<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
MICROMUSE INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
[MICROMUSE LOGO]
MICROMUSE INC.
139 TOWNSEND STREET
SAN FRANCISCO, CA 94107
---------------
January 6, 1999
Dear Micromuse Stockholder:
We cordially invite you to attend the Annual Meeting of Stockholders of
Micromuse Inc., which will be held at the Sheraton Palace Hotel, 2 New
Montgomery Street, San Francisco, California 94105 on Thursday, January 28,
1999, at 10:00 a.m. pacific standard time.
Details of the business to be conducted at the Annual Meeting are given in
the attached Proxy Statement and Notice of Annual Meeting of Stockholders.
On behalf of the Board of Directors, I would like to express our
appreciation for your continued interest in the affairs of the Company. We look
forward to seeing you at the Annual Meeting.
Sincerely,
/s/ STEPHEN A. ALLOTT
- -----------------------------------------------
Stephen A. Allott
Director, President and Chief Financial Officer
<PAGE> 3
MICROMUSE INC.
139 TOWNSEND STREET
SAN FRANCISCO, CALIFORNIA 94107
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 28, 1999
The Annual Meeting of Stockholders (the "Annual Meeting") of Micromuse Inc.
(the "Company") will be held at the Sheraton Palace Hotel, 2 New Montgomery
Street, San Francisco, California 94105 on Thursday, January 28, 1999, at 10:00
a.m., pacific standard time, for the following purposes:
1. To elect three directors of the Board of Directors to serve until the 2001
Annual Meeting or until their successors have been duly elected and qualified;
2. To approve an amendment to the 1997 Stock Option/Stock Issuance Plan to
increase the number of shares available for issuance, as set forth in the
accompanying proxy;
3. To ratify the appointment of KPMG Peat Marwick LLP as independent auditors
of the Company for the fiscal year ending September 30, 1999; and
4. To transact such other business as may properly come before the Annual
Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only stockholders of record at the close of
business on December 16, 1998 are entitled to notice of, and to vote at, the
Annual Meeting and at any adjournments or postponements thereof. A list of such
stockholders will be available for inspection at the Company's principal
executive offices located at 139 Townsend Street, San Francisco, CA 94107 during
ordinary business hours for the ten-day period prior to the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ STEPHEN A. ALLOTT
---------------------------------------
STEPHEN A. ALLOTT
Director, President and Chief
Financial Officer
San Francisco, California
January 6, 1999
- --------------------------------------------------------------------------------
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE. YOU
MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE ANNUAL MEETING. IF YOU DECIDE
TO ATTEND THE ANNUAL MEETING AND WISH TO CHANGE YOUR PROXY VOTE, YOU MAY DO SO
AUTOMATICALLY BY VOTING IN PERSON AT THE MEETING.
- --------------------------------------------------------------------------------
<PAGE> 4
[MICROMUSE LOGO]
139 TOWNSEND STREET
SAN FRANCISCO, CALIFORNIA 94107
---------------
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 28, 1999
---------------
GENERAL INFORMATION
The enclosed proxy is solicited on behalf of the Board of Directors of
Micromuse Inc., a Delaware corporation ("Micromuse" or the "Company"), for use
at the Annual Meeting of Stockholders (the "Annual Meeting") to be held at the
Sheraton Palace Hotel, 2 New Montgomery Street, San Francisco, California 94105,
on Thursday, January 28, 1999, and at any adjournment or postponement of the
Annual Meeting. These proxy solicitation materials were first mailed on or about
January 6, 1999 to all stockholders entitled to vote at the Annual Meeting.
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual Meeting
are summarized in the accompanying Notice of Annual Meeting of Stockholders.
Each proposal is described in more detail in this Proxy Statement.
VOTING RIGHTS AND SOLICITATION OF PROXIES
The Company's Common Stock is the only type of security entitled to vote at
the Annual Meeting. On December 16, 1998, the record date for determination of
stockholders entitled to vote at the Annual Meeting, there were 15,635,763
shares of Common Stock outstanding. Each stockholder of record on December 16,
1998 is entitled to one vote for each share of Common Stock held by such
stockholder on such date. Shares of Common Stock may not be voted cumulatively.
