Issuance Plan (the "Stock Option Plan"). The Stock Option
Plan was approved by the Company's stockholders in March 1997. On January 20,
1998, the Board of Directors approved an amendment and restatement of the Stock
Option Plan that increased the number of shares authorized under the plan and
modified certain terms of the plan.
Pursuant to such amendment, the number of shares of Common Stock that are
reserved for issuance under the Stock Option Plan pursuant to the direct award
or sale of shares or the exercise of options is equal to 2,512,600 shares. If
any options granted under the Stock Option Plan are forfeited or terminate for
any other reason without having been exercised in full, then the unpurchased
shares subject to those options will become available for additional grants
under the Stock Option Plan. If shares granted or purchased under the Stock
Option Plan are forfeited, then those shares will also become available for
additional grants under the Stock Option Plan. The number of shares reserved for
issuance under the Stock Option Plan will be increased automatically on October
1 of each fiscal year, starting with October 1, 1999, by a number equal to the
lesser of (a) 1,000,000 shares or (b) 5% of the shares of Common Stock
outstanding at that time.
Under the Stock Option Plan, all employees (including officers) and
directors of the Company or any subsidiary and any independent contractor or
advisor who performs services for the Company or a subsidiary are eligible to
purchase shares of Common Stock and to receive awards of shares or grants of
nonstatutory options. Employees are also eligible to receive grants of incentive
stock options ("ISOs") intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). The Stock Option Plan is
administered by the Board of Directors, which selects the persons to whom shares
will be sold or awarded or options will be granted, determines the number of
shares to be made subject to each sale, award or grant, and prescribes the other
terms and conditions of each sale, award or grant, including the type of
consideration to be paid to the Company upon sale or exercise and the vesting
schedule.
The exercise price under any nonstatutory options generally must be at
least 85% of the fair market value of the Common Stock on the date of grant. The
exercise price under ISOs cannot be lower than 100% of the fair market value of
the Common Stock on the date of grant and, in the case of ISOs granted to
holders of more than
52
<PAGE> 54
10% of the voting power of the Company, not less than 110% of such fair market
value. The term of an ISO cannot exceed 10 years, and the term of an ISO granted
to a holder of more than 10% of the voting power of the Company cannot exceed
five years.
As of June 30, 1998, options to purchase an aggregate of 1,598,709 shares
of Common Stock were outstanding under the Stock Option Plan at a weighted
average exercise price of $4.43. As of June 30, 1998, a total of 951,404 shares
of Common Stock are available for future issuance under the Stock Option Plan.
1998 Employee Stock Purchase Plan
In January 1998, the Board of Directors adopted the Company's 1998 Employee
Stock Purchase Plan (the "ESPP") to provide employees of the Company with an
opportunity to purchase Common Stock through payroll deductions. Under the ESPP
300,000 shares of Common Stock have been reserved for issuance. The ESPP became
effective at the time of the Company's initial public offering. All full-time
regular employees who are employed by the Company will be eligible to
participate in the ESPP after completing a three-month waiting period.
Eligible employees may contribute up to 15% of their total cash
compensation to the ESPP. Amounts withheld are applied at the end of every
six-month accumulation period to purchase shares of Common Stock, but not more
than 1,250 shares per accumulation period. The value of the Common Stock
(determined as of the beginning of the offering period) that may be purchased by
any participant in a calendar year is limited to $25,000. Participants may
withdraw their contributions at any time before stock is purchased.
The purchase price is equal to 85% of the lower of (a) the market price of
Common Stock immediately before the beginning of the applicable offering period
or (b) the market price of Common Stock at the time of the purchase. In general,
each offering period is 24 months long, but a new offering period begins every
six months. Thus up to four overlapping offering periods may be in effect at the
same time. An offering period continues to apply to a participant for the full
24 months, unless the market price of Common Stock is lower when a subsequent
offering period begins. In that event, the subsequent offering period
automatically becomes the applicable period for purposes of determining the
purchase price. The first accumulation and offering periods are expected to
commence on the effective date of this Offering and will end on July 31, 1998
and January 31, 2000, respectively.
CHANGE OF CONTROL ARRANGEMENTS
Upon a Corporate Transaction, each outstanding option shall automatically
accelerate so that each such option shall become fully exercisable and all of
the shares subject to each outstanding but unvested option shall vest in full or
applicable repurchase rights shall lapse, as the case may be, except to the
extent any such option is assumed or replaced with a comparable option by the
successor corporation. In addition, the Plan Administrator, the Board or an
authorized committee, shall have the discretion to provide for the automatic
acceleration of any options upon the occurrence of a Corporate Transaction. A
Corporate Transaction includes a merger or consolidation of the Company after
which the Company's then current stockholders own less than 50% of the surviving
corporation and a sale of all or substantially all of the assets of the Company.
In the event of a merger or other reorganization, outstanding options and
restricted shares will be subject to the agreement of merger or reorganization,
which may provide for the assumption of outstanding awards by the surviving
corporation or its parent, for their continuation by the Company (if the Company
is a surviving corporation), for accelerated vesting and accelerated expiration
or for settlement in cash.
53
<PAGE> 55
CERTAIN TRANSACTIONS
Since October 1, 1994, the Company has issued and sold securities to the
following persons who are principal stockholders, executive officers or
directors of the Company.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C TOTAL SHARES
PREFERRED PREFERRED PREFERRED COMMON AS
INVESTOR(1) STOCK(2) STOCK(3) STOCK(4) STOCK CONVERTED(5)
----------- --------- --------- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
Sierra Ventures V, L.P.(6)......... 1,341,059 2,000,000 295,490 -- 3,795,490
CITICORP(7)........................ -- -- 777,605 -- 777,605
Jeffrey M. Drazan(8)............... -- -- 15,552 60,000 75,552
David C. Schwab.................... -- -- 15,552 60,000 75,552
</TABLE>
- ---------------
(1) See "Principal and Selling Stockholders" for more detail on shares held by
these purchasers.
(2) Reflects shares purchased through the net exercise of a warrant to purchase
shares of Series A Preferred Stock at a per share exercise price of $2.00.
(3) The per share purchase price for the Series B Preferred Stock was $2.50.
(4) The per share purchase price for the Series C Preferred Stock was $6.43.
(5) Reflects the conversion to Common Stock of each share of Series A, Series B
and Series C Preferred Stock that was effective upon the closing of the
Company's initial public offering.
(6) Jeffrey M. Drazan and David C. Schwab, each a general partner of SV
Associates V, LP, the general partner of Sierra Ventures V, L.P., is a
former director and director, respectively, of the Company.
(7) In connection with this purchase, CITICORP and the Company entered into an
agreement whereby CITICORP agreed not to vote in any election for the
directors of the Company any shares it holds in excess of 4.99% of the
outstanding capital stock of the Company entitled to vote on such matters,
assuming for the purposes of such calculation the exercise or conversion of
any securities exercisable or convertible into shares of Common Stock.
(8) Includes 7,776 shares of Series C Preferred Stock registered in the name of
the Sandra Drazan Living Trust and 7,776 shares of Series C Preferred Stock
registered in the name of ZD. Air, Inc.
In addition, the Company has granted options to certain of its executive
officers. See "Management -- Option Grants."
MARCH 1997 FINANCING
On March 6, 1997, the Company entered into the following transactions with
Sierra Ventures V, L.P.: (i) the Company issued 2,000,000 shares of Series B
Preferred Stock at a per share purchase price of $2.50; (ii) the Series A
Warrant; and (iii) the Company and Sierra Ventures V, L.P. entered into a Credit
Agreement (the "Credit Agreement") whereby Sierra Ventures V, L.P. agreed to
make revolving loans to the Company in an aggregate amount of up to $3.0 million
for a period of five years. The Company had borrowed and repaid an aggregate of
$1.0 million under the Credit Agreement and as of December 31, 1997 there was no
outstanding balance under the Credit Agreement. The Credit Agreement terminated
upon the closing of the Company's initial public offering.
SEPTEMBER 1997 FINANCING
On September 8, 1997, the Company issued an aggregate of 2,488,336 shares
of Series C Preferred Stock at a per share purchase price of $6.43 to 18
investors, including 295,490 shares to Sierra Ventures V, L.P., 777,605 shares
to CITICORP, 15,552 shares to David C. Schwab, 7,776 shares to the Sandra Drazan
Living Trust and 7,776 shares to ZD. Air, Inc.
54
<PAGE> 56
STOCK PURCHASES BY CURRENT AND FORMER DIRECTORS
On July 15, 1997, the Company issued to each of Jeffrey M. Drazan and David
C. Schwab 60,000 shares of Common Stock at a per share purchase price of $2.50
pursuant to the Company's 1997 Stock Option/Stock Issuance Plan. See
"Management -- Employee Benefit Plans."
REPURCHASES OF STOCK FROM CERTAIN OFFICERS
On July 15, 1997, the Company repurchased 120,000 shares of Common Stock at
a per share purchase price of $2.50 from Christopher J. Dawes, President and
Chief Executive of the Company. On November 13, 1997, the Company repurchased
777,605 shares of Common Stock at a per share purchase price of $6.43 from Mr.
Dawes.
LOANS TO CERTAIN OFFICERS
The Company has loaned funds to Christopher J. Dawes pursuant to interest
free loans. These loans have had fluctuating balances equaling in the aggregate
$158,613 at September 30, 1996 and $1.2 million at September 30, 1997. The
outstanding loan balance as of September 30, 1996 has been translated from
British pounds sterling into United States dollars solely for the convenience of
the reader at L1.00 = $1.62, based on the New York foreign exchange selling rate
at 4:00 p.m. Eastern time as reported in the Wall Street Journal.
All future transactions, including loans between the Company and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors on the Board of Directors.
55
<PAGE> 57
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of June 30, 1998 and as
adjusted to reflect the sale of the Common Stock offered hereby for: (i) each of
the directors and Named Executive Officers of the Company; (ii) all directors
and executive officers of the Company as a group; and (iii) each other person
known by the Company to own beneficially more than 5% of the Company's Common
Stock. Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed below, based on information furnished by such
owners have sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OFFERING SHARES OWNED AFTER THE OFFERING
----------------------------- BEING -----------------------------
NUMBER PERCENT(1)(2) OFFERED(3) NUMBER PERCENT(1)(2)(3)
---------- ---------------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND
DIRECTORS
Christopher J. Dawes........... 2,460,226 16.5% 421,198 2,039,028 12.8%
Mark J. Peach(4)............... 93,020 * 12,352 80,668 *
Stephen A. Allott(5)........... 84,637 * 12,500 72,137 *
Timothy J. Tokarsky(6)......... 77,000 * 4,394 72,606 *
Peter Shearan(7)............... 72,484 * 5,061 67,423 *
Angela Dawes................... 1,751,636 11.8 299,886 1,451,750 9.1
Michael E.W. Jackson........... 68,126 * 11,663 56,463 *
David C. Schwab(8)............. 4,026,042 27.0 39,471 3,363,982 21.1
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
OTHER 5% STOCKHOLDERS
Jeffrey M. Drazan(9)........... 3,863,266 25.9 10,272 3,229,074 20.2
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
Sierra Ventures V, L.P.(10).... 3,795,490 25.5 622,589 3,172,901 19.9
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
CITICORP(11)................... 777,605 5.2 133,128 644,477 4.0
155 East 53rd Street
1 CITICORP Center
New York, NY 10043
OTHER SELLING STOCKHOLDERS
East River Ventures, L.P....... 311,042 2.1 53,251 257,791 1.6
DMG Technology Ventures LLC.... 155,521 1.0 26,626 128,895 *
Network Equipment Technologies,
Inc. ........................ 311,042 2.1 53,251 257,791 1.6
Victory Ventures LLC........... 311,042 2.1 53,251 257,791 1.6
Other Selling
Stockholders(12)............. 1,731,183 11.0 241,107 1,490,076 8.9
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (10
PERSONS)(13)................. 8,752,620 57.1 811,414 7,318,616 44.7
</TABLE>
- ---------------
* Less than 1%
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Common Stock subject to options currently exercisable or
exercisable within 60 days of June 30, 1998 are deemed outstanding for
purposes of computing the percentage ownership of the person holding such
option but are not deemed
56
<PAGE> 58
outstanding for purposes of computing the percentage ownership of any other
person. Except where indicated, and subject to community property laws
where applicable, the persons in the table above have sole voting and
investment power with respect to all Common Stock shown as beneficially
owned by them. Unless otherwise indicated, the address of each of the
individuals listed in the table is c/o Micromuse Inc., 139 Townsend Street,
San Francisco, CA 94107.
(3) Each stockholder of the Company who was subject to a 180 day lock-up
agreement with the underwriters in the Company's initial public offering,
and each optionee of the Company with vested options, was granted an
opportunity to sell such holder's pro rata portion of the 2,000,000 shares
offered by the Selling Stockholders hereby. The Principal and Selling
Stockholders table assumes that such Stockholders elect to sell their pro
rata portion. In the event that any or all such holders do not elect to
sell their pro rata portion, then the amount sold by certain of the
participating Selling Stockholders shall be proportionately adjusted.
(4) Includes 93,020 shares subject to options which are exercisable within 60
days of June 30, 1998.
(5) Includes 84,637 shares subject to options which are exercisable within 60
days of June 30, 1998.
(6) Includes 77,000 shares subject to options which are exercisable within 60
days of June 30, 1998.
(7) Includes 72,484 shares subject to options which are exercisable within 60
days of June 30, 1998.
(8) Shares beneficially owned before the Offering includes 3,795,490 shares
held by Sierra Ventures V, L.P. Shares beneficially owned after the
Offering includes 3,172,901 shares held by Sierra Ventures V, L.P. Mr.
Schwab, a director of the Company, is a general partner of SV Associates V,
LP, which is the general partner of Sierra Ventures V, L.P. Mr. Schwab
disclaims beneficial ownership of the shares held by Sierra Ventures V,
L.P. except to the extent of his pecuniary interest therein arising from
his general partnership interest in SV Associates V, LP.
(9) Shares beneficially owned before the Offering includes 3,795,490 shares
held by Sierra Ventures V, L.P. and 7,776 shares held by ZD. Air, Inc., a
corporation. Shares beneficially owned after the Offering includes
3,172,901 shares held by Sierra Ventures V, L.P. and 6,449 shares held by
ZD. Air, Inc. Mr. Drazan, a former director of the Company, is a general
partner of SV Associates V, LP, which is the general partner of Sierra
Ventures V, L.P. Mr. Drazan disclaims beneficial ownership of the shares
held by Sierra Ventures V, L.P. except to the extent of his pecuniary
interest therein arising from his general partnership interest in SV
Associates V, LP.
(10) Messrs. Drazan and Schwab, a former director and director, respectively, of
the Company, are general partners of SV Associates V, LP, which is the
general partner of Sierra Ventures V, L.P. Each of Messrs. Drazan and
Schwab disclaim beneficial ownership of the shares held by Sierra Ventures
V, L.P. except to the extent of his pecuniary interest therein arising from
his general partnership interest in SV Associates V, LP.
(11) Pursuant to the terms of an Agreement between the Company and CITICORP,
dated as of September 8, 1997, CITICORP may vote in an election of the
Company's directors a number of its shares up to but not exceeding 4.99% of
the Company's outstanding Common Stock, including shares of Common Stock
issuable upon the exercise of outstanding options and shares of Common
Stock reserved for issuance under the Company's stock plans. The terms of
such agreement do not affect the rights of CITICORP to vote on any other
matter.
(12) Shares beneficially owned before the Offering include 775,469 shares of
Common Stock issuable upon exercise of immediately exercisable options held
by certain of the Selling Stockholders. Shares beneficially owned after the
Offering include 721,554 shares of Common Stock issuable upon exercise of
immediately exercisable options held by certain of the Selling
Stockholders.
(13) Shares beneficially owned before the Offering includes 446,590 shares of
Common Stock issuable upon exercise of immediately exercisable options held
by certain officers and 3,795,490 shares held by entities affiliated with
Mr. Schwab. Shares beneficially owned after the Offering includes 407,393
shares of Common Stock issuable upon exercise of immediately exercisable
options held by certain officers and 3,172,901 shares held by entities
affiliated with Mr. Schwab.
57
<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000 shares
of Common Stock, $0.01 par value, and 5,000,000 shares of Preferred Stock, $0.01
par value.
COMMON STOCK
As of June 30, 1998, there were 14,891,723 shares of Common Stock
outstanding that were held of record by 57 stockholders. There will be
15,979,945 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and no exercise after June 30, 1998 of
outstanding options except for the sale of 88,222 shares of Common Stock
issuable upon exercise of outstanding options by certain of the Selling
Stockholders) after giving effect to the sale of the shares of Common Stock to
the public offered hereby.
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 such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of the liquidation, dissolution or winding up of
the Company, 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, if any, 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 completion of this Offering will be
fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. At present, the Company has no plans to issue any of
the Preferred Stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Certificate of Incorporation and Bylaws
The Company's Restated Certificate of Incorporation provides that the Board
of Directors is divided into two classes of directors, with each class serving a
staggered two-year term. The classification of the Board of Directors has the
effect of generally requiring at least two annual stockholder meetings, instead
of one, to replace a majority of the Board members. The Restated Certificate of
Incorporation also provides that all stockholder actions must be effected at a
duly called meeting and not by consent in writing. Provisions of the Bylaws and
the Restated Certificate of Incorporation provide that the stockholders may
amend the Bylaws or certain provisions of the Restated Certificate of
Incorporation only with the affirmative vote of 75% of the Company's capital
stock. Further, the Bylaws (i) provide that only the Board of Directors may call
special meetings of the stockholders and (ii) establish an advance notice
procedure for stockholder proposals to be brought before an annual meeting of
stockholders of the Company, including proposed nominations of persons for
election to the Board of Directors. These provisions of the Restated Certificate
of Incorporation and Bylaws could discourage potential acquisition proposals and
could delay or prevent a change in control of the Company. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of the
58
<PAGE> 60
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal. The provisions also are intended
to discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for the Company's shares and, as a consequence, they also may inhibit
fluctuations in the market price of the Company's shares that could result from
actual or rumored takeover attempts. Such provisions also may have the effect of
preventing changes in the management of the Company. See "Risk
Factors -- Anti-takeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combinations to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
After this Offering, the holders of 9,032,854 shares of Common Stock will
be entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of the agreement between the Company
and the holders of such registrable securities, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other security holders exercising registration
rights, such holders are entitled to notice of such registration and are
entitled to include shares of such Common Stock therein. Additionally, such
holders are also entitled to certain demand registration rights pursuant to
which they may require the Company to file a registration statement under the
Securities Act at its expense with respect to their shares of Common Stock, and
the Company is required to use its best efforts to effect such registration.
Further, holders may require the Company to file additional registration
statements on Form S-3 at the Company's expense. All of these registration
rights are subject to certain conditions and limitations, among them the right
of the underwriters of an offering to limit the number of shares included in
such registration and the right of the Company not to effect a requested
registration within six months following an offering of the Company's
securities, including the offering made hereby.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services and its telephone number is (415) 743-1444.
59
<PAGE> 61
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 15,979,945 shares
of Common Stock outstanding (assuming no exercise of options or issuance of
Common Stock subsequent to June 30, 1998 except for the sale of 88,222 shares of
Common Stock issuable upon exercise of outstanding options by certain of the
Selling Stockholders and based upon 14,891,723 shares of the Company's Common
Stock outstanding as of June 30, 1998). All of the 3,000,000 shares sold in this
Offering, the 3,680,000 shares sold in the Company's initial public offering and
1,000 shares publicly resold by stockholders of the Company are freely tradeable
without restriction or further registration under the Securities Act, except for
any shares purchased by affiliates of the Company, as that term is defined in
Rule 144 under the Securities Act ("Affiliates"), which may generally be sold
only in compliance with certain of the limitations of Rule 144 described below.
The remaining 9,298,945 shares of Common Stock are deemed "restricted
securities" under Rule 144. Restricted shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below. 136,607 shares will be available for immediate sale in the
public market in accordance with Rules 144 and, upon the expiration of transfer
restrictions specified in preexisting agreements or in lock-up agreements with
Credit Suisse First Boston Corporation, 8,985,161 shares will be available for
sale in the public market beginning 90 days after the date of this Prospectus in
accordance with Rule 144 or Rule 701, subject to the volume and other resale
limitations of Rule 144, other than the one year holding period. The remaining
177,177 shares are eligible for sale in the public market more than 90 days
after the date of this Prospectus.
All officers and directors and certain stockholders and certain option
holders of the Company have agreed not to offer, pledge, sell, contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly (or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of), any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock, for a period of 90 days
after the date of this Prospectus, without the prior written consent of Credit
Suisse First Boston Corporation.
In general, under Rule 144, beginning on May 13, 1998, a stockholder,
including an Affiliate, who has beneficially owned his or her restricted
securities (as that term is defined in Rule 144) for at least one year from the
later of the date such securities were acquired from the Company or (if
applicable) the date they were acquired from an Affiliate, is entitled to sell,
within any three-month period, a number of such shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock (approximately
159,799 shares immediately after this Offering) or the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the date on
which notice of such sale was filed under Rule 144, provided certain
requirements concerning availability of public information, manner of sale and
notice of sale are satisfied. In addition, under Rule 144(k), if a period of at
least two years has elapsed between the later of the date restricted securities
were acquired from the Company, a stockholder who is not an Affiliate of the
Company at the time of sale and has not been an Affiliate of the Company for at
least three months prior to the sale is entitled to sell the shares immediately
without compliance with the foregoing requirements of Rule 144.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted prior
to this Offering) are also restricted securities and, beginning May 13, 1998,
may be sold by stockholders other than Affiliates of the Company subject only to
the manner of sale provisions of Rule 144 and by an Affiliate under Rule 144
without compliance with its one-year holding period requirement. As of June 30,
1998, the holders of options exercisable into approximately 1,598,709 shares of
Common Stock will be eligible to sell their shares upon the expiration of
transfer restrictions specified in the Stock Option Plan 180 days after the date
of this Prospectus, subject in certain cases to vesting of such options.
No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time. The Company is unable to estimate
the number of shares that may be sold in the public market pursuant to Rule 144,
since this
60
<PAGE> 62
will depend on the market price of the Common Stock, the personal circumstances
of the sellers and other factors. Nevertheless, sales of significant amounts of
the Common Stock of the Company in the public market could adversely affect the
market price of the Common Stock and could impair the Company's ability to raise
capital through an offering of its equity securities.
In addition, following this Offering, the holders of 9,032,854 shares of
outstanding Common Stock will, under certain circumstances, have rights to
require the Company to register their shares for future sale. See "Description
of Capital Stock -- Registration Rights."
61
<PAGE> 63
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement, dated the date of this Prospectus (the "Underwriting Agreement")
among the Company, the Selling Stockholders and the underwriters named below
(the "Underwriters"), for whom CSFBC, NationsBanc Montgomery Securities LLC and
Smith Barney Inc. are acting as the representatives (the "Representatives"), the
Underwriters have severally, but not jointly, agreed to purchase from the
Company and the Selling Stockholders, the following respective numbers of shares
of Common Stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
NationsBanc Montgomery Securities LLC.......................
Smith Barney Inc............................................
---------
Total.............................................
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides,
that, in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Selling Stockholders have granted to the Underwriters an option
exercisable by CSFBC, expiring at the close of business on the 30th day after
the date of this Prospectus, to purchase up to 450,000 additional shares of
Common Stock at the offering price, less the underwriting discounts and
commissions, all as set forth on the cover page of this Prospectus. Such option
may be exercised only to cover over-allotments in the sale of the shares of
Common Stock. To the extent that the option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares of Common Stock as it was obligated to
purchase pursuant to the Underwriting Agreement.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public initially at the public offering price set forth on the
cover page of this Prospectus and, through the Underwriters, to certain dealers
at such price less a concession of $ per share and the Underwriters and
such dealers may allow a discount of $ per share on sales to certain other
dealers. After the Offering, the public offering price and concession and
discount to dealers may be changed by the Representatives.
The Company and certain of its directors, officers and shareholders have
agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, or,
in the case of the Company file with the Securities and Exchange Commission (the
"Commission") a registration statement under the Securities Act relating to any
additional shares of the Common Stock or securities convertible into or
exchangeable or exercisable for any shares of the Common Stock, without the
prior written consent of CSFBC for a period of 90 days after the date of this
Prospectus.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments that the Underwriters may be required
to make in respect thereof.
In May 1996, Smith Barney Inc. ("Smith Barney") paid approximately $160,000
to the Company for a license of the Company's software and a service and
maintenance agreement in connection therewith. Smith Barney obtained such
license and service and maintenance agreement through arms-length negotiations
on terms substantially similar to terms obtained by other customers of the
Company at approximately the same time.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with
62
<PAGE> 64
Regulation M under the Securities Exchange Act of 1934 (the "Exchange Act").
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
shares of Common Stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
shares of Common Stock originally sold by such syndicate member are purchased in
a syndicate covering transaction to cover syndicate short positions. In
"passive" market making, market makers in the Securities who are Underwriters or
prospective Underwriters may, subject to certain limitations, make bids for or
purchases of the Securities until the time, if any, at which a stabilizing bid
is made. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of the Common Stock are
effected. Accordingly, any resale of the Common Stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of the Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Stockholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities laws
to purchase such Common Stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent, and (iii) such purchaser has reviewed
the text above under "-- Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the Company's directors and officers as well as the experts named
herein and the Selling Stockholders may be located outside of Canada, and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the Company or such persons. All or a substantial
portion of the assets of the Company and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the Company or such persons in Canada or to enforce a judgment obtained in
Canadian courts against the Company or such persons outside of Canada.
63
<PAGE> 65
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, Menlo Park, California. As of June 30, 1998, an
investment partnership comprised of members of that firm beneficially owned
15,552 shares of the Company's Common Stock. Certain legal matters in connection
with the Offering will be passed upon for the Underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements of Micromuse Inc. as of September 30,
1996 and 1997, and for each of the years in the three-year period ended
September 30, 1997, have been included in this Prospectus and Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
auditors, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
64
<PAGE> 66
MICROMUSE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of September 30, 1996, 1997
and June 30, 1998......................................... F-3
Consolidated Statements of Operations for the Years Ended
September 30, 1995, 1996, and 1997 and the Nine Months
Ended June 30, 1997 and 1998.............................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended September 30, 1995, 1996, and 1997 and
the Nine Months Ended June 30, 1998....................... F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1995, 1996, and 1997 and Nine Months Ended
June 30, 1997 and 1998.................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Micromuse Inc.:
We have audited the accompanying consolidated balance sheets of Micromuse
Inc. and subsidiaries as of September 30, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended September 30, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Micromuse
Inc. and subsidiaries as of September 30, 1996 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Mountain View, California
December 10, 1997
F-2
<PAGE> 68
MICROMUSE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
----------------- -------------
1996 1997 1998
------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 594 $13,741 23,503
Short-term investments.................................... -- -- 20,254
Accounts receivable....................................... 5,682 4,461 5,386
Inventories............................................... 399 -- --
Prepaid expenses and other current assets................. 1,250 935 1,400
Related party loan........................................ 159 1,153 --
------ ------- --------
Total current assets.............................. 8,084 20,290 50,543
Property and equipment, net................................. 1,023 2,450 2,724
------ ------- --------
$9,107 $22,740 $ 53,267
====== ======= ========
Current liabilities:
Accounts payable.......................................... $4,048 $ 2,654 1,670
Bank overdraft............................................ 1,351 -- --
Current portion of capital lease obligations.............. 114 -- --
Accrued expenses.......................................... 971 3,133 3,918
Short-term notes.......................................... 1,275 -- --
Deferred revenue.......................................... 1,172 1,322 4,649
------ ------- --------
Total current liabilities......................... 8,931 7,109 10,237
Long-term liabilities:
Long-term portion of capital lease obligations............ 130 -- --
Long-term notes........................................... 268 -- --
Commitments and contingencies
Redeemable convertible preferred stock:
Series A, B, and C redeemable convertible preferred stock;
$0.01 par value; 1,500,000, 2,000,000, and 2,488,336
shares authorized in 1996, 1997 and 1998 respectively;
none, 4,488,336 and none issued and outstanding, in
1996, 1997 and 1998, respectively (aggregate
liquidation preference of $21,000,000 in 1997)......... -- 22,865 --
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding........... -- -- --
Common stock, $0.01 par value; 60,000,000 shares
authorized; 6,099,753, 6,705,853 and 14,891,723 shares
issued and outstanding in 1996, 1997 and 1998,
respectively........................................... 61 67 148
Additional paid-in capital................................ 264 2,390 55,455
Treasury stock, at cost: 120,000 shares in 1997........... -- (300) --
Deferred compensation..................................... -- (215) (173)
Cumulative translation adjustment......................... 50 52 (100)
Accumulated deficit....................................... (597) (9,228) (12,300)
------ ------- --------
Total stockholders' equity (deficit).............. (222) (7,234) 43,030
------ ------- --------
$9,107 $22,740 $ 53,267
====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 69
MICROMUSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------- -------------------
1995 1996 1997 1997 1998
------ ------ ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License............................................. $1,077 $3,374 $ 6,968 3,991 14,672
Maintenance and services............................ 369 1,141 2,324 1,630 3,945
------ ------ ------- -------- --------
Total revenues.............................. 1,446 4,515 9,292 5,621 18,617
------ ------ ------- -------- --------
Cost of revenues:
License............................................. 163 311 523 324 945
Maintenance and services............................ 102 384 1,042 649 2,361
------ ------ ------- -------- --------
Total cost of revenues...................... 265 695 1,565 973 3,306
------ ------ ------- -------- --------
Gross profit................................ 1,181 3,820 7,727 4,648 15,311
------ ------ ------- -------- --------
Operating expenses:
Sales and marketing................................. 728 1,768 8,970 4,669 10,819
Research and development............................ 708 1,582 2,042 1,282 3,804
General and administrative.......................... 584 996 4,244 2,734 3,154
------ ------ ------- -------- --------
Total operating expenses.................... 2,020 4,346 15,256 8,685 17,777
------ ------ ------- -------- --------
Loss from operations........................ (839) (526) (7,529) (4,037) (2,466)
Other income (expense):
Interest income..................................... -- 8 64 8 992
Interest expense.................................... (106) (212) (1,268) (717) (4)
Other............................................... -- 25 (200) (179) (210)
------ ------ ------- -------- --------
Loss before income taxes.................... (945) (705) (8,933) (4,925) (1,688)
Income taxes.......................................... -- 100 -- -- 50
------ ------ ------- -------- --------
Loss from continuing operations............. (945) (805) (8,933) (4,925) (1,738)
Discontinued operations:
Income (loss) from discontinued operations.......... 711 569 (104) (104) --
Gain on disposal of discontinued operations......... -- -- 1,161 -- --
------ ------ ------- -------- --------
Net loss.................................... (234) (236) (7,876) (5,029) (1,738)
Accretion on redeemable convertible preferred stock... -- -- (755) (353) (1,334)
------ ------ ------- -------- --------
Net loss applicable to holders of common
stock..................................... $ (234) $ (236) $(8,631) $ (5,382) (3,072)
====== ====== ======= ======== ========
Basic and diluted per share data:
Loss from continuing operations applicable to
holders of common stock.......................... $(0.17) (0.14) (1.52) (0.84) (0.29)
Income (loss) from discontinued operations.......... .13 .10 (.02) (.02) --
Gain on disposal of discontinued operations......... -- -- .18 -- --
Net loss applicable to holders of common stock...... $(0.04) (0.04) (1.35) (0.86) (0.29)
Shares used in per share calculations................. 5,498 5,954 6,373 6,250 10,487
====== ====== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 70
MICROMUSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK DEFERRED CUMULATIVE
---------------- PAID-IN ---------------- STOCK TRANSLATION
SHARES AMOUNT CAPITAL SHARES AMOUNT COMPENSATION ADJUSTMENT
------- ------ ---------- ------ ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of September 30, 1994............ 2,969 $ 30 $ 47 -- $ -- $ -- $ --
Issuance of common stock..................... 2,968 29 48 -- -- -- --
Foreign currency translation adjustment...... -- -- -- -- -- -- 4
Net loss..................................... -- -- -- -- -- -- --
Dividend..................................... -- -- -- -- -- -- --
------- ---- ------- ---- ------- ----- -----
Balances as of September 30, 1995............ 5,937 59 95 -- -- -- 4
Issuance of common stock..................... 163 2 2 -- -- -- --
Deferred compensation related to grants of
stock options............................... -- -- 167 -- -- (167) --
Amortization of deferred employee
compensation................................ -- -- -- -- -- 167 --
Foreign currency translation adjustment...... -- -- -- -- -- -- 46
Net loss..................................... -- -- -- -- -- -- --
------- ---- ------- ---- ------- ----- -----
Balances as of September 30, 1996............ 6,100 61 264 -- -- -- 50
Bonus shares issued.......................... 450 5 1,138 -- -- -- --
Stock options exercised...................... 36 -- 130 -- -- -- --
Compensation expense related to stock
transfers................................... -- -- 210 -- -- -- --
Treasury stock purchased..................... -- -- -- (120) (300) -- --
Issuance of common stock..................... 120 1 419 -- -- -- --
Deferred compensation related to grants of
stock options............................... -- -- 229 -- -- (229) --
Amortization of deferred employee
compensation................................ -- -- -- -- -- 14 --
Foreign currency translation adjustment...... -- -- -- -- -- -- 2
Net loss..................................... -- -- -- -- -- -- --
Accretion on redeemable convertible preferred
stock....................................... -- -- -- -- -- -- --
------- ---- ------- ---- ------- ----- -----
Balances as of September 30, 1997............ 6,706 67 2,390 (120) (300) (215) 52
Treasury stock purchased (unaudited)......... -- -- -- (778) (5,000) -- --
Stock options exercised (unaudited).......... 25 -- 37 -- -- -- --
Issuance of common stock upon initial public
offering, net of related costs
(unaudited)................................. 2,332 23 28,889 898 5,300 -- --
Conversion of Series B and C preferred stock
(unaudited)................................. 4,488 45 22,566 -- -- -- --
Exercise of Series A warrants (unaudited).... 1,341 13 1,575 -- -- -- --
Amortization of deferred employee
compensation (unaudited).................... -- -- -- -- -- 42 --
Foreign currency translation adjustment
(unaudited)................................. -- -- -- -- -- -- (152)
Net loss (unaudited)......................... -- -- -- -- -- -- --
Accretion on redeemable convertible preferred
stock (unaudited)........................... -- -- -- -- -- -- --
------- ---- ------- ---- ------- ----- -----
Balances as of June 30, 1998 (unaudited)..... 14,892 $148 $55,455 -0- $ -0- $(173) $(100)
======= ==== ======= ==== ======= ===== =====
<CAPTION>
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
----------- -------------
<S> <C> <C>
Balances as of September 30, 1994............ $ 13 $ 90
Issuance of common stock..................... (77) --
Foreign currency translation adjustment...... -- 4
Net loss..................................... (234) (234)
Dividend..................................... (63) (63)
-------- --------
Balances as of September 30, 1995............ (361) (203)
Issuance of common stock..................... -- 4
Deferred compensation related to grants of
stock options............................... -- --
Amortization of deferred employee
compensation................................ -- 167
Foreign currency translation adjustment...... -- 46
Net loss..................................... (236) (236)
-------- --------
Balances as of September 30, 1996............ (597) (222)
Bonus shares issued.......................... -- 1,143
Stock options exercised...................... -- 130
Compensation expense related to stock
transfers................................... -- 210
Treasury stock purchased..................... -- (300)
Issuance of common stock..................... -- 420
Deferred compensation related to grants of
stock options............................... -- --
Amortization of deferred employee
compensation................................ -- 14
Foreign currency translation adjustment...... -- 2
Net loss..................................... (7,876) (7,876)
Accretion on redeemable convertible preferred
stock....................................... (755) (755)
-------- --------
Balances as of September 30, 1997............ (9,228) (7,234)
Treasury stock purchased (unaudited)......... -- (5,000)
Stock options exercised (unaudited).......... -- 37
Issuance of common stock upon initial public
offering, net of related costs
(unaudited)................................. -- 34,210
Conversion of Series B and C preferred stock
(unaudited)................................. -- 22,611
Exercise of Series A warrants (unaudited).... -- 1,588
Amortization of deferred employee
compensation (unaudited).................... -- 42
Foreign currency translation adjustment
(unaudited)................................. -- (152)
Net loss (unaudited)......................... (1,738) (1,738)
Accretion on redeemable convertible preferred
stock (unaudited)........................... (1,334) (1,334)
-------- --------
Balances as of June 30, 1998 (unaudited)..... $(12,300) $ 43,030
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 71
MICROMUSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------ ------------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $ (234) $ (236) $ (7,876) $(5,029) $ (1,738)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 489 603 669 615 903
Loss on disposal of assets......................... 484 242 51 -- --
Debt issuance costs................................ -- -- 1,350 -- --
Amortization of deferred employee compensation..... -- 167 14 -- 42
Compensation expense related to stock transfers.... -- -- 330 -- --
Compensation expense relating to bonus shares
issued........................................... -- -- 1,143 -- --
Changes in operating assets and liabilities:
Accounts receivable.............................. (1,372) (2,495) 1,221 1,702 (925)
Inventories...................................... 747 (53) 399 (94) --
Prepaid expenses and other current assets........ (618) (294) 315 (189) (465)
Related party loan............................... (25) (127) (994) (738) 1,153
Accounts payable................................. 85 1,806 (1,394) (231) (984)
Accrued expenses................................. 255 149 2,162 (40) 785
Deferred revenue................................. 111 548 150 941 3,327
Long-term taxes payable.......................... 17 (22) -- -- --
-------- -------- -------- ------- --------
Net cash provided by (used in) operating
activities.................................. (61) 288 (2,460) (3,063) 2,098
-------- -------- -------- ------- --------
Cash flows used in investing activities:
Capital expenditures................................. (397) (602) (2,147) (907) (1,177)
Purchase of short-term investments................... -- -- -- -- (20,254)
-------- -------- -------- ------- --------
Net cash used in investing activities......... (397) (602) (2,147) (907) (21,431)
-------- -------- -------- ------- --------
Cash flows from financing activities:
Bank overdraft....................................... 309 677 (1,351) (814) --
Proceeds from short-term notes....................... 324 951 1,000 2,500 --
Payment of short-term notes.......................... -- -- (2,275) (3,611) --
Proceeds from long-term notes payable................ 414 -- -- -- --
Payments on long-term notes payable.................. (204) (205) (268) (68) --
Payments on capital lease obligations................ (332) (577) (244) -- --
Proceeds from issuance of common stock............... -- 4 430 -- 34,247
Purchase of treasury stock........................... -- -- (300) -- (5,000)
Proceeds from issuance of redeemable convertible
preferred stock.................................... -- -- 20,760 6,730 --
Payment of dividends................................. (63) -- -- -- --
-------- -------- -------- ------- --------
Net cash provided by (used in) financing
activities.................................. 448 850 17,752 4,737 29,247
-------- -------- -------- ------- --------
Effect of exchange rate changes on cash and cash
equivalents.......................................... 4 46 2 47 (152)
-------- -------- -------- ------- --------
Net increase (decrease) in cash and cash equivalents... (6) 582 13,147 814 9,762
Cash and cash equivalents at beginning of period....... 18 12 594 594 13,741
-------- -------- -------- ------- --------
Cash and cash equivalents at end of period............. $ 12 $ 594 $ 13,741 $ 1,408 $ 23,503
======== ======== ======== ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period -- interest.............. $ 79 $ 159 $ 154 $ 125 $ --
======== ======== ======== ======= ========
Noncash financing activities:
Accretion on redeemable convertible preferred
stock............................................ $ -- $ -- $ 755 $ 353 $ 1,334
======== ======== ======== ======= ========
Exercise of warrant to purchase redeemable
convertible Series A preferred stock for common
stock............................................ $ -- $ -- $ -- $ -- $ 1,588
======== ======== ======== ======= ========
Conversion of redeemable convertible Series B and C
preferred stock to common stock.................. $ -- $ -- $ -- $ -- $ 22,611
======== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 72
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1996, AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Micromuse Inc. and subsidiaries (the Company) develops, markets, and
supports a family of scaleable, highly configurable, rapidly deployable,
software solutions for the effective monitoring and management of multiple
elements underlying an enterprise's information technology infrastructure. The
Company maintains its U.S. headquarters in California and its European
headquarters in London, England.
Micromuse plc was incorporated in England in 1989 and operated in the
United States through its subsidiary, Micromuse (USA) Inc., a Texas corporation.
In 1997, Micromuse plc became a subsidiary of Micromuse Inc., a Delaware
corporation. The Company entered into a stock exchange agreement with the
stockholders of the English corporation in March 1997. The Company's Board of
Directors approved an exchange of one share in the English corporation for
5.9365 shares in the Delaware corporation. The Certificate of Incorporation of
the Delaware corporation authorizes 18,500,000 shares of common stock at $0.01
par value per share and 5,988,336 shares of preferred stock at $0.01 par value
per share. The accompanying consolidated financial statements have been
retroactively restated to give effect to the reorganization and exchange of
common stock.
Initial Public Offering of Common Stock
In February 1998, the Company completed an offering of its capital stock
pursuant to a Registration Statement on Form S-1 ("IPO"), whereby the Company
sold 3,230,000 shares of Common Stock to the public at a price of $12.00 per
share. The net proceeds to the Company from the IPO were $34.2 million.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Cash Equivalents
The Company considers all highly liquid instruments with a purchased
maturity of 90 days or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments consist of cash and trade receivables. Trade
receivables potentially subject the Company to concentrations of credit risk.
The Company closely monitors extensions of credit and has not experienced
significant credit losses in the past. Credit losses have been provided for in
the consolidated financial statements and have been within management's
expectations.
F-7
<PAGE> 73
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
Fair Value of Financial Instruments
The fair value of the Company's cash and cash equivalents, accounts
receivable, accounts payable and the redeemable convertible preferred stock
approximate their respective carrying amounts defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, generally three years.
During 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to Be Disposed Of. The adoption of SFAS No. 121
did not have a material effect on the Company's consolidated financial position
or results of operations.
Revenue Recognition
License revenues are recognized upon the acceptance of a purchase order and
shipment of the software if no significant obligations on the part of the
Company remain and collection of the resulting receivable is probable.
Allowances for credit losses and for estimated future returns are provided for
upon shipment. Returns to date have not been material. Maintenance revenues from
ongoing customer support and product upgrades are deferred and recognized
ratably over the term of the maintenance agreement, typically 12 months.
Payments for maintenance fees (on initial order or on renewal) are generally
made in advance and are nonrefundable. Revenues for consulting and training
services are recognized as the services are performed. In October 1997, the
American Institute of Certified Public Accountants issued Statement of Position
No. 97-2, Software Revenue Recognition (SOP 97-2). SOP 97-2 generally requires
revenue earned on software arrangements involving multiple elements such as
software products, upgrades, enhancements, postcontract customer support,
installation and training to be allocated to each element based on the relative
fair values of the elements. The fair value of an element must be based on
evidence which is specific to the vendor. The revenue allocated to software
products, including specified upgrades or enhancements generally is recognized
upon delivery of the products. The revenue allocated to postcontract customer
support generally is recognized ratably over the term of the support, and
revenue allocated to service elements generally is recognized as the services
are performed. If evidence of the fair value for all element arrangement does
not exist, all revenue from the arrangement is deferred until such evidence
exists or until all elements are delivered. SOP 97-2 was adopted effective
October 1, 1997. There was no material change to the Company's accounting for
revenue as a result of the adoption of SOP 97-2.