All votes will be tabulated by the inspector of elections appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes.
QUORUM REQUIRED
The Company's bylaws provide that the holders of a majority of the Company's
Common Stock issued and outstanding and entitled to vote at the Annual Meeting,
present in person or represented by proxy, shall constitute a quorum for the
transaction of business at the Annual Meeting. Abstentions and broker non-votes
will be counted as present for the purpose of determining the presence of a
quorum.
VOTES REQUIRED
Proposal 1. Directors are elected by a plurality of the affirmative votes
cast by those shares present in person or represented by proxy and entitled to
vote at the Annual Meeting. The three nominees for director receiving the
highest number of affirmative votes will be elected. Abstentions and broker
non-votes will not be counted towards a nominee's total. Stockholders may not
cumulate votes in the election of directors.
Proposal 2. Approval of the adoption of the amendment to the Company's 1997
Stock Option/Stock Issuance Plan requires the affirmative vote of a majority of
those shares present, in person or represented by proxy, and entitled to vote at
the Annual Meeting. Abstentions are not affirmative votes and, therefore, will
have the same effect as a vote against the proposal. Broker non-votes will not
be treated as entitled to vote on the matter and thus, will not affect the
outcome of the voting on the proposal.
Proposal 3. Ratification of the appointment of KPMG Peat Marwick LLP as the
Company's independent auditors for the fiscal year ending September 30, 1999
requires the affirmative vote of a majority of those shares present, in person
or represented by proxy, and entitled to vote at the Annual Meeting. Abstentions
are not affirmative votes and, therefore, will have the same effect as a vote
<PAGE> 5
against the proposal. Broker non-votes will not be treated as entitled to vote
on the matter and thus, will not affect the outcome of the voting on the
proposal.
PROXIES
Whether or not you are able to attend the Company's Annual Meeting, you are
urged to complete and return the enclosed proxy, which is solicited by the
Company's Board of Directors and which will be voted as you direct on your proxy
when properly completed. In the event no directions are specified, such proxies
will be voted FOR the Nominees of the Board of Directors (as set forth in
Proposal No. 1), FOR Proposals Nos. 2 and 3, and in the discretion of the proxy
holder as to other matters that may properly come before the Annual Meeting. You
may also revoke or change your proxy at any time before the Annual Meeting. To
do this, send a written notice of revocation or another signed proxy with a
later date to the Secretary of the Company at the Company's principal executive
offices before the beginning of the Annual Meeting. You may also automatically
revoke your proxy by attending the Annual Meeting and voting in person. All
shares represented by a valid proxy received prior to the Annual Meeting will be
voted.
SOLICITATION OF PROXIES
The cost of soliciting proxies, including the preparation, assembly,
printing, and mailing of this Proxy Statement, the proxy, and any additional
soliciting material furnished to stockholders will be borne by the Company. The
Company has retained the services of CIC to assist in the solicitation of
proxies, for which it will receive a fee from the Company of approximately
$5,000, plus out-of-pocket expenses. In addition, the Company may reimburse
brokerage houses and other persons representing beneficial owners of shares for
their expenses in forwarding solicitation materials to such beneficial owners.
The Company will furnish copies of solicitation material to such brokerage
houses and other representatives. Proxies may also be solicited by certain of
the Company's directors, officers and employees, without additional
compensation, personally or by telephone, telecopy or telegram. Except as
described above, the Company does not presently intend to solicit proxies other
than by mail.
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
The Company's Certificate of Incorporation provides for a Classified Board of
Directors, with the terms of office of each class of Directors ending in
successive years. The Company currently has authorized five directors and has
one vacancy on the Board. At the Annual Meeting, three directors are to be
elected to serve until the Company's 2001 Annual Meeting or until their
successors are elected and qualified. The directors who are being nominated for
election to the Board of Directors (the "Nominees"), their ages as of December
16, 1998, their positions and offices held with the Company and certain
biographical information are set forth below. Each Nominee for election has
agreed to serve if elected, and management has no reason to believe that any
Nominee will be unavailable to serve. In the event any Nominee is unable or
declines to serve as a director at the time of the Annual Meeting, the proxies
will be voted for any nominee who may be designated by the present Board of
Directors to fill the vacancy. Unless otherwise instructed, the proxy holders
will vote the Proxies received by them FOR the Nominees named below. The three
Nominees receiving the highest number of affirmative votes of the shares
represented and voting on this proposal at the Annual Meeting will be elected
directors of the Company.