Research and Development Costs
In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, development costs related to
software products are expensed as incurred until the technological feasibility
of the product has been established. Technological feasibility in the Company's
circumstances occurs when a working model is completed. After technological
feasibility is established, additional costs would be capitalized. The Company
believes its process for developing software is essentially completed concurrent
with the establishment of technological feasibility, and, accordingly, no
research and development costs have been capitalized to date.
F-8
<PAGE> 74
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The measurement of deferred
tax assets is reduced, if necessary, by a valuation allowance for any tax
benefits that are not expected to be realized.
Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements using
the intrinsic value method. As such, compensation expense is recorded when on
the date of grant the fair value of the underlying common stock exceeds the
exercise price for stock options or the purchase price for issuance or sales of
common stock.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
foreign currency. The Company translates the assets and liabilities of its
foreign subsidiaries to U.S. dollars at the rates of exchange in effect at the
end of the year. Revenues and expenses are translated at the average rates of
exchange for the year. Translation adjustments and the effects of exchange rate
changes on intercompany transactions of long-term investment nature are included
in stockholders' deficit in the consolidated balance sheets. Gains and losses
resulting from foreign currency transactions denominated in a currency other
than the functional currency are included in income and have not been
significant to the Company's consolidated operating results in any period.
Per Share Data
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. SFAS No. 128 establishes standards for the computation,
presentation and disclosure of earnings per share (EPS) and also requires dual
presentation of basic EPS and diluted EPS for entities with complex capital
structures. SFAS No. 128 became effective for the Company's consolidated
financial statements for quarterly and annual periods beginning October 1, 1997,
and requires restatement of EPS for periods prior to the effective date.
SFAS No. 128 requires the presentation of basic and diluted EPS for both
loss from continuing operations applicable to holders of common stock and net
loss applicable to holders of common stock. Loss from continuing operations and
net loss are increased by the amount of accretion on redeemable convertible
preferred stock during each period in arriving at the respective amounts
applicable to holders of common stock. Under SFAS No. 128, basic EPS is computed
as net loss applicable to common shareholders divided by the weighted-average
number of common shares outstanding during the period. Diluted EPS is computed
based on the weighted-average number of common shares outstanding during the
period and, when dilutive, the weighted average number of potential common
shares from the assumed exercise of outstanding options and warrants to purchase
common stock using the treasury stock method and from the assumed conversion of
convertible debt and convertible preferred stock using the as if converted
method.
Potential common shares have been excluded from the computation of EPS for
all periods presented since their effect on EPS is antidilutive due to the
losses incurred in each period. Consequently, the number of
F-9
<PAGE> 75
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
shares in the computations of basic and diluted EPS is the same for each period.
Potential common shares which were excluded from the computations of EPS but
which could potentially dilute basic EPS in the future consisted of options to
purchase common stock totaling 476,083 shares in fiscal 1995, 575,379 shares in
fiscal 1996, 1,312,086 shares in fiscal 1997, and 1,132,928 shares and 1,597,753
shares in the nine-month periods ended June 30, 1997 and 1998, respectively.
Also excluded from the computations of EPS were common shares resulting from the
assumed conversion of Series B and Series C redeemable convertible preferred
stock because the effects of these securities were antidilutive prior to their
conversion into 2,000,000 and 2,488,336 shares, respectively, of common stock
upon the closing of the Company's initial public offering on February 13, 1998.
Unaudited Interim Financial Information
The consolidated financial information as of June 30, 1998 and for the nine
months ended June 30, 1997 and 1998 is unaudited, but includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the financial position at such dates and
the operations and cash flows for the periods then ended. Operating results for
the nine months ended June 30, 1998 are not necessarily indicative of results
that may be expected for the entire year.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements. It does not,
however, require a specific format for the statement, but requires the Company
to display an amount representing total comprehensive income for the period in
that financial statement. The Company is in the process of determining its
preferred format. This statement is effective for fiscal years beginning after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for financial statements for periods
beginning after December 31, 1997. The Company has not yet determined whether it
has any separately reportable business segments.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use ("SOP 98-1"). This SOP applies
to software that is acquired or developed solely for an entity's internal use
and requires the capitalization of qualifying costs in software application
development activities, which include design, coding, installation hardware and
testing. Capitalization of qualifying costs incurred in development stage
activities begins when the entity has committed to fund a particular internal
computer software project and the entity considers it probable that the
committed software will be used to perform the intended function, provided that
the entity has completed the preliminary project stage activities. Preliminary
project stage activities include the conceptual formulation and evaluation of
alternatives and the determination of the existence of needed technology.
Qualifying capitalizable computer software costs include the external direct
costs of materials and services and the payroll related costs of employees who
are directly involved with the internal project. All other costs related to the
project are expensed as incurred.
SOP 98-1 will be effective for internal use computer software costs
incurred in future years commencing with the Company's fiscal year beginning
October 1, 1999. The Company has followed an accounting policy of expensing as
incurred all costs related to software developed for internal use and intends to
continue this policy
F-10
<PAGE> 76
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
until the effective date of SOP 98-1. The Company has not yet determined whether
the adoption of SOP 98-1 will have a material effect on the Company's financial
position or results of operations after the effective date of SOP 98-1.
2. DISCONTINUED OPERATIONS
In July 1997, the Company adopted a formal plan to discontinue its Systems
Integration division based in England. In September the Company sold the
division for approximately $400,000 in cash, net of fees. The disposition of the
division in September 1997 has been accounted for as a discontinued operation in
accordance with APB Opinion No. 30 and prior period consolidated financial
statements have been restated to reflect the discontinuation of the Systems
Integration business. Revenue from discontinued operations was $16.6 million,
$14.0 million and $15.7 million, respectively in fiscal 1995, 1996 and 1997. The
income (loss) from discontinued operations of $711,000, $569,000, and ($104,000)
in fiscal 1995, 1996, and 1997, respectively, represents the operation's
operating income. The gain on disposal of discontinued operations of $1.2
million in fiscal 1997 represents the gain on disposal of the operation
including net income from operations of $256,000 from the measurement date to
the disposal date. The following assets and liabilities are included in the
consolidated balance sheet as of September 30, 1996 (in thousands):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Cash and cash equivalents................................... $ 162
Accounts receivable......................................... 4,137
Inventory................................................... 399
Prepaid expenses and other current assets................... 692
Property and equipment...................................... 710
-------
Total assets................................................ 6,100
Deferred revenue............................................ (1,049)
Other liabilities........................................... (6,131)
-------
Net liabilities............................................. $(1,080)
=======
</TABLE>
If the revenues of the Systems Integration business and purchaser combined
exceed $22.9 million in the first year following the disposal date, additional
consideration of $250,000 is payable to the Company. At the end of the option
period, which expires at December 16, 1997, the purchaser has the option to pay
the Company further consideration of $250,000. If the purchaser decides not to
pay this amount, the Company is released from all obligations to perform any
services for the purchaser except as explicitly specified by the contract. As of
March 31, 1998, the Company has not recorded either of these amounts.
F-11
<PAGE> 77
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
3. BALANCE SHEET COMPONENTS
Property and equipment
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------- JUNE 30
1996 1997 1998
------- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
In thousands:
Computer equipment........................... $ 1,583 $2,819 $ 3,883
Furniture and fixtures....................... 196 959 1,000
Other........................................ 591 597 479
------- ------ -------
2,370 4,375 5,362
Less accumulated depreciation................ (1,347) (1,925) (2,638)
------- ------ -------
$ 1,023 $2,450 $ 2,724
======= ====== =======
</TABLE>
Accrued expenses
<TABLE>
<S> <C> <C> <C>
In thousands:
Payroll and commission related............... $ 125 $ 996 $ 1,903
Other........................................ 846 2,137 2,015
------- ------ -------
$ 971 $3,133 $ 3,918
======= ====== =======
</TABLE>
4. RELATED PARTY TRANSACTIONS
In July 1997, the Company repurchased, from a stockholder who is an officer
and a director, 120,000 shares of common stock at $2.50 per share for a total
price of $300,000.
In November 1997, the Company repurchased, from a stockholder who is an
officer and a director, 777,605 shares of common stock at $6.43 per share for a
total price of $5.0 million. The stockholder used a portion of the proceeds to
repay an interest free loan from the Company.
5. NOTES PAYABLE
In February 1995, the Company entered into a $597,000 loan agreement with a
bank, bearing interest at 10% per annum, expiring in December 2000. The note was
repaid in full by the Company in 1997.
In April 1996, the Company entered into a convertible promissory note
agreement for $1,000,000. The note was convertible to Series A Preferred Stock.
The note was repaid in full by the Company in December 1996.
F-12
<PAGE> 78
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY
Redeemable Convertible Preferred Stock
Redeemable convertible preferred stock as of September 30, 1997, was
comprised of the following:
<TABLE>
<CAPTION>
SHARES ISSUED
AND OUTSTANDING CARRYING VALUE
--------------- --------------
<S> <C> <C>
Series A......................................... -- $ 1,468,000
Series B......................................... 2,000,000 5,333,000
Series C......................................... 2,488,336 16,064,000
---------- -----------
4,488,336 $22,865,000
========== ===========
</TABLE>
Holders of Series A, B, and C preferred stock were permitted to convert all
or part of their shares at any time after the date of issuance into such number
of common stock as is determined by dividing $2.00, $2.50 and $6.43,
respectively, by the conversion price in effect at the time. Conversion was
automatic upon the closing of an IPO of the Company's common stock, with respect
to Series A and B, at a price of not less than $6.86 per share and with
aggregate proceeds of not less than $10 million and with respect to Series C, at
a price not less than $9.65 per share if such public offering occurred on or
before September 8, 1998, and $12.86 per share thereafter, and with aggregate
proceeds of not less than $10 million or by written consent or agreement of the
holders of two-thirds of the outstanding shares of Series A, B, and C voting
together as a single class.
The holders of the Series A, B, and C preferred stock were entitled to
receive noncumulative dividends of $0.20, $0.25, and $0.643 per share per annum,
respectively, when, and if, declared by the Board of Directors.
Upon the occurrence of a liquidation event, such as a dissolution of the
Company or a merger or sale of assets, the holders of Series A, B, and C
preferred stock were entitled to receive in preference to holders of common
stock an amount equal to the original issuance price and an amount equal to
declared but unpaid dividends, and thereafter, share any remaining proceeds on a
pro rata basis with the holders of common stock based on the number of shares of
common stock held by each, assuming full conversion of Series A, B, and C
preferred stock.
The Company was required to redeem the Series A, B, and C preferred stock
at the option of the holders of preferred stock after March 6, 2002, subject to
reasonable financial stability considerations, payable quarterly thereafter
until satisfied. The holders of preferred stock were entitled to a redemption
price per share equal to the original issuance price, plus an annually
compounded 15% cumulative rate of return thereon. The Company accrued the 15%
rate of return to the redemption date. The amount accrued as of September 30,
1997 is included in the carrying value of the redeemable convertible preferred
stock.
A $3.0 million line of credit was made available to the Company in March
1997. Interest under the line of credit was at no more than prime plus 2% and
funds drawn were to be used to finance an acquisition or other vehicle of growth
as approved by the Board of Directors. The $3.0 million line of credit was
available as of September 30, 1997. If exercised, the line of credit will become
due and payable upon the earliest of a qualified public offering, a qualified
acquisition, or expiration of the Series A warrant issued in conjunction with
the line of credit. During fiscal 1997, the Company drew down $1.0 million which
was repaid as of September 30, 1997. The warrant expired on the earlier of March
2002, or the closing date of a public offering, merger, or acquisition of the
Company. The warrant issued in conjunction with the line of credit allowed the
holder to purchase 1,500,000 shares of the Series A preferred stock at an
exercise price of $2.00 per share. The warrant was initially recorded at fair
value of $1,350,000 which is included in the carrying value of the Series A
preferred stock and treated as a debt issuance cost. This cost was amortized to
interest expense over
F-13
<PAGE> 79
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
the period from the date of issuance to the anticipated date of the initial
public offering, which resulted in a noncash interest charge of $1,050,000 in
fiscal 1997 and the remaining debt issuance cost at September 30, 1997 is
included in prepaid expenses and other current costs.
Common Stock
In March 1997, approximately 450,000 shares of common stock were issued to
stockholders as bonuses. The Company recorded compensation expense of $1,138,000
for the fair market value of such shares. During fiscal 1997, the principal
stockholders transferred shares of common stock to certain employees. The
Company recorded compensation expense of $210,000 for the difference between the
fair market value and the transfer price of the common stock.
Under the Company's 1997 Stock Option/Stock Issuance Plan (the Plan),
options to purchase up to an aggregate of approximately 2,513,000 shares of
common stock may be granted to employees, officers, directors, and consultants.
Because the warrant to purchase 1,500,000 shares of Series A was exercised upon
the IPO, options to purchase an additional 166,666 shares of common stock were
reserved under the Plan. The Plan provides for the issuance of incentive and
non-statutory options that must be granted at an exercise price not less than
100% and 85% of the fair market value of the common stock on the date of grant,
respectively, (110% if the person to whom the option is granted is a 10%
stockholder). Incentive options may only be granted to employees. Options
generally vest over four years from the date of grant. The options expire
between 5 and 10 years from the grant date, and any vested options must normally
be exercised within three months after termination of employment. The Plan is
administered by the Company's Board of Directors.
A summary of the status of the Company's options under the plan is as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
NUMBER EXERCISE AVERAGE
OF SHARES PRICE FAIR VALUE
---------- --------- ----------
<S> <C> <C> <C>
Balances as of September 30, 1994......... 444,875 $2.41 --
Granted at market value................... 31,208 2.40 --
----------
Balances as of September 30, 1995......... 476,083 2.41 --
Granted at greater than market value...... 212,266 3.21 0.10
Granted at market value................... 70,765 2.31 0.36
Granted at less than market value......... 133,915 1.06 1.43
Canceled.................................. (317,650) 2.31 --
----------
Balances as of September 30, 1996......... 575,379 2.43 --
Granted at greater than market value...... 269,992 2.50 1.25
Granted at market value................... 640,856 2.55 0.43
Exercised................................. (36,320) 3.50 --
==========
Balances as of September 30, 1997......... 1,312,086 2.38 --
==========
</TABLE>
As of September 30, 1996 and 1997, 338,083 and 267,687 shares, with
weighted-average exercise prices of $2.43 and $1.97, were fully vested and
exercisable, respectively. As of September 30, 1997, 100,000 shares are
available for grant.
F-14
<PAGE> 80
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
The following table summarizes information concerning outstanding and
exercisable options under the plans outstanding as of September 30, 1997:
<TABLE>
<CAPTION>
OUTSTANDING
----------------------------------- EXERCISABLE
WEIGHTED- --------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OF LIFE EXERCISE OF EXERCISE
PRICES SHARES (IN YEARS) PRICE SHARES PRICE
------------ --------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
$0.03 - 2.50 1,237,984 9.13 $2.29 202,875 $1.43
$6.43 74,102 6.34 3.99 64,862 3.64
--------- ---- ----- ------- -----
1,312,086 8.97 $2.38 267,737 $1.97
========= ==== ===== ======= =====
</TABLE>
The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans. Accordingly, no compensation cost has
been recognized for its stock options in the accompanying consolidated financial
statements because the fair value of the underlying common stock equals or
exceeds the exercise price of the stock options at the date of grant, except
with respect to certain options issued in 1996 and during fiscal 1997. The
Company has recorded deferred stock compensation expense of $167,000 and
$229,000 for the difference at the grant date between the exercise price and the
fair value of the common stock underlying the options issued in September 1996
and fiscal 1997, respectively. The $167,000 was amortized in fiscal 1996 as the
options were fully vested upon issuance and $14,000 and $42,000 of the $229,000
was amortized in fiscal 1997 and in the nine month period ended June 30, 1998,
respectively, as the options vest over four years.
Had compensation cost for the Company's stock options been determined in a
manner consistent with SFAS No. 123, Accounting for Stock-Based Compensation,
the Company's net loss would have increased by $47,000 for fiscal 1997 and the
loss per share would have remained unchanged from that disclosed in the
Consolidated Statements of Operations.
The per share weighted-average fair value of stock options granted during
1996 and 1997 was $0.57 and $0.67, respectively, on the date of grant using the
minimum value method with the following weighted assumptions: 1996 -- expected
dividend yield 0.0%, risk-free interest rate of 6.06%, and expected life of 3
years; 1997 -- expected dividend yield of 0.0%, risk-free interest rate of
6.28%, and expected life of 3 years.
In July 1997, 120,000 shares were issued to two directors at $2.50 per
share, under the Plan. The Company has recorded stock compensation expense of
$120,000, for the difference between the issuance price and the fair market
value of the common stock.
1998 Employee Stock Purchase Plan
In January 1998, the Board of Directors adopted the Company's 1998 Employee
Stock Purchase Plan (the "ESPP") to provide employees of the Company with an
opportunity to purchase Common Stock through payroll deductions. Under the ESPP
300,000 shares of Common Stock have been reserved for issuance. The ESPP became
effective at the time of the IPO. All full-time regular employees who are
employed by the Company will be eligible to participate in the ESPP after
completing a three-month waiting period.
Preferred Stock
In 1997, the Board of Directors approved an amendment to the Certificate of
Incorporation to allow, upon completion of the IPO, the issuance of up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences, and privileges, including voting and redemption rights of those
shares without further vote or action by the stockholders.
F-15
<PAGE> 81
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. INCOME TAXES
The provision for income taxes attributable to continuing operations in
fiscal 1996 was primarily for current federal income taxes. As of September 30,
1997, the Company had approximately $2.4 million and $1.4 million of net
operating loss carryforwards for federal and state purposes, respectively. The
federal net operating loss carryforwards expire in 2012. The state net operating
loss carryforwards expire primarily in 2002. The difference between the federal
and state net operating loss carryforwards is due primarily to a 50% limitation
on net operating loss carryforwards for California purposes. As of September 30,
1997, the Company also had approximately $1.8 million and $200,000 of loss
carryforwards in England and Australia, respectively. The loss carryforwards of
the English company can be carried forward indefinitely. The Australian loss
carryforwards can also be carried forward indefinitely, subject to certain
restrictions.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are presented below (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1996 1997
------- -------
<S> <C> <C>
Various accruals and reserves not deductible for tax
purposes.................................................. $ -- $ 498
Net operating loss carryforwards............................ 28 1,525
Property and equipment...................................... 56 124
Other....................................................... -- 25
------- -------
Total deferred tax assets......................... 84 2,172
Valuation allowance......................................... (84) (2,172)
------- -------
Net deferred tax assets........................... $ -- $ --
======= =======
</TABLE>
The valuation allowance increased by $2.1 million for the year ended
September 30, 1997.
Income (loss) before income taxes is comprised as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
----- ------- -------
<S> <C> <C> <C>
United States......................................... $ (5) $ 851 $(4,931)
Europe................................................ (940) (1,556) (4,002)
----- ------- -------
Total............................................ $(945) $ (705) $(8,933)
===== ======= =======
</TABLE>
Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss carryforwards in the event of an "ownership
change" as defined in Section 382 of the Internal Revenue Code. The Company has
not yet determined whether an ownership change occurred due to significant stock
transactions in each of the reporting years disclosed. If an ownership change
has occurred, utilization of the net operating loss carryforwards could be
significantly reduced. Additionally, loss carryforwards of either Micromuse Inc.
or Micromuse USA Inc. cannot be utilized against future profits generated by the
other company.
F-16
<PAGE> 82
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
Total income tax expense from continuing operations differs from expected
income tax expense (computed by applying the U.S. federal corporate income tax
rate of 34% to profit (loss) before taxes, as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -------
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory rate... $(321) $(240) $(2,532)
State income taxes, net of federal income tax benefit.... -- 10 --
Unutilized losses........................................ 321 345 2,514
Change in beginning of year valuation allowance.......... -- (16) --
Other.................................................... -- 1 18
----- ----- -------
$ -- $ 100 $ --
===== ===== =======
</TABLE>
8. GEOGRAPHIC INFORMATION
The Company markets its products primarily from its operations in the
United States. Direct sales in Europe are primarily to customers in France,
Germany, and the United Kingdom. Information regarding operations in different
geographic regions is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Revenues:
United States......................................... $ 349 $2,030 $ 4,810
Europe................................................ 1,097 2,485 4,482
------ ------ -------
Total......................................... $1,446 $4,515 $ 9,292
====== ====== =======
Income (loss) from continuing operations:
United States......................................... $ (5) $ 725 $(4,931)
Europe................................................ (940) (1,530) (4,002)
------ ------ -------
Total......................................... $ (945) $ (805) $(8,933)
====== ====== =======
Identifiable assets:
United States......................................... $ 164 $1,467 $15,398
Europe................................................ 302 1,540 7,342
Assets related to discontinued operations............. 5,301 6,100 --
------ ------ -------
Total......................................... $5,767 $9,107 $22,740
====== ====== =======
</TABLE>
Intercompany transfers between geographic areas are accounted for using the
transfer prices in effect for subsidiaries.
9. MAJOR CUSTOMERS
A summary of the net sales to major customers that exceed 10% of total
revenues during each of the years in the three-year period ended September 30,
1997, and the amount due from these customers as of September 30, 1997, follows
(accounts receivable in thousands):
<TABLE>
<CAPTION>
ACCOUNTS
1995 1996 1997 RECEIVABLE
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Customer 1.................................... -- -- 18% $311
Customer 2.................................... 57% 14% 9% 898
</TABLE>
F-17
<PAGE> 83
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. COMMITMENTS
The Company leases its facilities and certain equipment under noncancelable
operating leases. The lease agreements expire at various dates during the next
11 years.
Rent expense was approximately $80,000, $215,000 and $538,000 for the years
ended September 30, 1995, 1996, and 1997, respectively. Future minimum lease
payments under noncancelable operating leases will be approximately $890,000,
$822,000, $764,000, $667,000, $325,000 and $825,000 for each of the years in the
five-year period and thereafter, respectively.
In August 1997, the Company obtained a lease facility of $300,000 for
equipment. The term of the lease facility is 42 months. As of September 30,
1997, the lease facility remained unused.
F-18
<PAGE> 84
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's following Regional Offices: 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549. The Commission maintains a World Wide Web site
that contains reports, proxy statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov. The Company's Common Stock is quoted on the Nasdaq
National Market and reports, proxy statements and other information concerning
the Company also may be inspected at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered by this
Prospectus. This Prospectus, which forms a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement, including the exhibits filed or incorporated by reference in the
Registration Statement. Statements made in this Prospectus about any contract or
other document are not necessarily complete and in each instance in which a copy
of such contract is filed with, or incorporated by reference in, the
Registration Statement as an exhibit, reference is made to such copy, and each
such statement shall be deemed qualified in all respects by such reference.
Copies of the Registration Statement may be inspected, without charge, at the
offices of the Commission, or obtained at prescribed rates from the Public
Reference Section of the Commission at the address set forth above.
Netcool(R), Micro Muse M(R) and the Micromuse logo are registered
trademarks of the Company and Micromuse(TM) NETCOOL/OMNIbus(TM) and
Netcool/Reporter(TM) are trademarks of the Company. All other trademarks or
service marks appearing in this Prospectus are trademarks or service marks of
the respective companies that utilize them.
<PAGE> 85
APPENDIX -- DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER
NETCOOL SUITE LOGO
Graphic: Illustration of operators managing Internet, Web Connects, Network
Devises, Databases, Applications, Systems, LANs and Carrier Services.
Caption: Netcool/OMNIbus is a state-of-the-art service level management system,
designed for building and managing views of business services in realtime.
Photo:
Caption: Telecommunications Firms. Using Netcool, the availability of a Telco's
ATM, Frame Relay, or other managed service can be discovered in realtime.
Photo:
Caption: Internet Service Providers. In the ISP world, Netcool monitors the
status of user-to-Internet connections and services such as Web hosting.
Photo:
Caption: Mission-Critical Enterprises. In large scale, global networks, Netcool
monitors the availability of any application, such as e-mail or Wall Street
trading.
<PAGE> 86
- ------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDERS OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE COMMON STOCK IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANYTIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS NOT BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 4
Risk Factors.......................... 5
Use of Proceeds....................... 16
Dividend Policy....................... 16
Price Range of Common Stock........... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 31
Management............................ 47
Certain Transactions.................. 54
Principal and Selling Stockholders.... 56
Description of Capital Stock.......... 58
Shares Eligible for Future Sale....... 60
Underwriting.......................... 62
Notice to Canadian Residents.......... 63
Legal Matters......................... 64
Experts............................... 64
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
LOGO
Micromuse Inc.
3,000,000 Shares
Common Stock
($.01 par value)
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
NATIONSBANC MONTGOMERY
SECURITIES LLC
SALOMON SMITH BARNEY
- ------------------------------------------------------
<PAGE> 87
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 the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 39,565
NASD fee.................................................... 13,912
Nasdaq National Market listing fee.......................... 17,500
Printing and engraving expenses............................. 140,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 80,000
Blue sky fees and expenses.................................. 5,000
Transfer agent fees......................................... 4,000
Miscellaneous fees and expenses............................. 100,023
--------
Total............................................. $650,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article IX, Section 1, of the Registrant's
Bylaws provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Restated
Certificate of Incorporation provides that, pursuant to Delaware law, its
directors shall not be liable for monetary damages for breach of the directors'
fiduciary duty as directors to the Company and its stockholders. This provision
in the Restated Certificate of Incorporation does not eliminate the directors'
fiduciary duty, and in appropriate circumstances equitable remedies such as
injunctive or other forms of non-monetary relief will remain available under
Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company for acts
or omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors, a form
of which is attached as Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-42177) that was declared effective February 12,
1998 (the "IPO S-1") and incorporated herein by reference. The Indemnification
Agreements provide the Registrant's officers and directors with further
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. Reference is made to Section 6 of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since September 30, 1994, the Registrant has sold and issued the following
unregistered securities:
1. The Registrant issued and sold 120,000 shares of its Common Stock
at a per share price of $2.50 for an aggregate purchase price of $300,000
to certain directors pursuant to direct issuances under its 1997 Stock
Option/Stock Issuance Plan (Incorporated by reference to Exhibit 10.2 to
the IPO S-1).
II-1
<PAGE> 88
2. On April 18, 1996, the Registrant issued and sold notes convertible
to Series A Preferred Stock in the aggregate principal amount of $1,000,000
to M.D. Strategic, L.P., Seedling Fund, L.P. and P.V. II, L.P. The notes
were repaid without conversion to Series A Preferred Stock.
3. On March 6, 1997, the Registrant issued and sold a warrant
exercisable for 1,500,000 shares of Series A Preferred Stock at $2.00 per
share in consideration for the execution and delivery of a Credit Agreement
whereby Sierra Ventures V, L.P. agreed to make revolving loans to the
Registrant in an aggregate amount of up to $3,000,000 for a period of five
years and 2,000,000 shares of Series B Preferred Stock for an aggregate
purchase price of $5,000,000 to Sierra Ventures V, L.P. On February 13,
1998, the warrant was exercised by means of a net issuance for an aggregate
of 1,341,059 shares of Series A Preferred Stock that were converted to
Common Stock upon the closing of the Company's initial public offering.
4. On September 8, 1997, the Registrant issued and sold 2,488,336
shares of Series C Preferred Stock for an aggregate purchase price of
$16,000,000.48 to a group of eighteen investors.
The issuances described in Item 15(a)(1) were deemed exempt from
registration under the Act in reliance upon Rule 701 promulgated under the Act.
The issuance of the securities described in items 15(a)(2), (3) and (4) were
deemed to be exempt from registration under the act in reliance on Section 4(2)
of the Act as transactions by an issuer not involving any public offering. In
addition, the recipients of the above-described securities represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof. Appropriate legends
were affixed to the share certificates and warrants issued in such transactions.
All recipients had adequate access, through employment or other relationships
with the Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement (preliminary form).
2.1+ Agreement for the sale of the systems integration business
of Micromuse plc by and among Micromuse plc, Horizon Open
Systems (UK) Limited and Horizon Computer Services Limited,
dated as of September 16, 1997.
3.1 Restated Certificate of Incorporation of the Registrant, as
amended to date.
3.2 Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1, 3.2 and 10.4.
4.2+ Specimen Common Stock certificate.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1+ Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
10.2+ 1997 Stock Option/Stock Issuance Plan and forms of
agreements thereunder.
10.3+ 1997 Employee Stock Purchase Plan.
10.4+ Amended and Restated Investors' Rights Agreement by and
among the Registrant and certain stockholders of the
Registrant, dated as of September 8, 1997.
10.5+ Office lease, dated as of March 25, 1997, by and between the
Registrant and SOMA Partners, L.P.
10.6+ Office lease, dated as of March 3, 1997, by and between
Micromuse plc, Marldown Limited and Christopher J. Dawes.
10.7+ Office lease, dated as of March 3, 1993, by and between
Micromuse plc, Guildquote Limited and Christopher J. Dawes.
10.8+ Agreement for the sale of the systems integration business
of Micromuse plc dated as of September 16, 1997. Reference
is made to Exhibit 2.1.
21.1+ Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
</TABLE>
II-2
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
23.2* Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney (see page II-4).
27 Financial Data Schedule.
</TABLE>
- ---------------
+ Incorporated by reference to such exhibit as filed in the IPO S-1.
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
ITEM 17. UNDERTAKINGS
The 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 for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Restated
Certificate of Incorporation or the Bylaws of the Registrant, the Underwriting
Agreement, 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 such 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 of 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.
The 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-3
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California, on this 13th day of July 1998.
MICROMUSE INC.
By: /s/ CHRISTOPHER J. DAWES
------------------------------------
Christopher J. Dawes
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Christopher J. Dawes and Stephen A.
Allott, and each of them, his true and lawful attorneys-in-fact and agents with
full 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
so 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 said
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CHRISTOPHER J. DAWES President, Chief Executive July 13, 1998
- ----------------------------------------------------- Officer and Director
Christopher J. Dawes (Principal Executive
Officer)
/s/ STEPHEN A. ALLOTT Senior Vice President, July 13, 1998
- ----------------------------------------------------- Finance (Principal Financial
Stephen A. Allott and Accounting Officer)
/s/ ANGELA DAWES Director of Sales, Western July 13, 1998
- ----------------------------------------------------- Region and Director
Angela Dawes
/s/ MICHAEL E.W. JACKSON Director July 13, 1998
- -----------------------------------------------------
Michael E.W. Jackson
/s/ DAVID C. SCHWAB Director July 13, 1998
- -----------------------------------------------------
David C. Schwab
</TABLE>
II-4
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement (preliminary form).
2.1+ Agreement for the sale of the systems integration business
of Micromuse plc by and among Micromuse plc, Horizon Open
Systems (UK) Limited and Horizon Computer Services Limited,
dated as of September 16, 1997.
3.1 Restated Certificate of Incorporation of the Registrant, as
amended to date.
3.2 Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1, 3.2 and 10.4.
4.2+ Specimen Common Stock certificate.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1+ Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
10.2+ 1997 Stock Option/Stock Issuance Plan and forms of
agreements thereunder.
10.3+ 1997 Employee Stock Purchase Plan.
10.4+ Amended and Restated Investors' Rights Agreement by and
among the Registrant and certain stockholders of the
Registrant, dated as of September 8, 1997.
10.5+ Office lease, dated as of March 25, 1997, by and between the
Registrant and SOMA Partners, L.P.
10.6+ Office lease, dated as of March 3, 1997, by and between
Micromuse plc, Marldown Limited and Christopher J. Dawes.
10.7+ Office lease, dated as of March 3, 1993, by and between
Micromuse plc, Guildquote Limited and Christopher J. Dawes.
10.8+ Agreement for the sale of the systems integration business
of Micromuse plc dated as of September 16, 1997. Reference
is made to Exhibit 2.1.
21.1+ Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney (see page II-4).
27 Financial Data Schedule.
</TABLE>
- ---------------
+ Incorporated by reference to such exhibit as filed in the IPO S-1.
* To be filed by amendment.
<PAGE> 1
WSGR DRAFT: 07/10/98
EXHIBIT 1.1
3,000,000 SHARES
MICROMUSE INC.
COMMON STOCK
UNDERWRITING AGREEMENT
July __, 1998
CREDIT SUISSE FIRST BOSTON CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
SMITH BARNEY INC.,
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Micromuse Inc., a Delaware corporation
("Company") proposes to issue and sell 1,000,000 shares of its common stock,
par value $0.01 per share ("Securities"), and the stockholders listed in
Schedule A hereto ("Selling Stockholders") propose severally to sell an
aggregate of 2,000,000 outstanding shares of the Securities (such 3,000,000
shares of Securities being hereinafter referred to as the "Firm Securities").
Certain of the Selling Stockholders also propose to sell to the Underwriters,
at the option of the Underwriters, an aggregate of not more than 450,000
additional outstanding shares of the Company's Securities, as set forth below
(such 450,000 additional shares being hereinafter referred to as the "Optional
Securities"). The Firm Securities and the Optional Securities are herein
collectively called the "Offered Securities." The Company and the Selling
Stockholders hereby agree with the several Underwriters named in Schedule B
hereto ("Underwriters") as follows:
2. Representations and Warranties of the Company and the Selling
Stockholders.
(a) The Company and the Selling Stockholders jointly and
severally represent and warrant to, and agree with, the several Underwriters
that:
(i) A registration statement (No. 333-______)
relating to the Offered Securities, including a form of
prospectus, has been filed with the Securities and Exchange
Commission ("Commission") and either (A) has been declared
effective under the Securities Act of 1933, as amended
("Act"), and is not proposed to be amended or (B) is proposed
to be amended by amendment or post-effective amendment. If
such registration statement (the "initial registration
statement") has been declared effective, either (A) an
additional registration statement (the "additional
registration statement") relating to the Offered Securities
may have been filed with the Commission pursuant to Rule
462(b) ("Rule 462(b)") under the Act and, if so filed, has
become effective upon filing pursuant to such Rule and the
Offered Securities all have been duly registered under the Act
pursuant to the
<PAGE> 2
initial registration statement and, if applicable, the
additional registration statement or (B) such an additional
registration statement is proposed to be filed with the
Commission pursuant to Rule 462(b) and will become effective
upon filing pursuant to such Rule and upon such filing the
Offered Securities will all have been duly registered under
the Act pursuant to the initial registration statement and
such additional registration statement. If the Company does
not propose to amend the initial registration statement or if
an additional registration statement has been filed and the
Company does not propose to amend it, and if any
post-effective amendment to either such registration statement
has been filed with the Commission prior to the execution and
delivery of this Agreement, the most recent amendment (if any)
to each such registration statement has been declared
effective by the Commission or has become effective upon
filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
or, in the case of the additional registration statement, Rule
462(b). For purposes of this Agreement, "Effective Time" with
respect to the initial registration statement or, if filed
prior to the execution and delivery of this Agreement, the
additional registration statement means (A) if the Company has
advised the Representatives to the several Underwriters named
herein ("Representatives") that it does not propose to amend
such registration statement, the date and time as of which
such registration statement, or the most recent post-effective
amendment thereto (if any) filed prior to the execution and
delivery of this Agreement, was declared effective by the
Commission or has become effective upon filing pursuant to
Rule 462(c), or (B) if the Company has advised the
Representatives that it proposes to file an amendment or post-
effective amendment to such registration statement, the date
and time as of which such registration statement, as amended
by such amendment or post-effective amendment, as the case may
be, is declared effective by the Commission. If an additional
registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has
advised the Representatives that it proposes to file one,
"Effective Time" with respect to such additional registration
statement means the date and time as of which such
registration statement is filed and becomes effective pursuant
to Rule 462(b). "Effective Date" with respect to the initial
registration statement or the additional registration
statement (if any) means the date of the Effective Time
thereof. The initial registration statement, as amended at its
Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a
part of the initial registration statement as of the Effective
Time of the additional registration statement pursuant to the
General Instructions of the Form on which it is filed and
including all information (if any) deemed to be a part of the
initial registration statement as of its Effective Time
pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is
hereinafter referred to as the "Initial Registration
Statement." The additional registration statement, as amended
at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and
including all information (if any) deemed to be a part of the
additional registration statement as of its Effective Time
pursuant to Rule 430A(b), is hereinafter referred to as the
"Additional Registration Statement." The Initial Registration
Statement and the Additional Registration are hereinafter
referred to collectively as the "Registration Statements" and
individually as a "Registration Statement." The form of
prospectus relating to the Offered Securities, as first filed
with the Commission pursuant to and in accordance with Rule
424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is
hereinafter referred to as the "Prospectus." No document has
been or will be prepared or distributed in reliance on Rule
434 under the Act.
(ii) The Commission has not issued any order
preventing or suspending the use of the Prospectus or any
preliminary prospectus contained in the Initial Registration
Statement or instituted any proceedings for that purpose. If
the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on
the Effective Date of the Initial Registration Statement, the
Initial Registration Statement
2
<PAGE> 3
conformed in all respects to the requirements of the Act and
the rules and regulations of the Commission ("Rules and
Regulations") and did not include 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, (B) on the Effective Date of the Additional
Registration Statement (if any), each Registration Statement
conformed or will conform, in all respects to the requirements
of the Act and the Rules and Regulations and did not include,
or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact
required to be stated therein or necessary to make the
statements therein not misleading, and (C) on the date of this
Agreement, the Initial Registration Statement and, if the
Effective Time of the Additional Registration Statement is
prior to the execution and delivery of this Agreement, the
Additional Registration Statement each conforms, and at the
time of filing of the Prospectus pursuant to Rule 424(b) or
(if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is
included, each Registration Statement and the Prospectus will
conform, in all respects to the requirements of the Act and
the Rules and Regulations, and neither of such documents
includes, or will include, any untrue statement of a material
fact or omits, or will omit, to state any material fact
required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of
the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement: on the Effective
Date of the Initial Registration Statement, the Initial
Registration Statement and the Prospectus will conform in all
respects to the requirements of the Act and the Rules and
Regulations, neither of such documents will include any untrue
statement of a material fact or will omit to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading, and no Additional
Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions
from a Registration Statement or the Prospectus based upon
written information furnished to the Company by any
Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such
information is that described as such in Section 7(c) hereof.
(iii) The Company has not distributed and, prior to
the later of (a) any Closing Date (as defined herein) and (b)
the completion of the distribution of the Offered Securities,
will not distribute any offering material in connection with
the offering of the Offered Securities other than a
Registration Statement, any preliminary prospectus contained
therein or the Prospectus or any amendment or supplement
thereto.
(iv) The Company has been duly incorporated and is
an existing corporation in good standing under the laws of the
State of Delaware, with power and authority (corporate and
other) to own its properties and conduct its business as
described in the Prospectus; and the Company is duly qualified
to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such
qualification.
(v) Each subsidiary of the Company has been duly
incorporated and is an existing corporation in good standing
under the laws of the jurisdiction of its incorporation, with
power and authority (corporate and other) to own its
properties and conduct its business as described in the
Prospectus; and each subsidiary of the Company is duly
qualified to do business as a foreign corporation in good
standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification; all of the issued and outstanding capital stock
of each subsidiary of the Company has been duly authorized and
validly issued and is fully paid and nonassessable; and the
capital stock of each subsidiary owned by the Company,
directly or through subsidiaries, is owned free from liens,
encumbrances and defects.
3
<PAGE> 4
(vi) The Offered Securities and all other
outstanding shares of capital stock of the Company have been
duly authorized and validly issued, fully paid and
nonassessable and conform to the description thereof contained
in the Prospectus; and the stockholders of the Company have no
preemptive rights with respect to the Securities. The
information set forth under the caption "Capitalization" in
the Prospectus is true and correct. There are no outstanding
options, warrants or other rights granted to or by the Company
to purchase Securities or other securities of the Company
other than as described in the Prospectus.
(vii) Except as disclosed in the Prospectus, there
are no contracts, agreements or understandings between the
Company and any person that would give rise to a valid claim
against the Company or any Underwriter for a brokerage
commission, finder's fee or other like payment in connection
with this offering.
(viii) There are no contracts, agreements or
understandings between the Company and any person granting
such person the right to require the Company or Micromuse PLC
to cause any securities of the Company or Micromuse PLC owned
or to be owned by such person to be registered pursuant to the
Registration Statement filed by the Company under the Act
covering the Offered Securities which have not been fully
satisfied or waived.
(ix) Except as disclosed in the Prospectus, there
are no contracts, agreements or understandings between the
Company or Micromuse PLC and any person granting such person
the right to require the Company or Micromuse PLC to file a
registration statement under the Act with respect to any
securities of the Company or Micromuse PLC owned or to be
owned by such person or to require the Company or Micromuse
PLC to include such securities in any securities being
registered pursuant to a registration statement filed by the
Company or Micromuse PLC under the Act.
(x) The Offered Securities have been approved for
listing on The Nasdaq Stock Market's National Market, subject
to notice of issuance.
(xi) No consent, approval, authorization, or order
of, or filing with, any governmental agency or body or any
court is required to be obtained or made by the Company for
the consummation of the transactions contemplated by this
Agreement in connection with the sale of the Offered
Securities, except such as have been obtained and made under
the Act and such as may be required under state securities
laws.
(xii) The execution, delivery and performance of
this Agreement, and the consummation of the transactions
herein contemplated will not result in a breach or violation
of any of the terms and provisions of, or constitute a default
under, any statute, any rule, regulation or order of any
governmental agency or body or any court, domestic or foreign,
having jurisdiction over the Company or any subsidiary of the
Company or any of their properties, or any agreement or
instrument to which the Company or any such subsidiary is a
party or by which the Company or any such subsidiary is bound
or to which any of the properties of the Company or any such
subsidiary is subject, or the charter or by-laws of the
Company or any such subsidiary.
(xiii) This Agreement has been duly authorized,
executed and delivered by the Company.
(xiv) Except as disclosed in the Prospectus, the
Company and its subsidiaries have good and marketable title to
all real properties and all other properties and assets owned
by them, in each case free from liens, encumbrances and
defects that would materially affect
4
<PAGE> 5
the value thereof or materially interfere with the use made or
to be made thereof by them; and except as disclosed in the
Prospectus, the Company and its subsidiaries hold any leased
real or personal property under valid and enforceable leases
with no exceptions that would materially interfere with the
use made or to be made thereof by them.
(xv) The Company and its subsidiaries possess
adequate certificates, authorities or permits issued by
appropriate governmental agencies or bodies necessary to
conduct the business now operated by them and have not
received any notice of proceedings relating to the revocation
or modification of any such certificate, authority or permit
that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a
material adverse effect on the Company and its subsidiaries
taken as a whole.
(xvi) No labor dispute with the employees of the
Company or any subsidiary exists or, to the knowledge of the
Company, is imminent that might have a material adverse effect
on the Company and its subsidiaries taken as a whole.
(xvii) The Company and its subsidiaries own, possess
or can acquire on reasonable terms, adequate trademarks, trade
names and other rights to inventions, know-how, patents,
copyrights, confidential information and other intellectual
property (collectively, "intellectual property rights")
necessary to operate its business as presently being conducted
and proposed to be conducted as described in the Prospectus,
and have not received any notice of infringement of or
conflict with asserted rights of others with respect to any
Intellectual Property Rights that, if determined adversely to
the Company or any of its subsidiaries, would individually or
in the aggregate have a material adverse effect on the Company
and its subsidiaries taken as a whole. Neither the Company
nor any of its subsidiaries is infringing any trademark, trade
name rights, patent rights, mask works, copyrights, licenses,
trade secret, servicemarks or other similar rights of others,
and there is no claim being made against the Company or any of
its subsidiaries regarding trademark, trade name, patent, mask
work, copyright, license, trade secret or other infringement
or assertion of intellectual property rights which could have
a material adverse effect on the earnings, properties,
business affairs or business prospects, stockholders' equity,
net worth or results of operations of the Company. The
Company has agreements in place with each employee, consultant
or other person or party engaged by the Company or any
subsidiary sufficient to enable the Company and any subsidiary
to fulfill their contractual obligations and to conduct their
respective businesses as now conducted or proposed to be
conducted as described in the Prospectus and providing for the
assignment to the Company or any of its subsidiaries, as the
case may be, of all intellectual property and exploitation
rights in the work performed and the protection of the trade
secrets and confidential information of the Company, each of
its subsidiaries and of third parties which have been
developed by such person for or on behalf of the Company or
any of its subsidiaries.
(xviii) Except as disclosed in the Prospectus,
neither the Company nor any of its subsidiaries is in
violation of any statute, any rule, regulation, decision or
order of any governmental agency or body or any court,
domestic or foreign, relating to the use, disposal or release
of hazardous or toxic substances or relating to the protection
or restoration of the environment or human exposure to
hazardous or toxic substances (collectively, "environmental
laws"), owns or operates any real property contaminated with
any substance that is subject to any Environmental Laws, is
liable for any off-site disposal or contamination pursuant to
any Environmental Laws, or is subject to any claim relating to
any Environmental Laws, which violation, contamination,
liability or claim would individually or in the aggregate have
a material adverse effect on the Company and its subsidiaries
taken as a whole; and the Company is not aware of any pending
investigation which might lead to such a claim.
5
<PAGE> 6
(xix) Except as disclosed in the Prospectus, there
are no pending actions, suits or proceedings against or
affecting the Company, any of its subsidiaries or any of their
respective properties that, if determined adversely to the
Company or any of its subsidiaries, would individually or in
the aggregate have a material adverse effect on the condition
(financial or other), business, properties or results of
operations of the Company and its subsidiaries taken as a
whole, or would materially and adversely affect the ability of
the Company to perform its obligations under this Agreement,
or which are otherwise material in the context of the sale of
the Offered Securities; and no such actions, suits or
proceedings are threatened or, to the Company's knowledge,
contemplated.
(xx) The financial statements included in each
Registration Statement and the Prospectus present fairly the
financial position of the Company and its consolidated
subsidiaries as of the dates shown and their results of
operations and cash flows for the periods shown, and such
financial statements have been prepared in conformity with the
generally accepted accounting principles in the United States
applied on a consistent basis and the schedules included in
each Registration Statement present fairly the information
required to be stated therein.
(xxi) Except as disclosed in the Prospectus, since
the date of the latest audited financial statements included
in the Prospectus there has been no material adverse change,
nor any development or event involving a prospective material
adverse change, in the condition (financial or other),
business, properties or results of operations of the Company
and its subsidiaries taken as a whole, and, except as
disclosed in or contemplated by the Prospectus, there has been
no dividend or distribution of any kind declared, paid or made
by the Company on any class of its capital stock.
(xxii) The Company and each of its subsidiaries has
filed all foreign, federal, state and local tax returns that
are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not
have a materially adverse effect on the Company and its
subsidiaries, taken as a whole) and the Company and each of
its subsidiaries has paid all material taxes required to be
paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that
is currently being contested in good faith or as described in
or contemplated by the Registration Statement or the
Prospectus.
(xxiii) The Company is not and, after giving effect
to the offering and sale of the Offered Securities and the
application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as defined in
the Investment Company Act of 1940.
(xxiv) Neither the Company, nor any of its
affiliates, has taken or may take, directly or indirectly, any
action designed to cause or result in, or which has
constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of
the shares of the Securities to facilitate the sale or resale
of the Offered Securities.
(xxv) KPMG Peat Marwick LLP, who have certified the
financial statements filed with the Commission as part of each
Registration Statement, are independent public accountants as
required by the Act and the Rules and Regulations. The
Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (a)
transactions are executed in accordance with management's
general or specific authorization; (b) transactions are
recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; and (c)
access to assets is permitted only in accordance with
management's general or specific authorization.
6
<PAGE> 7
(xxvi) The Company and each of its subsidiaries
carry, or are covered by, insurance in such amounts and
covering such risks as is adequate for the conduct of their
respective businesses and the value of their respective
properties and as is customary for companies engaged in
similar industries.
(xxvii) The Company and each of its subsidiaries are
in compliance in all material respects with all presently
applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations
and published interpretations thereunder ("ERISA"); no
"reportable event" (as defined in ERISA) has occurred with
respect to any "pension plan" (as defined in ERISA) for which
the Company or any of its subsidiaries would have any
liability; the Company and each of its subsidiaries have not
incurred and do not expect to incur liability under (i) Title
IV of ERISA with respect to termination of, or withdrawal
from, any "pension plan" or (ii) Section 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder ("Code");
and each "pension plan" for which the Company and each of its
subsidiaries would have any liability that is intended to be
qualified under Section 401(a) of the Code is so qualified in
all material respect and nothing has occurred, whether by
action or by failure to act, which would cause the loss of
such qualification.
(xxviii) Except as set forth in each Registration
Statement and the Prospectus, there are no agreements, claims,
payment, issuances, arrangements or understandings, whether
oral or written, for services in the nature of finder's,
consulting or origination fees with respect to the sale of the
Offered Securities or any other arrangements, agreements,
understandings, payments or issuance with respect to the
Company or any of its officers, directors, shareholders,
partners, employees, subsidiaries or affiliates that may
affect the Underwriters' compensation as determined by the
National Association of Securities Dealers, Inc. (the
"NASD").
(xxix) Except as set forth in each Registration
Statement (including without limitation the documents
incorporated by reference therein) and the Prospectus, no
officer, director or shareholder of the Company or any
"affiliate" or "associate" (as these terms are defined in Rule
405 under the Act) of any of the foregoing persons or entities
has or has had, either directly or indirectly (a) an interest
in any person or entity that (x) furnishes or sells services
or products which are furnished or sold or that are proposed
to be furnished or sold by the Company, or (y) purchases from
or sells or furnishes to the Company any goods or services, or
(b) a beneficial interest in any contract or agreement to
which the Company is a party or by which it may be bound or
affected. Except as set forth in each Registration Statement
and the Prospectus under the caption "Certain Transactions"
and "Management", there are no existing or proposed
agreements, arrangements, understandings or transactions,
between or among the Company and any officer, director,
principal shareholder of the Company or any partner, affiliate
or associate of any of the foregoing persons or entities.
(xxx) The minute books of the Company made
available to the Underwriters contain a complete summary of
all meetings and actions of the directors and stockholders of
the Company since the time of its incorporation and reflects
accurately and fairly in all respects all transactions
referred to in such minutes.
(xxxi) Neither the Company nor any of its affiliates
does business with the government of Cuba or with any person
or affiliate located in Cuba within the meaning of Section
517.075, Florida Statutes and the Company agrees to comply
with such Section if prior to the completion of the
distribution of the Offered Securities it commences doing such
business.
7
<PAGE> 8
(xxxii) The execution and delivery of each of the
agreements relating to the share exchange and option
substitution in connection with the reorganization of
Micromuse PLC into the Company (collectively, the
"Reorganization Documents") was duly authorized by all
necessary corporate and other action on the part of each of
the Company, Micromuse PLC and each Selling Stockholder. Each
of the Company, Micromuse PLC and each Selling Stockholder had
all corporate and other power and authority to execute and
deliver the Reorganization Documents and to consummate the
transactions contemplated therein and the Reorganization
Documents constituted valid and binding obligations of each of
the Company, Micromuse PLC and each Selling Stockholder.
(xxxiii) The execution, delivery and
performance of, and compliance with, the terms of the
Reorganization Documents did not, at the time of execution,
and do not violate any provision of the Amended and Restated
Certificate of Incorporation or Bylaws of the Company, or, any
provision of any applicable federal, state or United Kingdom
law, rule or regulation.
(b) Each Selling Stockholder severally represents and
warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has and on
each Closing Date hereinafter mentioned will have valid and
unencumbered title to the Offered Securities to be delivered
by such Selling Stockholder on such Closing Date and full
right, power and authority to enter into (a) this Agreement,
(b) the Custody Agreement signed by such Selling Stockholder
and __________________, as custodian (the "Custodian"),
relating to the deposit of the Securities to be sold by such
Selling Stockholder (the "Custody Agreement") and (c) the
power of attorney ("Power of Attorney") appointing certain
individuals named therein as such Selling Stockholder's
attorneys-in-fact (each, an "Attorney-in-Fact") to the extent
set forth therein relating to the transactions contemplated
hereby and by the Prospectus, and to sell, assign, transfer
and deliver the Offered Securities to be delivered by such
Selling Stockholder on such Closing Date hereunder; and upon
the delivery of and payment for the Offered Securities on each
Closing Date hereunder the several Underwriters will acquire
valid and unencumbered title to the Offered Securities to be
delivered by such Selling Stockholder on such Closing Date.
(ii) If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery
of this Agreement: (A) on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement
conformed in all respects to the requirements of the Act and
the Rules and Regulations and did not include 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, (B) on the Effective Date
of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all
respects to the requirements of the Act and the Rules and
Regulations did not include, or will not include, any untrue
statement of a material fact and did not omit, or will not
omit, to state any material fact required to be stated therein
or necessary to make the statements therein not misleading,
and (C) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution
and delivery of this Agreement, the Additional Registration
Statement each conforms, and at the time of filing of the
Prospectus pursuant to Rule 424(b) or (if no such filing is
required) at the Effective Date of the Additional Registration
Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all
respects to the requirements of the Act and the Rules and
Regulations, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or
will omit, to state any material fact required to be stated
therein
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<PAGE> 9
or necessary to make the statements therein not misleading.
If the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement:
on the Effective Date of the Initial Registration Statement,
the Initial Registration Statement and the Prospectus will
conform in all respects to the requirements of the Act and the
Rules and Regulations, neither of such documents will include
any untrue statement of a material fact or will omit to state
any material fact required to be stated therein or necessary
to make the statements therein not misleading. The two
preceding sentences do not apply to statements in or omissions
from a Registration Statement or the Prospectus based upon
written information furnished to the Company by any
Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such
information is that described as such in Section 7(c).
(iii) Except as disclosed in the
Prospectus, there are no contracts, agreements or
understandings between such Selling Stockholder and any person
that would give rise to a valid claim against such Selling
Stockholder or any Underwriter for a brokerage commission,
finder's fee or other like payment in connection with this
offering.
(iv) This Agreement has been duly
authorized, executed and delivered by or on behalf of such
Selling Stockholder and is a valid and binding agreement of
such Selling Stockholder, enforceable in accordance with its
terms, except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies
of creditors or by general equitable principles.
(v) Each of the Custody Agreement and
the Power of Attorney of such Selling Stockholder has been
duly authorized, executed and delivered by such Selling
Stockholder and is a valid and binding agreement of such
Selling Stockholder, enforceable in accordance with its terms,
except as the enforcement hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors
or by general equitable principles.
(vi) The execution and delivery by such
Selling Stockholder of, and the performance by such Selling
Stockholder of its obligations under, this Agreement, the
Custody Agreement and the Power of Attorney or the
consummation by any Selling Stockholder or any of the other
transactions contemplated hereby, will not contravene or
conflict with, result in a breach of, or constitute a default
under, or require the consent of any other party to, the
charter or by-laws, partnership agreement, trust agreement or
other organizational documents of such Selling Stockholder or
any other agreement or instrument to which such Selling
Stockholder is bound or under which it is entitled to any
right or benefit, any provision of applicable law or any
judgment, order, decree or regulation applicable to such
Selling Stockholder of any court, regulatory body,
administrative agency, governmental body or arbitrator having
jurisdiction over such Selling Stockholder. No consent,
approval, authorization or other order of, or registration or
filing with, any court or other governmental authority or
agency, is required for the consummation by such Selling
Stockholder of the transactions contemplated in this
Agreement, except such as have been obtained or made and are
in full force and effect under the Act, applicable state
securities or blue sky laws and from the NASD.
(vii) All consents, approvals,
authorizations and orders necessary for the execution and
delivery by such Selling Stockholder of this Agreement, the
Power of Attorney and the Custody Agreement (assuming the
making of all filings required under Rule 424(b) or Rule
430A), and have been obtained.
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<PAGE> 10
(viii) Such Selling Stockholder has not
taken and will not take, directly or indirectly, any action
designed to or which has constituted, or which might
reasonably be expected to cause or result in stabilization or
manipulation of the price of the Securities of the Company
and, other than as permitted by the Act, such Selling
Stockholder has not distributed, and will not distribute, any
prospectus or other offering material in connection with the
Offered Securities.
(ix) Neither such Selling Stockholder nor
any of its affiliates directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is
under common control with, or has any other association with
(within the meaning of Article I, Section (m) of the By- Laws
of the NASD), any member firm of the NASD.
3. Purchase, Sale and Delivery of Offered Securities. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company and each
Selling Stockholder agree, severally and not jointly, to sell to each
Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Company and each Selling Stockholder, at a purchase price of
$_________per share, that number of Firm Securities (rounded up or down, as
determined by Credit Suisse First Boston Corporation ("CSFBC") in its
discretion, in order to avoid fractions) obtained by multiplying _______Firm
Securities in the case of the Company and the number of Firm Securities set
forth opposite the name of such Selling Stockholder in Schedule A hereto, in
the case of a Selling Stockholder, in each case by a fraction the numerator of
which is the number of Firm Securities set forth opposite the name of such
Underwriter in Schedule B hereto and the denominator of which is the total
number of Firm Securities.
Certificates in negotiable form for the Offered Securities to be sold
by the Selling Stockholders hereunder have been placed in custody, for delivery
under this Agreement, under Custody Agreements made with the Custodian. Each
Selling Stockholder agrees that the shares represented by the certificates held
in custody for the Selling Stockholders under such Custody Agreements are
subject to the interests of the Underwriters hereunder, that the arrangements
made by the Selling Stockholders for such custody are to that extent
irrevocable, and that the obligations of the Selling Stockholders hereunder
shall not be terminated by operation of law, whether by the death of any
individual Selling Stockholder or the occurrence of any other event, or in the
case of a trust, by the death of any trustee or trustees or the termination of
such trust. If any individual Selling Stockholder or any such trustee or
trustees should die, or if any other such event should occur, or if any of such
trusts should terminate, before the delivery of the Offered Securities
hereunder, certificates for such Offered Securities shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death or other event or termination had not occurred, regardless of
whether or not the Custodian shall have received notice of such death or other
event or termination.
The Company and the Custodian will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, at the office of
___________________________, against payment of the purchase price in Federal
(same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to CSFBC drawn to the order of the Company in the
case of 1,000,000 shares Firm Securities and the Custodian in the case of
2,000,000 shares of Firm Securities, at the office of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, 155 Constitution Drive, Menlo Park,
California 94025, at 10:00 a.m., New York time, on _____________, or at such
other time not later than seven full business days thereafter as CSFBC and the
Company determine, such time being herein referred to as the "First Closing
Date." The certificates for the Firm Securities so to be delivered will be in
definitive form, in such denominations and registered in such names as CSFBC
requests and will be made available for checking and packaging at the above
office of CSFBC at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company and
the Selling Stockholders from time to time not more than 30 days subsequent to
the date of the Prospectus, the Underwriters may purchase all or less than all
of the Optional Securities at the purchase price per Security to be paid for
the Firm
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<PAGE> 11
Securities. The Selling Stockholders agree, severally and not jointly, to sell
to the Underwriters the respective numbers of Optional Securities obtained by
multiplying the number of Optional Securities specified in such notice by a
fraction the numerator of which is the number of shares set forth opposite the
names of such Selling Stockholders in Schedule A hereto under the caption
"Number of Optional Securities to be Sold" and the denominator of which is the
total number of Optional Securities (subject to adjustment by CSFBC to
eliminate fractions). Such Optional Securities shall be purchased from each
Selling Stockholder for the account of each Underwriter in the same proportion
as the number of Firm Securities set forth opposite such Underwriter's name
bears to the total number of Firm Securities (subject to adjustment by CSFBC to
eliminate fractions) and may be purchased by the Underwriters only for the
purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and
delivered. The right to purchase the Optional Securities or any portion thereof
may be exercised from time to time and to the extent not previously exercised
may be surrendered and terminated at any time upon notice by CSFBC to the
Company and the Selling Stockholders.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date," which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Custodian will deliver
the Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, at the above
office of CSFBC in New York, against payment of the purchase price therefor in
Federal (same day) funds by official bank check or checks or wire transfer to
an account at a bank acceptable to CSFBC drawn to the order of the Custodian in
the case of 450,000 Optional Securities, at the above office of Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP. The certificates for the
Optional Securities being purchased on each Optional Closing Date will be in
definitive form, in such denominations and registered in such names as CSFBC
requests upon reasonable notice prior to such Optional Closing Date and will be
made available for checking and packaging at the above office of CSFBC in New
York at a reasonable time in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling
Stockholders. The Company agrees with the several Underwriters and the Selling
Stockholders that:
(a) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement,
the Company will file the Prospectus with the Commission pursuant to
and in accordance with subparagraph (1) (or, if applicable and if
consented to by CSFBC, subparagraph (4)) of Rule 424(b) not later than
the earlier of (A) the second business day following the execution and
delivery of this Agreement or (B) the fifteenth business day after the
Effective Date of the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement and
an additional registration statement is necessary to register a
portion of the Offered Securities under the Act but the Effective Time
thereof has not occurred as of such execution and delivery, the
Company will file the additional registration statement or, if filed,
will file a post-effective amendment thereto with the Commission
pursuant to and in accordance with Rule 462(b) on or prior to 10:00
P.M., New York time, on the date of this Agreement or, if earlier, on
or prior to the time the Prospectus is printed and distributed to any
Underwriter, or will make such filing at such later date as shall have
been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any
proposal to amend or supplement the initial or any additional
registration statement as filed or the related prospectus or the
11
<PAGE> 12
Initial Registration Statement, the Additional Registration Statement
(if any) or the Prospectus and will not effect such amendment or
supplementation without CSFBC's consent; and the Company will also
advise CSFBC promptly of the effectiveness of each Registration
Statement (if its Effective Time is subsequent to the execution and
delivery of this Agreement) and of any amendment or supplementation of
a Registration Statement or the Prospectus and of the institution by
the Commission of any stop order proceedings in respect of a
Registration Statement and will use its best efforts to prevent the
issuance of any such stop order and to obtain as soon as possible its
lifting, if issued.
(c) The Company will comply with the Act, the Exchange
Act and the Rules and Regulations so as to permit the completion of
the distribution of the Offered Securities as contemplated in this
Agreement, each Registration Statement and the Prospectus. If, at any
time when a prospectus relating to the Offered Securities is required
to be delivered under the Act in connection with sales by any
Underwriter or dealer, any event occurs as a result of which the
Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CSFBC of such event and will promptly
prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an
amendment which will effect such compliance. Neither CSFBC's consent
to, nor the Underwriters' delivery of, any such amendment or
supplement shall constitute a waiver of any of the conditions set
forth in Section 6.
(d) As soon as practicable, but not later than the
Availability Date (as defined below), the Company will make generally
available to its securityholders an earnings statement covering a
period of at least 12 months beginning after the Effective Date of the
Initial Registration Statement (or, if later, the Effective Date of
the Additional Registration Statement) which will satisfy the
provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "Availability Date" means the 45th day after the
end of the fourth fiscal quarter following the fiscal quarter that
includes such Effective Date, except that, if such fourth fiscal
quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 90th day after the end of such fourth
fiscal quarter.
(e) The Company will furnish to the Representatives
copies of each Registration Statement (four of which will be signed
and will include all exhibits), each related preliminary prospectus,
and, so long as a prospectus relating to the Offered Securities is
required to be delivered under the Act in connection with sales by any
Underwriter or dealer, the Prospectus and all amendments and
supplements to such documents, in each case in such quantities as
CSFBC requests. The Prospectus shall be so furnished on or prior to
3:00 P.M., New York time, on the business day following the later of
the execution and delivery of this Agreement or the Effective Time of
the Initial Registration Statement. All other such documents shall be
so furnished as soon as available. The Company and the Selling
Stockholders will pay the expenses of printing and distributing to the
Underwriters all such documents.
(f) The Company will arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions as
CSFBC designates and will continue such qualifications in effect so
long as required for the distribution.
(g) During the period of 10 years hereafter, the Company
will furnish to the Representatives and, upon request, to each of the
other Underwriters, as soon as practicable after the end of each
fiscal year, a copy of its annual report to stockholders for such
year; and the Company will furnish to the Representatives (i) as soon
as available, a copy of each report and any definitive proxy statement
of the Company filed with the Commission under the Securities Exchange
Act of
12
<PAGE> 13
1934 or mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as CSFBC may reasonably request.
(h) Prior to issuing any press release regarding the
operating results or financial condition with respect to any of the
Company's first three fiscal quarters in any of fiscal years 1998,
1999 or 2000, and prior to filing a Quarterly Report on Form 10-Q
relating to any of such fiscal quarters, to retain KPMG Peat Marwick
LLP or other independent public accountants of recognized national
standing who shall review, in accordance with AICPA Statement on
Auditing Standards No. 71, the Company's unaudited consolidated
financial statements at the end of each such fiscal quarter; provided,
however, that the Company's obligations under this covenant may
terminate after the second quarter of fiscal year 1999 at the
discretion of the Company's Board of Directors if the Company's Board
of Directors determines in good faith that adequate financial controls
are in place.
(i) For a period of 90 days after the date on which the
Offered Securities are first sold by the Underwriters to the public
pursuant to a Registration Statement, the Company will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under
the Act relating to, any additional shares of its Securities or
securities convertible into or exchangeable or exercisable for any
shares of its Securities, or publicly disclose the intention to make
any such offer, sale, pledge, disposition or filing, without the prior
written consent of CSFBC, except issuances of Securities pursuant to
the conversion or exchange of convertible or exchangeable securities
or the exercise of warrants or options, in each case outstanding on
the date hereof, grants of employee stock options pursuant to the
terms of a plan in effect on the date hereof, issuances of Securities
pursuant to the exercise of such options.
(j) The Company and each Selling Stockholder agree with
the several Underwriters that the Company and such Selling Stockholder
will pay all expenses incident to the performance of the obligations
of the Company and such Selling Stockholder, as the case may be, under
this Agreement, including, without limitation, (a) any filing fees and
other expenses (including fees and disbursements of counsel) in
connection with qualification of the Offered Securities for sale under
the laws of such jurisdictions as CSFBC designates and the printing of
memoranda relating thereto, (b) the filing fee incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the NASD of the Offered Securities, (c)
any travel expenses of the Company's officers and employees and any
other expenses of the Company in connection with attending or hosting
meetings with prospective purchasers of the Offered Securities, (d)
any transfer taxes on the sale by the Selling Stockholders of the
Offered Securities to the Underwriters and (e) expenses incurred in
distributing preliminary prospectuses and the Prospectus (including
any amendments and supplements thereto) to the Underwriters.
(k) Each Selling Stockholder agrees to deliver to CSFBC,
attention: Transactions Advisory Group on or prior to the First
Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified
by Treasury Department regulations in lieu thereof).
(l) Each Selling Stockholder agrees, for a period of 90
days after the date on which the Offered Securities are first sold by
the Underwriters to the public pursuant to a Registration Statement,
that it will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any additional shares of the
Securities of the Company or securities convertible into or
exchangeable or exercisable for any shares of Securities, or publicly
disclose the intention to make any such offer, sale, pledge or
disposal, without the prior written consent of CSFBC.
(m) The Company shall apply the net proceeds of its sale
of the Offered Securities as set forth in the Prospectus.
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<PAGE> 14
(n) The Company and each Selling Stockholder will not
take, directly or indirectly, any action designed to cause or result
in, or that has constituted or might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
securities of the Company.
(o) If at any time during the 25-day period after a
Registration Statement becomes effective or during the period prior to
any Closing Date, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in the
Representatives' reasonable judgment the market price of the
Securities has been or is likely to be materially affected (regardless
of whether such rumor, publication or event necessitates a supplement
to or amendment of the Prospectus), the Company will, after notice
from the Representatives advising the Company to the effect set forth
above, forthwith prepare, consult with the Representatives concerning
the substance of, and disseminate a press release or other public
statement reasonably satisfactory to the Representatives, responding
to or commenting on such rumor, publication or event.
6. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm
Securities on the First Closing Date and the Optional Securities to be
purchased on each Optional Closing Date will be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders herein, to the accuracy of the statements of Company officers made
pursuant to the provisions hereof, to the performance by the Company and the
Selling Stockholders of their obligations hereunder and to the following
additional conditions precedent:
(a) The Representatives shall have received a letter,
dated the date of delivery thereof (which, if the Effective Time of
the Initial Registration Statement is prior to the execution and
delivery of this Agreement, shall be on or prior to the date of this
Agreement or, if the Effective Time of the Initial Registration
Statement is subsequent to the execution and delivery of this
Agreement, shall be prior to the filing of the amendment or
post-effective amendment to the registration statement to be filed
shortly prior to such Effective Time), of KPMG Peat Marwick LLP
confirming that they are independent public accountants within the
meaning of the Act and the applicable published Rules and Regulations
thereunder and stating to the effect that:
(i) in their opinion the financial
statements and schedules and summary of earnings examined by
them and included in the Registration Statements comply as to
form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations;
(ii) they have performed the procedures
specified by the American Institute of Certified Public
Accountants for a review of interim financial information as
described in Statement of Auditing Standards No. 71, Interim
Financial Information, on the unaudited financial statements
included in the Registration Statements;
(iii) on the basis of the review referred
to in clause (ii) above, a reading of the latest available
interim financial statements of the Company, inquiries of
officials of the Company who have responsibility for financial
and accounting matters and other specified procedures, nothing
came to their attention that caused them to believe that:
(A) the unaudited financial
statements included in the Registration Statements do
not comply as to form in all material respects with
the applicable accounting requirements of the Act and
the related published Rules and Regulations or any
material modifications should be made to such
unaudited financial statements and summary of
earnings for them to be in conformity with generally
accepted accounting principles;
14
<PAGE> 15
(B) at the date of the latest
available balance sheet read by such accountants, or
at a subsequent specified date not more than three
business days prior to the date of this Agreement,
there was any change in the capital stock or any
increase in short-term indebtedness or long-term debt
of the Company and its consolidated subsidiaries or,
at the date of the latest available balance sheet
read by such accountants, there was any decrease in
consolidated net current assets, total assets or
stockholders' equity, as compared with amounts shown
on the latest balance sheet included in the
Prospectus; or
(C) for the period from the closing
date of the latest income statement included in the
Prospectus to the closing date of the latest
available income statement read by such accountants
there were any decreases, as compared with the
corresponding period of the previous year and with
the period of corresponding length ended the date of
the latest income statement included in the
Prospectus, revenues or net operating income in the
total or per share amounts of consolidated income
before extraordinary items or net income;
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such
letter; and
(iv) they have compared specified dollar amounts
(or percentages derived from such dollar amounts) and other
financial information contained in the Registration Statements
(in each case to the extent that such dollar amounts,
percentages and other financial information are derived from
the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by
analysis or computation) with the results obtained from
inquiries, a reading of such general accounting records and
other procedures specified in such letter and have found such
dollar amounts, percentages and other financial information to
be in agreement with such results, except as otherwise
specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statements is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statements is prior to the execution and delivery of this Agreement
but the Effective Time of the Additional Registration Statement is
subsequent to such execution and delivery, "Registration Statements"
shall mean the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to be
amended by the post-effective amendment to be filed shortly prior to
its Effective Time, and (iii) "Prospectus" shall mean the prospectus
included in the Registration Statements.
(b) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this
Agreement, such Effective Time shall have occurred not later than
10:00 P.M., New York time, on the date of this Agreement or such later
date as shall have been consented to by CSFBC. If the Effective Time
of the Additional Registration Statement (if any) is not prior to the
execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or, if earlier, the time the Prospectus is printed and
distributed to any Underwriter, or shall have occurred at such later
date as shall have been consented to by CSFBC. If the Effective Time
of the Initial Registration Statement is prior to the execution and
delivery of this Agreement, the Prospectus shall have been filed with
the Commission in accordance with the Rules and Regulations and
Section 5(a) of this Agreement. Prior
15
<PAGE> 16
to such Closing Date, no stop order suspending the effectiveness of a
Registration Statement shall have been issued and no proceedings for
that purpose shall have been instituted or, to the knowledge of any
Selling Stockholder, the Company or the Representatives, shall be
contemplated by the Commission.
(c) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any change, or any
development or event involving a prospective change, in the condition
(financial or other), business, properties or results of operations of
the Company or its subsidiaries which, in the judgment of a majority
in interest of the Underwriters including the Representatives, is
material and adverse and makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and
payment for the Offered Securities; (ii) any downgrading in the rating
of any debt securities of the Company by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule
436(g) under the Act), or any public announcement that any such
organization has under surveillance or review its rating of any debt
securities of the Company (other than an announcement with positive
implications of a possible upgrading, and no implication of a possible
downgrading, of such rating); (iii) any suspension or limitation of
trading in securities generally on the New York Stock Exchange or the
Nasdaq National Market, or any setting of minimum prices for trading
on such exchange, or any suspension of trading of any securities of
the Company on any exchange or in the over-the-counter market; (iv)
any banking moratorium declared by U.S. Federal or New York
authorities; or (v) any outbreak or escalation of major hostilities in
which the United States is involved, any declaration of war by
Congress or any other substantial national or international calamity
or emergency if, in the judgment of a majority in interest of the
Underwriters including the Representatives, the effect of any such
outbreak, escalation, declaration, calamity or emergency makes it
impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion of
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
for the Company, with respect to subparagraphs (i), (iii) through
(xiv), and (xvi) through (xviii), and additionally, with respect to
subparagraphs (ii), (v), (vi), (xv), (xvii) and (xix) below, an
opinion of [Cameron McKenna], each dated the Closing Date, to the
effect that:
(i) The Company and Micromuse USA each
has been duly incorporated and is an existing corporation in
good standing under the laws of its jurisdiction of
incorporation, with corporate power and authority to own its
properties and conduct its business as described in the
Registration Statement and the Prospectus; and each of the
Company and Micromuse USA is duly qualified to do business as
a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification; and
the Company has corporate power to enter into this Agreement
and to carry out all the terms and provisions hereof to be
carried out by it; all of the issued and outstanding shares of
capital stock of Micromuse USA have been duly authorized and
validly issued, are to such counsel's knowledge, fully paid
and nonassessable and, to the best knowledge of such counsel,
are owned beneficially by the Company free and clear of any
perfected security interests, any other security interests,
liens, encumbrances, equities or claims;
(ii) Micromuse PLC has been duly
organized and is an existing corporation in good standing
under the laws of its jurisdiction of incorporation, with
corporate power and authority to own its properties and
conduct its business as described in the Registration
Statement and the Prospectus; Micromuse PLC is duly qualified
to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such
qualification; all of the issued and outstanding shares of
capital stock of Micromuse PLC have been duly
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<PAGE> 17
authorized and validly issued, are to such counsel's
knowledge, fully paid and nonassessable, and to the best
knowledge of such counsel, are owned beneficially by the
Company free and clear of any perfected security interests,
any other security interests, liens, encumbrances, equities or
claims;
(iii) The Offered Securities delivered on
such Closing Date and all other outstanding shares of the
Common Stock of the Company have been duly authorized and
validly issued, are fully paid and nonassessable and conform
to the description thereof contained in the Prospectus; the
Company has authorized and outstanding capital stock as set
forth under the caption "Capitalization" in the Prospectus as
of the date specified therein; the certificates for the
Offered Securities, assuming they are in the form filed with
the Commission, are in due and proper form; and no stockholder
of the Company has any preemptive rights with respect to the
Securities pursuant to any statute, the Company's Certificate
of Incorporation, By-laws, or to such counsel's knowledge, any
agreement with the Company;
(iv) Except as described in or
contemplated by the Prospectus, to the knowledge of such
counsel, there are no outstanding securities of the Company or
its subsidiaries convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares
of capital stock of the Company or its subsidiaries and there
are no outstanding or authorized options, warrants or other
securities obligating the Company or its subsidiaries to issue
any shares of its capital stock or any securities convertible
or exchangeable into or evidencing the right to purchase or
subscribe for any shares of such capital stock;
(v) There are no contracts, agreements
or understandings known to such counsel between the Company or
Micromuse PLC and any person granting such person the right to
cause any securities of the Company or Micromuse PLC owned or
to be owned by such person to be registered pursuant to the
Registration Statement filed by the Company under the Act
covering the Offered Securities which have not been fully
satisfied or waived;
(vi) Except as disclosed in the
Prospectus, there are no contracts, agreements or
understandings known to such counsel between the Company or
Micromuse PLC and any person granting such person the right to
require the Company or Micromuse PLC to file a registration
statement under the Act with respect to any securities of the
Company or Micromuse PLC owned or to be owned by such person
or to require the Company or Micromuse PLC to include such
securities in any securities being registered pursuant to any
registration statement filed by the Company or Micromuse PLC
under the Act;
(vii) The Company is not and, after giving
effect to the offering and sale of the Offered Securities and
the application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as defined in
the Investment Company Act of 1940.
(viii) No consent, approval, authorization
or order of, or filing with, any governmental agency or body
or any court is required to be obtained or made by the Company
or any Selling Stockholder for the consummation of the
transactions contemplated by this Agreement or the Custody
Agreement in connection with the sale of the Offered
Securities, except such as have been obtained and made under
the Act and such as may be required under state securities
laws;
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<PAGE> 18
(ix) The execution, delivery and
performance of this Agreement,[ the Custody Agreement] and the
consummation of the transactions herein or therein
contemplated will not result in a breach or violation of any
of the terms and provisions of, or constitute a default under,
any statute, any rule, regulation or order of any governmental
agency or body or any court having jurisdiction over the
Company or any subsidiary of the Company or any of their
properties, or any agreement or instrument to which the
Company or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject,
or the charter or by-laws of the Company or any such
subsidiary;
(x) The Initial Registration Statement
was declared effective under the Act as of the date and time
specified in such opinion, the Additional Registration
Statement (if any) was filed and became effective under the
Act as of the date and time (if determinable) specified in
such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b)
specified in such opinion on the date specified therein or was
included in the Initial Registration Statement or the
Additional Registration Statement (as the case may be), and,
to the best of the knowledge of such counsel, no stop order
suspending the effectiveness of a Registration Statement or
any part thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated
under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of
their respective effective or issue dates, complied as to form
in all material respects with the requirements of the Act and
the Rules and Regulations; such counsel have no reason to
believe that any part of a Registration Statement or any
amendment thereto, as of its effective date or as of such
Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading; or that the Prospectus or any amendment or
supplement thereto, as of its issue date or as of such Closing
Date, contained any untrue statement of a material fact or
omitted 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; the descriptions
in the Registration Statements and Prospectus of statutes,
legal and governmental proceedings and contracts and other
documents are accurate and fairly present the information
required to be shown; and such counsel do not know of any
legal or governmental proceedings required to be describe in a
Registration Statement or the Prospectus which are not
described as required or of any contracts or documents of a
character required to be described in a Registration Statement
or the Prospectus or to be filed as exhibits to a Registration
Statement which are not described and filed as required; it
being understood that such counsel need express no opinion as
to the financial statements or other financial data contained
in the Registration Statements or the Prospectus; and
(xi) This Agreement, [the Power of Attorney
and the Custody Agreement] have been duly authorized, executed
and delivered by the Company;
(xii) All of the Offered Securities have
been duly authorized and accepted for quotation on the Nasdaq
National Market, subject to official notice of issuance;
(xiii) Such counsel does not know of any
legal or governmental proceedings or investigations pending or
threatened to which the Company or any of its subsidiaries is
a party or to which the property of the Company or any of its
subsidiaries is subject that are required to be described in
any Registration Statement or the Prospectus and are not
described therein or any statutes, regulations, contracts or
other documents that are required to be described in any
Registration Statement or the Prospectus or to be filed as
exhibits to any Registration Statement that are not described
therein or filed as required;
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<PAGE> 19
(xiv) The execution and delivery of the
Reorganization Documents was duly authorized by all necessary
corporate (or other) action on the part of the Company and
each Selling Stockholder;
(xv) The execution and delivery of the
Reorganization Documents was duly authorized by all necessary
corporate (or other) action on the part of Micromuse PLC;
(xvi) The execution, delivery and
performance of, and compliance with, the terms of the
Reorganization Documents, did not, at the time of execution,
and do not violate any provision of the Amended and Restated
Certificate of Incorporation or Bylaws of the Company, or, any
provision of any applicable federal, or state law, rule or
regulation;
(xvii) The execution, delivery and
performance of, and compliance with, the terms of the
Reorganization Documents, did not, at the time of execution,
and do not violate any provision of the Amended and Restated
Certificate of Incorporation or Bylaws of the Company, or, any
provision of any applicable United Kingdom rule or regulation;
(xviii) The Company, and each Selling
Stockholder had all corporate power and authority necessary to
execute and deliver the Reorganization Documents, to
consummate the transactions contemplated therein and the
Reorganization Documents constituted a valid and binding
obligation of the Company, and each Selling Stockholder; and
(xix) Micromuse PLC had all corporate
power and authority necessary to execute and deliver the
Reorganization Documents, to consummate the transactions
contemplated therein and the Reorganization Documents
constituted a valid and binding obligation of Micromuse PLC.
(e) The Representatives shall have received the opinion
contemplated in the Power of Attorney executed and delivered by each
Selling Stockholder and an opinion, dated such Closing Date, of
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
for the Selling Stockholders, to the effect that:
(i) Each Selling Stockholder had valid
and unencumbered title to the Offered Securities delivered by
such Selling Stockholder on such Closing Date and had full
right, power and authority to sell, assign, transfer and
deliver the Offered Securities delivered by such Selling
Stockholder on such Closing Date hereunder; and the several
Underwriters have acquired valid and unencumbered title to the
Offered Securities purchased by them from the Selling
Stockholders on such Closing Date hereunder;
(ii) No consent, approval, authorization
or order of, or filing with, any governmental agency or body
or any court is required to be obtained or made by any Selling
Stockholder for the consummation of the transactions
contemplated by the Custody Agreement, the Power of Attorney
or this Agreement in connection with the sale of the Offered
Securities sold by the Selling Stockholders, except such as
have been obtained and made under the Act and such as may be
required under state securities laws;
(iii) The execution, delivery and
performance of the Custody Agreement, the Power of Attorney,
this Agreement and the consummation of the transactions
therein and herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute
a default under, any statute, any rule, regulation or order of
any governmental agency or body or any court having
jurisdiction over any
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<PAGE> 20
Selling Stockholder or any of their properties or any
agreement or instrument to which any Selling Stockholder is a
party or by which any Selling Stockholder is bound or to which
any of the properties of any Selling Stockholder is subject,
or the charter or by-laws of any Selling Stockholder which is
a corporation; and
(iv) The Power of Attorney and related
Custody Agreement with respect to each Selling Stockholder has
been duly authorized, executed and delivered by such Selling
Stockholder and constitute valid and legally binding
obligations of each such Selling Stockholder enforceable in
accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles;
and
(v) This Agreement has been duly
authorized, executed and delivered by each Selling Stockholder.
(f) The Representatives shall have received from Wilson
Sonsini Goodrich & Rosati, counsel for the Underwriters, such opinion
or opinions, dated such Closing Date, with respect to the
incorporation of the Company, the validity of the Offered Securities
delivered on such Closing Date, the Registration Statement, the
Prospectus and other related matters as the Representatives may
require, and the Selling Stockholders and the Company shall have
furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters. In rendering such
opinion, Wilson Sonsini Goodrich & Rosati may rely as to the
incorporation of the Company upon the opinion of Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP.
(g) The Representatives shall have received from (i) each
Selling Stockholder, (ii) each person who is a director or executive
officer of the Company and (iii) any other securityholder of the
Company that the Underwriters may request an agreement ("Lock-up
Agreement") dated on or before the date of this Agreement to the
effect that, for a period of 90 days after the date on which the
Offered Securities are first sold by the Underwriters to the public
pursuant to a Registration Statement, such person will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any additional shares of the Securities of the Company or
securities convertible into or exchangeable or exercisable for any
shares of Securities, or publicly disclose the intention to make any
such offer, sale, pledge or disposal, without the prior written
consent of CSFBC.
(h) The Representatives shall have received a
certificate, dated such Closing Date, of the President or any Vice
President and a principal financial or accounting officer of the
Company in which such officers, to the best of their knowledge after
reasonable investigation, shall state that: the representations and
warranties of the Company in this Agreement are true and correct; the
Company has complied with all agreements and satisfied all conditions
on its part to be performed or satisfied hereunder at or prior to such
Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are contemplated by the Commission;
the Additional Registration Statement (if any) satisfying the
requirements of subparagraphs (1) and (3) of Rule 462(b) was filed
pursuant to Rule 462(b), including payment of the applicable filing
fee in accordance with Rule 111(a) or (b) under the Act, prior to the
time the Prospectus was printed and distributed to any Underwriter;
and, subsequent to the respective dates of the most recent financial
statements in the Prospectus, there has been no material adverse
change, nor any development or event involving a prospective material
adverse change, in the condition (financial or other), business,
properties or results of operations of the Company and its
subsidiaries taken as a whole except as set forth in or contemplated
by the Prospectus or as described in such certificate; such officer
has carefully examined each Registration Statement and the Prospectus
and, in his opinion, as of the Effective Date of the Initial
Registration Statement (and, if applicable, the Additional
Registration Statement), the statements contained in the Registration
Statement and the Prospectus were true and correct, and such
Registration Statement and Prospectus
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<PAGE> 21
did not omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, and since
the Effective Date of the Registration Statement, no event has
occurred which should have been set forth in a supplement to or an
amendment of the Prospectus which has not been so set forth in such
supplement or amendment; and
(i) The Representatives shall have received a letter,
dated such Closing Date, of KPMG Peat Marwick LLP which meets the
requirements of subsection (a) of this Section, except that the
specified date referred to in such subsection will be a date not more
than three business days prior to such Closing Date for the purposes
of this subsection.
The Selling Stockholders and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. CSFBC may in its sole discretion waive
on behalf of the Underwriters compliance with any conditions to the obligations
of the Underwriters hereunder, whether in respect of an Optional Closing Date
or otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any Registration
Statement, the Prospectus, or any amendment or supplement thereto, or any
related preliminary prospectus, or arise out of or are based upon 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, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such
loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement in or omission or alleged
omission from any of such documents in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below.
(b) The Selling Stockholders, jointly and severally, will
indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon 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, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses
are incurred; provided, however, that the Selling Stockholders will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement in or omission or alleged omission from any of such documents in
reliance upon and in conformity with written information furnished to the
Company by an Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
furnished by any Underwriter consists of the information described as such in
subsection (c) below and provided, further, that the liability under this
subsection of each Selling Stockholder shall be limited to an amount equal to
the aggregate net proceeds (before deducting expenses) to such Selling
Stockholder from the sale of Securities sold by such Selling Stockholder
hereunder.
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<PAGE> 22
(c) Each Underwriter will severally and not jointly
indemnify and hold harmless the Company and each Selling Stockholder against
any losses, claims, damages or liabilities to which the Company or such Selling
Stockholder may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of
any material fact contained in any Registration Statement, the Prospectus, or
any amendment or supplement thereto, or any related preliminary prospectus, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the
Representatives specifically for use therein, and will reimburse any legal or
other expenses reasonably incurred by the Company and each Selling Stockholder
in connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred, it being understood and
agreed that the only such information furnished by any Underwriter consists of
the following information in the Prospectus furnished on behalf of each
Underwriter: (i) the last paragraph at the bottom of the cover page concerning
the terms of the offering by the Underwriters, (ii) the legend concerning over-
allotments, stabilizing and passive market making on the inside front cover
page, (iii) the concession and reallowance figures appearing in the
______________paragraph under the caption "Underwriting" and the (iv)
information contained in the_______________paragraph under the caption
"Underwriting."
(d) Promptly after receipt by an indemnified party under
this Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party under subsection (a), (b) or (c) above, notify the indemnifying party of
the commencement thereof; but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than under subsection (a), (b) or (c) above. In case any such
action is brought against any indemnified party and it notifies an indemnifying
party of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action.
(e) If the indemnification provided for in this Section
is unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each indemnifying 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 subsection (a), (b) or
(c) above (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other from the offering of the Securities 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 the
Company and the Selling Stockholders on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts and commissions received
by the Underwriters. The 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
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<PAGE> 23
to state a material fact relates to information supplied by the Company, the
Selling Stockholders or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of this
subsection (e). Notwithstanding the provisions of this subsection (e), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(f) The obligations of the Company and the Selling
Stockholders under this Section shall be in addition to any liability which the
Company and the Selling Stockholders may otherwise have and shall extend, upon
the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each director of the Company, to each officer of the
Company who has signed a Registration Statement and to each person, if any, who
controls the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters
default in their obligations to purchase Offered Securities hereunder on either
the First or any Optional Closing Date and the aggregate number of shares of
Offered Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing
Date, CSFBC may make arrangements satisfactory to the Company and the Selling
Stockholders for the purchase of such Offered Securities by other persons,
including any of the Underwriters, but if no such arrangements are made by such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Offered
Securities that such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to CSFBC, the Company and the Selling
Stockholders for the purchase of such Offered Securities by other persons are
not made within 36 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter, the Company or
the Selling Stockholders, except as provided in Section 9 (provided that if
such default occurs with respect to Optional Securities after the First Closing
Date, this Agreement will not terminate as to the Firm Securities or any
Optional Securities purchased prior to such termination). As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The
respective indemnities, agreements, representations, warranties and other
statements of the Selling Stockholders, of the Company or its officers and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation, or statement
as to the results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder, the Company or any of their respective representatives, officers
or directors or any controlling person, and will survive delivery of and
payment for the Offered Securities. If this Agreement is terminated pursuant to
Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by them pursuant
to Section 5 and the respective obligations of the Company, the Selling
Stockholders, and the Underwriters pursuant to Section 7 shall remain in
effect, and if any Offered Securities have been purchased hereunder the
representations and warranties in Section 2 and all
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<PAGE> 24
obligations under Section 5 shall also remain in effect. If the purchase of the
Offered Securities by the Underwriters is not consummated for any reason other
than solely because of the termination of this Agreement pursuant to Section 8
or the occurrence of any event specified in clause (iii), (iv) or (v) of
Section 6(c), the Company and the Selling Stockholders will, jointly and
severally, reimburse the Underwriters for all out-of-pocket expenses (including
fees and disbursements of counsel) reasonably incurred by them in connection
with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and,
if sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to the Representatives, c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment
Banking Department - Transactions Advisory Group, or, if sent to the Company,
will be mailed, delivered or telegraphed and confirmed to it at 139 Townsend
Street, San Francisco, California 94107, Attention: Christopher J. Dawes, or,
if sent to the Selling Stockholders or any of them, will be mailed, delivered
or telegraphed and confirmed to ________________ at_______________ ; provided,
however, that any notice to an Underwriter pursuant to Section 7 will be
mailed, delivered or telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective personal representatives
and successors and the officers and directors and controlling persons referred
to in Section 7, and no other person will have any right or obligation
hereunder.
12. Representation. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this
Agreement, and any action under this Agreement taken by the Representatives
jointly or by CSFBC will be binding upon all the Underwriters. ______________
will act for the Selling Stockholders in connection with such transactions, and
any action under or in respect of this Agreement taken by __________________
will be binding upon all the Selling Stockholders.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, without regard
to principles of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
24
<PAGE> 25
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of
the counterparts hereof, whereupon it will become a binding agreement among the
Selling Stockholders, the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
_____________________________________________
Insert name or names of Selling Stockholders
_____________________________________________
MICROMUSE INC.
By: _________________________________________
Title: ______________________________________
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first
above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
SMITH BARNEY INC.
_________________________________________
_________________________________________
Acting on behalf of themselves and as the
Representatives of the several Underwriters.
By: CREDIT SUISSE FIRST BOSTON CORPORATION
By: ______________________________________
Title: ___________________________________
25
<PAGE> 26
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Number of Firm Optional
Securities to be Securities to
Selling Stockholder Sold be Sold
- -------------------------------------------------------- ---------------- -------------
<S> <C> <C>
Total . . . . . . . . . . . . . . . . . . . . . . . . ---------------- -------------
================ =============
</TABLE>
<PAGE> 27
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Firm Securities
Underwriter to be Purchased
------------------------------------------------------------------------- ---------------
<S> <C>
Credit Suisse First Boston Corporation . . . . . . . . . . . . . . . . .
Nationsbanc Montgomery Securities LLC . . . . . . . . . . . . . . . . . .
Smith Barney Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
---------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
===============
</TABLE>
<PAGE> 1
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION OF
MICROMUSE INC.
A DELAWARE CORPORATION
(PURSUANT TO SECTIONS 228, 242 AND 245
OF THE DELAWARE GENERAL CORPORATION LAW)
Micromuse Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "General Corporation Law")
DOES HEREBY CERTIFY:
FIRST: That this corporation was originally incorporated on May 1, 1996,
pursuant to the General Corporation Law.
SECOND: That the Board of Directors duly adopted resolutions proposing
to amend and restate the Amended and Restated Certificate of Incorporation of
this corporation, declaring said amendment and restatement to be advisable and
in the best interests of this corporation and its stockholders, and authorizing
the appropriate officers of this corporation to solicit the consent of the
stockholders therefor, which resolution setting forth the proposed amendment and
restatement is as follows:
"RESOLVED, that the Restated Certificate of Incorporation of this
corporation, as amended, be amended and restated in its entirety as follows:
ARTICLE I
The name of the corporation is Micromuse Inc. (the "Corporation").
ARTICLE II
The address of the registered office of this corporation in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is Corporation Services
Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated common stock ("Common Stock") and preferred stock ("Preferred
Stock"). The number of
<PAGE> 2
shares of Common Stock authorized to be issued is Sixty Million (60,000,000),
par value $.01 per share, and the number of Preferred Stock authorized to be
issued is Five Million (5,000,000), par value $.01 per share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors is hereby
authorized, in the resolution or resolutions adopted by the Board of Directors
providing for the issue of any wholly unissued series of Preferred Stock, within
the limitations and restrictions stated in this Restated Certificate of
Incorporation (the "Restated Certificate"), to fix or alter the dividend rights,
dividend rate, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices, and the
liquidation preferences of any wholly unissued series of Preferred Stock, and
the number of shares constituting any such series and the designation thereof,
or any of them, and to increase or decrease the number of shares of any series
subsequent to the issue of shares of that series, but not below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status that they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
ARTICLE V
Except as otherwise provided in this Restated Certificate, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, repeal, alter, amend and rescind
any or all of the Bylaws of the Corporation.
ARTICLE VI
The number of directors of the Corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of Directors or
by the stockholders.
The Board of Directors shall be and is divided into two classes, Class I
and Class II. Such classes shall be as nearly equal in number of directors as
possible. Each director shall serve for a term ending on the second annual
meeting following the annual meeting at which such director was elected;
provided, however, that the directors first elected to Class I shall serve for a
term ending on the annual meeting next following the end of fiscal year 1998 and
the directors first elected to Class II shall serve for a term ending on the
second annual meeting next following the end of fiscal year 1999. The foregoing
notwithstanding, each director shall serve until such director's successor shall
have been duly elected and qualified, unless such director shall resign, become
disqualified, disabled or shall otherwise be removed.
At each annual election, directors chosen to succeed those whose terms
then expire shall be of the same class as the directors they succeed, unless by
reason of any intervening changes in the authorized number of directors, the
Board shall designate one or more directorships whose term then expires as
directorships of another class in order more nearly to achieve equality of
number of directors between the classes.
2
<PAGE> 3
Notwithstanding the rule that the two classes shall be as nearly equal
in number of directors as possible, in the event of any change in the authorized
number of directors each director then continuing to serve as such shall
nevertheless continue as a director of the class of which the director is a
member until the expiration of the director's current term, or the director's
prior death, resignation or removal. If any newly created directorship may,
consistently with the rule that the two classes shall be as nearly equal in
number of directors as possible, be allocated to either class, the Board shall
allocate it to that of the available class whose term of office is due to expire
at the earliest date following such allocation.
ARTICLE VII
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE VIII
Except as otherwise provided in this Restated Certificate, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of the stockholders of the Corporation,
and may not be effected by any consent in writing of such stockholders.
ARTICLE IX
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this Article
IX by the stockholders of the Corporation shall not adversely affect any right
or protection of a director of the Corporation existing at the time of, or
increase the liability of any director of this Corporation with respect to any
acts or omissions of such director occurring prior to, such repeal or
modification.
ARTICLE X
In addition to any vote of the holders of any class or series of the
stock of this Corporation required by law or by this Restated Certificate, the
affirmative vote of the holders of a majority of the voting power of all of the
then outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single
3
<PAGE> 4
class, shall be required to amend or repeal the provisions of ARTICLE I, ARTICLE
II, and ARTICLE III of this Restated Certificate. Notwithstanding any other
provision of this Certificate of Incorporation or any provision of law which
might otherwise permit a lesser vote or no vote, but in addition to any vote of
the holders of any class or series of the stock of this Corporation required by
law or by this Restated Certificate, the affirmative vote of the holders of at
least seventy-five percent (75%) of the voting power of all of the then
outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to amend or repeal any provision of this Restated Certificate not
specified in the preceding sentence.
* * * *
THIRD: The foregoing Restated Certificate of Incorporation has been duly
adopted by the Corporation's Board of Directors in accordance with the
applicable provisions of Section 245 of the General Corporation Law of the State
of Delaware.
4
<PAGE> 5
IN WITNESS WHEREOF, the undersigned has signed this Certificate this ___
day of ____________, 1998.
___________________________________
Christopher J. Dawes
President and Chief Executive
Officer
ATTEST:
___________________________________
Steven M. Spurlock
Secretary
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
MICROMUSE INC.
A DELAWARE CORPORATION
ARTICLE I
OFFICES
SECTION 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
SECTION 2. The corporation may also have offices at such other places
both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. All meetings of the stockholders for the election of
directors shall be held at such time and place, within or without the State of
Delaware, as may be fixed from time to time by the Board of Directors, and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
SECTION 2.
(a) Annual meetings of stockholders, commencing with the year 1998, shall
be held at such date and time as shall be designated from time to time by the
Board of Directors and stated in the notice of the meeting, at which they shall
elect by a plurality vote a board of directors, and transact such other business
as may properly be brought before the meeting.
(b) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the Corporation who was a stockholder
of record at the time of giving of the notice provided for in this by-law, who
is entitled to vote at the meeting and who complied with the notice procedures
set forth in this by-law.
(c) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of paragraph (b) of
this by-law, the stockholder
<PAGE> 2
must have given timely notice thereof in writing to the Secretary of the
Corporation and any such business must otherwise be a proper matter for
stockholder action under Delaware law. To be timely, a stockholder's notice
shall be delivered to the Secretary at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth (i) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (ii)
as to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; and (iii) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (a) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner and (b) the
class and number of shares of the Corporation which are owned beneficially and
of record by such stockholder and such beneficial owner.
(d) Notwithstanding anything in the second sentence of paragraph (c) of
this by-law to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the Corporation at least 70
days prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this by-law shall also be considered timely,
but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal executive
offices of the Corporation not later than the close of business on the 10th day
following the day on which such public announcement is first made by the
Corporation.
(e) Only such persons who are nominated in accordance with the procedures
set forth in these By-laws shall be eligible to serve as directors and only such
business shall be conducted at an annual meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
these By-laws. The chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made in accordance with the procedures set forth in these By-laws.
The chairman of the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was made in
accordance with the procedures set forth in these By-laws, and, if any proposed
nomination or business is not
2
<PAGE> 3
in compliance with these By-laws, to declare that such defective proposed
business or nomination shall be disregarded.
(f) For purposes of these By-laws, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable national news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
(g) Notwithstanding the foregoing provisions of this by-law, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
by-law. Nothing in this by-law shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
SECTION 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting.
SECTION 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten (10) days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
SECTION 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called at any time by the Board of Directors pursuant to a
resolution approved by a majority of the whole Board of Directors. Such
resolution shall state the purpose or purposes of the proposed meeting.
SECTION 6. Written notice of a special meeting stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
SECTION 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
SECTION 8. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided
3
<PAGE> 4
by statute or by the certificate of incorporation. If, however, such quorum
shall not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted that might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
SECTION 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
SECTION 10. Unless otherwise provided in the certificate of
incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date, unless the proxy provides for a longer
period.
SECTION 11. Unless otherwise provided in the certificate of
incorporation, any action required to be taken at any annual or special meeting
of stockholders of the corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
SECTION 1. The number of directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption). Directors shall be divided
into two classes, as nearly equal in number as reasonably possible, with the
term of office of the first class to expire at the 1999 annual meeting of
stockholders, the term of office of the second class to expire at the 2000
annual meeting of stockholders. At each annual meeting of stockholders following
such initial classification and election, directors elected to succeed
4
<PAGE> 5
those directors whose terms expire shall be elected for a term of office to
expire at the second succeeding annual meeting of stockholders after their
election. All directors shall hold office until the expiration of term for which
elected, and until their respective successors are elected and qualified, except
in the case of the death, resignation or removal of any director. Directors need
not be stockholders.
SECTION 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and not by stockholders, and the directors so chosen shall hold office
until the next annual election and until their successors are duly elected and
shall qualify, unless sooner displaced. If there are no directors in office,
then an election of directors may be held in the manner provided by statute.
SECTION 3. The business of the corporation shall be managed by or under
the direction of its board of directors, which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these bylaws directed or required to
be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
SECTION 4. The Board of Directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
SECTION 5. The first meeting of each newly elected Board of Directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
SECTION 6. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
SECTION 7. Special meetings of the Board of Directors may be called by
the president on ten (10) days' notice to each director by mail or forty-eight
(48) hours notice to each director either personally or by telephone, telegram
or facsimile; special meetings shall be called by the president or secretary in
like manner and on like notice on the written request of two (2) directors
unless the board consists of only one director, in which case special meetings
shall be called by the president or secretary in like manner and on like notice
on the written request of the sole director.
SECTION 8. At all meetings of the board a majority of the directors
shall
5
<PAGE> 6
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be present
at any meeting of the Board of Directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
SECTION 9. Unless otherwise restricted by the certificate of
incorporation of these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
SECTION 10. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
SECTION 11. The Board of Directors may, by resolution passed by a
majority of the whole board, designate one (1) or more committees, each
committee to consist of one (1) or more of the directors of the corporation. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee.
In the absence of disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or she or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board
of Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
6
<PAGE> 7
SECTION 12. Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
SECTION 13. Unless otherwise restricted by the certificate of
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
SECTION 14. Unless otherwise restricted by the certificate of
incorporation or bylaw, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
SECTION 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram, telephone or facsimile.
SECTION 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
SECTION 1. The officers of the corporation shall be chosen by the Board
of Directors and shall be a president, treasurer and a secretary. The Board of
Directors may elect from among its members a Chairman of the Board and a Vice
Chairman of the Board. The Board of Directors may also choose one or more
vice-presidents, assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless
7
<PAGE> 8
the certificate of incorporation or these bylaws otherwise provide.
SECTION 2. The Board of Directors at its first meeting after each annual
meeting of stockholders shall choose a president, a treasurer, and a secretary,
and may choose vice presidents, assistant secretaries and assistant treasurers.
SECTION 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
SECTION 4. The salaries of all officers and agents of the corporation
shall be fixed by the Board of Directors.
SECTION 5. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the corporation
shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
SECTION 6. The Chairman of the Board, if any, shall preside at all
meetings of the Board of Directors and of the stockholders at which he or she
shall be present. He or she shall have and may exercise such powers as are, from
time to time, assigned to him or her by the Board and as may be provided by law.
SECTION 7. In the absence of the Chairman of the Board, the Vice
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which he or she shall be present. He or she
shall have and may exercise such powers as are, from time to time, assigned to
him or her by the Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
SECTION 8. The president shall be the chief executive officer of the
corporation; and in the absence of the Chairman and Vice Chairman of the Board
the president shall preside at all meetings of the stockholders and the Board of
Directors; the president shall have general and active management of the
business of the corporation and shall see that all orders and resolutions of the
Board of Directors are carried into effect.
SECTION 9. The president shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the corporation.
SECTION 10. In the absence of the president or in the event of the
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president's inability or refusal to act, the vice-president, if any, (or in the
event there be more than one vice-president, the vice-presidents in the order
designated by the directors, or in the absence of any designation, then in the
order of their election) shall perform the duties of the president, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
SECTION 11. The secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or president, under whose supervision he or she shall be. The secretary shall
have custody of the corporate seal of the corporation and the secretary, or an
assistant secretary, shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by his signature or by the
signature of such assistant secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the corporation and to
attest the affixing by his signature.
SECTION 12. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
TREASURER AND ASSISTANT TREASURERS
SECTION 13. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors. Unless
otherwise appointed, the chief financial officer shall be the treasurer.
SECTION 14. The treasurer shall disburse the funds of the corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his or her transactions as treasurer and of the financial condition of the
corporation.
SECTION 15. If required by the Board of Directors, the treasurer shall
give the corporation a bond (which shall be renewed every six years) in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of
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the duties of the treasurer's office and for the restoration to the corporation,
in case of the treasurer's death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in the treasurer's possession or under the treasurer's control belonging to
the corporation.
SECTION 16. The assistant treasurer, or if there shall be more than one,
the assistant treasurers in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the treasurer or in the event of the treasurer's inability or
refusal to act, perform the duties and exercise the powers of the treasurer and
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
SECTION 1. Every holder of stock in the corporation shall be entitled to
have a certificate, signed by, or in the name of the corporation by, the
chairman or vice-chairman of the Board of Directors, or the president or a
vice-president and the treasurer or an assistant treasurer, or the secretary or
an assistant secretary of the corporation, certifying the number of shares owned
by such stockholder in the corporation.
Certificates may be issued for partly paid shares and in such case upon the
face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate that the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
SECTION 2. Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he or she
were such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
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SECTION 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
SECTION 4. Upon surrender to the corporation or the transfer agent of
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
SECTION 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholder or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
SECTION 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
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SECTION 1. Dividends upon the capital stock of the corporation, subject
to the provisions of the certificate of incorporation, if any, may be declared
by the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
SECTION 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
SECTION 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
FISCAL YEAR
SECTION 4. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
SEAL
SECTION 5. The Board of Directors may adopt a corporate seal having
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
SECTION 6. The corporation shall hold harmless and indemnify any person
entitled to the benefits of indemnification pursuant to this Article 7 (such
person being hereunder referred to as "Indemnitee") to the full extent
authorized or permitted by the provisions of Section 145 of the Delaware General
Corporation Law (the "Law"), as such may be amended from time to time, and by
this Article 7, as such may be amended. In furtherance of the foregoing
indemnification, and without limiting the generality thereof:
(a) PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF THE
CORPORATION. Indemnitee shall be entitled to the rights of indemnification
provided in this Section 6(a) if, by reason of his Corporate Status (as
hereinafter defined), he is, or is threatened to be made, a party to or
participant in any Proceeding (as hereinafter defined) other than a Proceeding
by or in the right of the corporation. Pursuant to this Section 6(a), Indemnitee
shall be indemnified against all Expenses (as hereinafter defined), judgments,
penalties, fines and
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amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such Proceeding or any claim, issue or matter therein,
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal Proceeding, had no reasonable cause to believe his conduct was
unlawful.
(b) PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. Indemnitee shall
be entitled to the rights of indemnification provided in this Section 6(b) if,
by reason of his Corporate Status, he is, or is threatened to be made, a party
to or participant in any Proceeding brought by or in the right of the
corporation. Pursuant to this Section 6(b), Indemnitee shall be indemnified
against all Expenses actually and reasonably incurred by him or on his behalf in
connection with such Proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation; provided, however, that, if applicable law so provides, no
indemnification against such Expenses shall be made in respect of any claim,
issue or matter in such Proceeding as to which Indemnitee shall have been
adjudged to be liable to the corporation unless and to the extent that the Court
of Chancery of the State of Delaware shall determine that such indemnification
may be made.
(c) INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR PARTLY
SUCCESSFUL. Notwithstanding any other provision hereunder, to the extent that
Indemnitee is, by reason of his Corporate Status, a party to and is successful,
on the merits or otherwise, in any Proceeding, he shall be indemnified to the
maximum extent permitted by law against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith. If Indemnitee is not
wholly successful in such Proceeding but is successful, on the merits or
otherwise, as to one or more but less than all claims, issues or matters in such
Proceeding, the corporation shall indemnify Indemnitee against all Expenses
actually and reasonably incurred by him or on his behalf in connection with each
successfully resolved claim, issue or matter. For purposes of this Section and
without limitation, the termination of any claim, issue or matter in such a
Proceeding by dismissal, with or without prejudice, shall be deemed to be a
successful result as to such claim, issue or matter.
SECTION 7. In addition to, and without regard to any limitations on, the
indemnification provided for in Section 6, the corporation shall and hereby does
indemnify and hold harmless Indemnitee against all Expenses, judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by him or on his behalf if, by reason of his Corporate Status, he is, or is
threatened to be made, a party to or participant in any Proceeding (including a
Proceeding by or in the right of the corporation), including, without
limitation, all liability arising out of the negligence or active or passive
wrongdoing of Indemnitee. The only limitation that shall exist upon the
corporation's obligations hereunder shall be that the corporation shall not be
obligated to make any payment to Indemnitee that is finally determined (under
the procedures, and subject to the presumptions, set forth in Sections 11 and 12
hereof) to be unlawful under Delaware law.
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SECTION 8.
(a) Whether or not the indemnification provided in Sections 6 and 7
hereof is available, in respect of any threatened, pending or completed action,
suit or proceeding in which corporation is jointly liable with Indemnitee (or
would be if joined in such action, suit or proceeding), corporation shall pay,
in the first instance, the entire amount of any judgment or settlement of such
action, suit or proceeding without requiring Indemnitee to contribute to such
payment and corporation hereby waives and relinquishes any right of contribution
it may have against Indemnitee. The corporation shall not enter into any
settlement of any action, suit or proceeding in which corporation is jointly
liable with Indemnitee (or would be if joined in such action, suit or
proceeding) unless such settlement provides for a full and final release of all
claims asserted against Indemnitee.
(b) Without diminishing or impairing the obligations of the corporation
set forth in the preceding subparagraph, if, for any reason, Indemnitee shall
elect or be required to pay all or any portion of any judgment or settlement in
any threatened, pending or completed action, suit or proceeding in which
corporation is jointly liable with Indemnitee (or would be if joined in such
action, suit or proceeding), corporation shall contribute to the amount of
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred and paid or payable by Indemnitee in
proportion to the relative benefits received by the corporation and all
officers, directors or employees of the corporation other than Indemnitee who
are jointly liable with Indemnitee (or would be if joined in such action, suit
or proceeding), on the one hand, and Indemnitee, on the other hand, from the
transaction from which such action, suit or proceeding arose; provided, however,
that the proportion determined on the basis of relative benefit may, to the
extent necessary to conform to law, be further adjusted by reference to the
relative fault of corporation and all officers, directors or employees of the
corporation other than Indemnitee who are jointly liable with Indemnitee (or
would be if joined in such action, suit or proceeding), on the one hand, and
Indemnitee, on the other hand, in connection with the events that resulted in
such expenses, judgments, fines or settlement amounts, as well as any other
equitable considerations which the law may require to be considered. The
relative fault of corporation and all officers, directors or employees of the
corporation other than Indemnitee who are jointly liable with Indemnitee (or
would be if joined in such action, suit or proceeding), on the one hand, and
Indemnitee, on the other hand, shall be determined by reference to, among other
things, the degree to which their actions were motivated by intent to gain
personal profit or advantage, the degree to which their liability is primary or
secondary, and the degree to which their conduct is active or passive.
(c) The corporation shall fully indemnify and hold Indemnitee harmless
from any claims of contribution which may be brought by officers, directors or
employees of the corporation other than Indemnitee who may be jointly liable
with Indemnitee.
SECTION 9. Notwithstanding any other provision hereof, to the extent
that Indemnitee is, by reason of his Corporate Status, a witness in any
Proceeding to which Indemnitee is not a party, he shall be indemnified against
all Expenses actually and reasonably incurred by him or on his behalf in
connection therewith.
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SECTION 10. Notwithstanding any other provision hereof, the corporation
shall advance all Expenses incurred by or on behalf of Indemnitee in connection
with any Proceeding by reason of Indemnitee's Corporate Status within ten (10)
days after the receipt by the corporation of a statement or statements from
Indemnitee requesting such advance or advances from time to time, whether prior
to or after final disposition of such Proceeding. Such statement or statements
shall reasonably evidence the Expenses incurred by Indemnitee and shall include
or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to
repay any Expenses advanced if it shall ultimately be determined that Indemnitee
is not entitled to be indemnified against such Expenses. Any advances and
undertakings to repay pursuant to this Section 10 shall be unsecured and
interest free. Notwithstanding the foregoing, the obligation of the corporation
to advance Expenses pursuant to this Section 10 shall be subject to the
condition that, if, when and to the extent that the corporation determines that
Indemnitee would not be permitted to be indemnified under applicable law, the
corporation shall be entitled to be reimbursed, within thirty (30) days of such
determination, by Indemnitee (who hereby agrees to reimburse the corporation)
for all such amounts theretofore paid; provided, however, that if Indemnitee has
commenced or thereafter commences legal proceedings in a court of competent
jurisdiction to secure a determination that Indemnitee should be indemnified
under applicable law, any determination made by the corporation that Indemnitee
would not be permitted to be indemnified under applicable law shall not be
binding and Indemnitee shall not be required to reimburse the corporation for
any advance of Expenses until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have been exhausted
or lapsed).
SECTION 11. It is the intent of the corporation to secure for Indemnitee
rights of indemnity that are as favorable as may be permitted under the law and
public policy of the State of Delaware. Accordingly, the following procedures
and presumptions shall apply in the event of any question as to whether
Indemnitee is entitled to indemnification under this Article 7:
(a) To obtain indemnification (including, but not limited to, the
advancement of Expenses and contribution by the corporation), Indemnitee shall
submit to the corporation a written request, including therein or therewith such
documentation and information as is reasonably available to Indemnitee and is
reasonably necessary to determine whether and to what extent Indemnitee is
entitled to indemnification. The Secretary of the corporation shall, promptly
upon receipt of such a request for indemnification, advise the Board of
Directors in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to
the first sentence of Section 11(a) hereof, a determination, if required by
applicable law, with respect to Indemnitee's entitlement thereto shall be made
in the specific case by one of the following three methods, which shall be at
the election of Indemnitee: (1) by a majority vote of the disinterested
directors, even though less than a quorum, or (2) by independent legal counsel
in a written opinion, or (3) by the stockholders.
(c) If the determination of entitlement to indemnification is to be made
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by Independent Counsel pursuant to Section 11(b) hereof, the Independent Counsel
shall be selected as provided in this Section 11(c). The Independent Counsel
shall be selected by Indemnitee (unless Indemnitee shall request that such
selection be made by the Board of Directors). Indemnitee or the corporation, as
the case may be, may, within 10 days after such written notice of selection
shall have been given, deliver to the corporation or to Indemnitee, as the case
may be, a written objection to such selection; provided, however, that such
objection may be asserted only on the ground that the Independent Counsel so
selected does not meet the requirements of "Independent Counsel" as defined in
Section 18 hereunder, and the objection shall set forth with particularity the
factual basis of such assertion. Absent a proper and timely objection, the
person so selected shall act as Independent Counsel. If a written objection is
made and substantiated, the Independent Counsel selected may not serve as
Independent Counsel unless and until such objection is withdrawn or a court has
determined that such objection is without merit. If, within 20 days after
submission by Indemnitee of a written request for indemnification pursuant to
Section 11(a) hereof, no Independent Counsel shall have been selected and not
objected to, either the corporation or Indemnitee may petition the Court of
Chancery of the State of Delaware or other court of competent jurisdiction for
resolution of any objection which shall have been made by the corporation or
Indemnitee to the other's selection of Independent Counsel and/or for the
appointment as Independent Counsel of a person selected by the court or by such
other person as the court shall designate, and the person with respect to whom
all objections are so resolved or the person so appointed shall act as
Independent Counsel under Section 11(b) hereof. The corporation shall pay any
and all reasonable fees and expenses of Independent Counsel incurred by such
Independent Counsel in connection with acting pursuant to Section 11(b) hereof,
and the corporation shall pay all reasonable fees and expenses incident to the
procedures of this Section 11(c), regardless of the manner in which such
Independent Counsel was selected or appointed.
(d) In making a determination with respect to entitlement to
indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Article 7 if Indemnitee has submitted a request for indemnification in
accordance with Section 11(a) hereunder. Anyone seeking to overcome this
presumption shall have the burden of proof and the burden of persuasion, by
clear and convincing evidence.
(e) Indemnitee shall be deemed to have acted in good faith if
Indemnitee's action is based on the records or books of account of the
Enterprise, including financial statements, or on information supplied to
Indemnitee by the officers of the Enterprise in the course of their duties, or
on the advice of legal counsel for the Enterprise or on information or records
given or reports made to the Enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Enterprise. In addition, the knowledge and/or actions, or failure to act, of
any director, officer, agent or employee of the Enterprise shall not be imputed
to Indemnitee for purposes of determining the right to indemnification under
this Article 7. Whether or not the foregoing provisions of this Section 11(e)
are satisfied, it shall in any event be presumed that Indemnitee has at all
times acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. Anyone seeking to overcome
this presumption shall have the burden
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of proof and the burden of persuasion, by clear and convincing evidence.
(f) If the person, persons or entity empowered or selected under Section
11 to determine whether Indemnitee is entitled to indemnification shall not have
made a determination within thirty (30) days after receipt by the corporation of
the request therefor, the requisite determination of entitlement to
indemnification shall be deemed to have been made and Indemnitee shall be
entitled to such indemnification, absent (i) a misstatement by Indemnitee of a
material fact, or an omission of a material fact necessary to make Indemnitee's
statement not materially misleading, in connection with the request for
indemnification, or (ii) a prohibition of such indemnification under applicable
law; provided, however, that such 30 day period may be extended for a reasonable
time, not to exceed an additional fifteen (15) days, if the person, persons or
entity making the determination with respect to entitlement to indemnification
in good faith requires such additional time for the obtaining or evaluating
documentation and/or information relating thereto; and provided, further, that
the foregoing provisions of this Section 11(g) shall not apply if the
determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 11(b) hereunder and if (A) within fifteen (15)
days after receipt by the corporation of the request for such determination the
Board of Directors or the Disinterested Directors, if appropriate, resolve to
submit such determination to the stockholders for their consideration at an
annual meeting thereof to be held within seventy five (75) days after such
receipt and such determination is made thereat, or (B) a special meeting of
stockholders is called within fifteen (15) days after such receipt for the
purpose of making such determination, such meeting is held for such purpose
within sixty (60) days after having been so called and such determination is
made thereat.
(g) Indemnitee shall cooperate with the person, persons or entity making
such determination with respect to Indemnitee's entitlement to indemnification,
including providing to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged or otherwise
protected from disclosure and which is reasonably available to Indemnitee and
reasonably necessary to such determination. Any Independent Counsel, member of
the Board of Directors, or stockholder of the corporation shall act reasonably
and in good faith in making a determination under this Article 7 of the
Indemnitee's entitlement to indemnification. Any costs or expenses (including
attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with
the person, persons or entity making such determination shall be borne by the
corporation (irrespective of the determination as to Indemnitee's entitlement to
indemnification) and the corporation hereby indemnifies and shall hold
Indemnitee harmless therefrom.
(h) The corporation acknowledges that a settlement or other disposition
short of final judgment may be successful if it permits a party to avoid
expense, delay, distraction, disruption and uncertainty. In the event that any
action, claim or proceeding to which Indemnitee is a party is resolved in any
manner other than by adverse judgment against Indemnitee (including, without
limitation, settlement of such action, claim or proceeding with or without
payment of money or other consideration) it shall be presumed that Indemnitee
has been successful on the merits or otherwise in such action, suit or
proceeding. Anyone seeking to overcome this presumption shall have the burden of
proof and the burden of persuasion, by clear
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and convincing evidence.
SECTION 12.
(a) In the event that (i) a determination is made pursuant to this
Article 7 that Indemnitee is not entitled to indemnification hereunder, (ii)
advancement of Expenses is not timely made pursuant to Section 10 hereunder,
(iii) no determination of entitlement to indemnification shall have been made
pursuant to Section 11(b) hereunder within 90 days after receipt by the
corporation of the request for indemnification, (iv) payment of indemnification
is not made pursuant to this Article 7 within ten (10) days after receipt by the
corporation of a written request therefor, or (v) payment of indemnification is
not made within ten (10) days after a determination has been made that
Indemnitee is entitled to indemnification or such determination is deemed to
have been made pursuant to Section 11 hereunder, Indemnitee shall be entitled to
an adjudication in an appropriate court of the State of Delaware, or in any
other court of competent jurisdiction, of his entitlement to such
indemnification. Indemnitee shall commence such proceeding seeking an
adjudication within 180 days following the date on which Indemnitee first has
the right to commence such proceeding pursuant to this Section 12(a). The
corporation shall not oppose Indemnitee's right to seek any such adjudication.
(b) In the event that a determination shall have been made pursuant to
Section 11(b) hereunder that Indemnitee is not entitled to indemnification, any
judicial proceeding commenced pursuant to this Section 12 shall be conducted in
all respects as a de novo trial, on the merits and Indemnitee shall not be
prejudiced by reason of that adverse determination under Section 11(b).
(c) If a determination shall have been made pursuant to Section 11(b)
hereunder that Indemnitee is entitled to indemnification, the corporation shall
be bound by such determination in any judicial proceeding commenced pursuant to
this Section 12, absent a prohibition of such indemnification under applicable
law.
(d) In the event that Indemnitee, pursuant to this Section 12, seeks a
judicial adjudication of his rights under, or to recover damages for breach of,
this Article 7, or to recover under any directors' and officers' liability
insurance policies maintained by the corporation the corporation shall pay on
his behalf, in advance, any and all expenses (of the types described in the
definition of Expenses in Section 17 hereunder) actually and reasonably incurred
by him in such judicial adjudication, regardless of whether Indemnitee
ultimately is determined to be entitled to such indemnification, advancement of
expenses or insurance recovery.
(e) The corporation shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 12 that the procedures and
presumptions hereunder are not valid, binding and enforceable and shall
stipulate in any such court that the corporation is bound by all the provisions
hereunder.
SECTION 13.
(a) The rights of indemnification as provided hereunder shall not be
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deemed exclusive of any other rights to which Indemnitee may at any time be
entitled under applicable law, the certificate of incorporation of the
corporation, these Bylaws, any agreement, a vote of stockholders or a resolution
of directors, or otherwise. No amendment, alteration or repeal hereunder or of
any provision hereof shall limit or restrict any right of Indemnitee under this
Article 7 in respect of any action taken or omitted by such Indemnitee in his
Corporate Status prior to such amendment, alteration or repeal. To the extent
that a change in the Law, whether by statute or judicial decision, permits
greater indemnification than would be afforded currently hereunder and any
indemnification agreement between the corporation and the Indemnitee, it is the
intent of the parties hereto that Indemnitee shall enjoy the greater benefits so
afforded by such change. No right or remedy herein conferred is intended to be
exclusive of any other right or remedy, and every other right and remedy shall
be cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other right or remedy.
(b) To the extent that the corporation maintains an insurance policy or
policies providing liability insurance for directors, officers, employees, or
agents or fiduciaries of the corporation or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the corporation, Indemnitee shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of the coverage available for any such director, officer,
employee or agent under such policy or policies.
(c) In the event of any payment pursuant to this Article 7 or any
indemnification agreement between the corporation and Indemnitee, the
corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and take
all action necessary to secure such rights, including execution of such
documents as are necessary to enable the corporation to bring suit to enforce
such rights.
(d) The corporation shall not be liable to make any payment of amounts
otherwise indemnifiable hereunder if and to the extent that Indemnitee has
otherwise actually received such payment under any insurance policy, contract,
agreement or otherwise.
SECTION 14. Notwithstanding any other provision hereunder, Indemnitee
shall not be entitled to indemnification with respect to any Proceeding brought
by Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding
or making of such claim shall have been approved by the Board of Directors of
the corporation or (b) such Proceeding is being brought by the Indemnitee to
assert, interpret or enforce his rights as set forth herein or in any
indemnification agreement between the corporation and the Indemnitee.
SECTION 15. All agreements and obligations of the corporation contained
in this Article 7 shall continue during the period Indemnitee is an officer or
director of the corporation (or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) and shall
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<PAGE> 20
continue thereafter so long as Indemnitee shall be subject to any Proceeding (or
any proceeding commenced under Section 12 hereof) by reason of his Corporate
Status, whether or not he is acting or serving in any such capacity at the time
any liability or expense is incurred for which indemnification can be provided
hereunder. The terms of this Article 7 shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors (including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or substantially all of the business or assets
of the corporation), assigns, spouses, heirs, executors and personal and legal
representatives. The terms of this Article 7 shall continue in effect regardless
of whether Indemnitee continues to serve as an officer or director of the
corporation or any other Enterprise at the corporation's request.
SECTION 16. To the extent requested by the Indemnitee and approved by
the Board of Directors of the corporation, the corporation may at any time and
from time to time provide security to the Indemnitee for the corporation's
obligations hereunder through an irrevocable bank line of credit, funded trust
or other collateral. Any such security, once provided to the Indemnitee, may not
be revoked or released without the prior written consent of the Indemnitee.
SECTION 17. For purposes of this Article 7:
(a) "Corporate Status" describes the status of a person who is or was a
director, officer, employee or agent or fiduciary of the corporation or of any
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise which such person is or was serving at the express written
request of the corporation.
(b) "Disinterested Director" means a director of the corporation who is
not and was not a party to the Proceeding in respect of which indemnification is
sought by Indemnitee.
(c) "Enterprise" shall mean the corporation and any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise of
which Indemnitee is or was serving at the express written request of the
corporation as a director, officer, employee, agent or fiduciary.
(d) "Expenses" shall include all reasonable attorneys' fees, retainers,
court costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating, participating, or being or preparing to be a
witness in a Proceeding.
(e) "Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither presently is, nor
in the past five years has been, retained to represent: (i) the corporation or
Indemnitee in any matter material to either such party (other than with respect
to matters concerning the Indemnitee under this Article 7, or of other
indemnitees under similar indemnification agreements), or (ii) any
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<PAGE> 21
other party to the Proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall
not include any person who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in representing
either the corporation or Indemnitee in an action to determine Indemnitee's
rights under this Article 7. The corporation shall pay the reasonable fees of
the Independent Counsel referred to above and to fully indemnify such counsel
against any and all Expenses, claims, liabilities and damages arising out of or
relating to this Article 7 or its engagement pursuant hereto.
(f) "Proceeding" includes any threatened, pending or completed action,
suit, arbitration, alternate dispute resolution mechanism, investigation,
inquiry, administrative hearing or any other actual, threatened or completed
proceeding, whether brought by or in the right of the corporation or otherwise
and whether civil, criminal, administrative or investigative, in which
Indemnitee was, is or will be involved as a party or otherwise, by reason of the
fact that Indemnitee is or was a director of the corporation, by reason of any
action taken by him or of any inaction on his part while acting as an officer or
director of the corporation, or by reason of the fact that he is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other Enterprise; in
each case whether or not he is acting or serving in any such capacity at the
time any liability or expense is incurred for which indemnification can be
provided under this Article 7; including one pending on or before the date
hereunder; and excluding one initiated by an Indemnitee pursuant to Section 7
hereunder to enforce his rights under this Article 7.
SECTION 18. If any provision or provisions hereunder shall be held by a
court of competent jurisdiction to be invalid, void, illegal or otherwise
unenforceable for any reason whatsoever: (a) the validity, legality and
enforceability of the remaining provisions hereunder (including without
limitation, each portion of any section hereunder containing any such provision
held to be invalid, illegal or unenforceable, that is not itself invalid,
illegal or unenforceable) shall not in any way be affected or impaired thereby
and shall remain enforceable to the fullest extent permitted by law; and (b) to
the fullest extent possible, the provisions hereunder (including, without
limitation, each portion of any section hereunder containing any such provision
held to be invalid, illegal or unenforceable, that is not itself invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested thereby.
ARTICLE VIII
AMENDMENTS
SECTION 1. These bylaws may be altered, amended or repealed or new
bylaws may be adopted by stockholders holding at least seventy-five percent
(75%) of the corporation's outstanding capital stock ("Amending Stockholders")
or by the Board of Directors, when such power is conferred upon the Board of
Directors by the certificate of incorporation at any regular meeting of the
stockholders or of the Board of Directors or by the Amending Stockholders at any
special meeting of the stockholders or by the Board of Directors at any special
meeting of the Board of Directors if notice of such alteration, amendment,
repeal or
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<PAGE> 22
adoption of new bylaws be contained in the notice of such special meeting. If
the power to adopt, amend or repeal bylaws is conferred upon the Board of
Directors by the certificate or incorporation it shall not divest or limit the
power of the stockholders to adopt, amend or repeal bylaws.
22
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
Micromuse Inc.:
We consent to the use of our report included herein and to the references
to our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Mountain View, California
July 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOUND
ON PAGE 19 OF THE COMPANY'S FORM S-1 FOR THE YEAR TO DATE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 23,503
<SECURITIES> 20,254
<RECEIVABLES> 5,463
<ALLOWANCES> 77
<INVENTORY> 0
<CURRENT-ASSETS> 10,237
<PP&E> 5,362
<DEPRECIATION> 2,638
<TOTAL-ASSETS> 53,267
<CURRENT-LIABILITIES> 10,237
<BONDS> 0
0
0
<COMMON> 55,603
<OTHER-SE> (12,573)
<TOTAL-LIABILITY-AND-EQUITY> 53,267
<SALES> 14,672
<TOTAL-REVENUES> 18,617
<CGS> 945
<TOTAL-COSTS> 17,777
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 304
<INCOME-PRETAX> (1,688)
<INCOME-TAX> 50
<INCOME-CONTINUING> (1,738)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,072)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