2
<PAGE> 6
YEAR FIRST POSITIONS & OFFICES
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED
NOMINEES AGE DIRECTOR HELD WITH THE COMPANY
-------- --- ---------- ---------------------
<S> <C> <C> <C>
Stephen A. Allott 40 1998 Director, President and Chief Financial Officer
Angela Dawes (1) 36 1997 Manager of Strategic Accounts and Director
David C. Schwab (2)(3) 41 1996 Director
</TABLE>
- ----------
(1) Member of the Stock Option Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Mr. Allott has served as the Company's President and as a director since
October 1998 and as the Company's Chief Financial Officer since July 1998. Mr.
Allott served as the Company's Senior Vice President, Finance from September
1997 to July 1998. 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.
Mrs. Dawes has been a director of the Company since September 1997. Mrs.
Dawes has also served as Manager of Strategic Accounts since October 1998. Mrs.
Dawes served as Director of Sales, Western Region from January 1997 to October
1998. 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. Mrs. Dawes has also been a director of Micromuse plc
since its inception. Prior to joining the Company, Mrs. Dawes served at Computer
Associates International, Inc. in various capacities.
Mr. Schwab has been a director of the Company since December 1996. Mr. Schwab
has been a general partner of Sierra Ventures since November 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.
CONTINUING DIRECTOR -- TERM ENDING IN 2000
Set forth below is information regarding the continuing Director of the
Company, including his age, the period during which he has served as a Director,
and information furnished by him as to principal occupations and directorships
held by him in corporations whose shares are publicly registered.
Michael E.W. Jackson, age 48, 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 a 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.
3
<PAGE> 7
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
During the fiscal year ended September 30, 1998, the Board of Directors held
eight meetings and acted by written consent on five occasions. For the fiscal
year, each of the directors during the term of their tenure attended or
participated in at least 75% of the aggregate of (i) the total number of
meetings or actions by written consent of the Board of Directors and (ii) the
total number of meetings held by all Committees of the Board of Directors on
which each such director served. During such year the Board of Directors had an
Audit Committee, a Compensation Committee and a Stock Option Committee.
During the fiscal year ended September 30, 1998, the Audit Committee held no
meetings. The Audit Committee currently consists of two directors, Messrs.
Jackson and Schwab. 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.
During the fiscal year ended September 30, 1998, the Compensation Committee
held three meetings. The Compensation Committee currently consists of two
directors, Messrs. Jackson and Schwab. 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 and will administer the 1997 Stock Option/Stock Issuance
Plan and Employee Stock Purchase Plan.
During the fiscal year ended September 30, 1998, the Stock Option Committee
held no meetings and acted by written consent on 17 occasions. The Stock Option
Committee currently consists of one director, Angela Dawes, and one
non-director. The Stock Option Committee has the authority to grant options
covering up to 7,000 shares to new, non-officer employees of the Company.
The Company currently has no standing Nominating Committee. Nominations for
election of directors at the Annual Meeting were made by the full Board of
Directors of the Company.
DIRECTOR COMPENSATION
Directors are reimbursed for reasonable expenses incurred by them in
attending meetings of the Board of Directors and any applicable Committee
meetings. On July 15, 1997, the Company issued to 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 "Proposal 2 - Amendment to
the 1997 Stock Option/Stock Issuance Plan." Michael E.W. Jackson will receive
$20,000 in cash for his service as a Board member per fiscal year, beginning in
fiscal year 1999. Mr. Jackson will receive $3,000 for each meeting of the Board
of Directors that he attends, beginning in fiscal year 1999.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED HEREIN.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 25, 1998 by (i) each
person known by the Company to be the beneficial owner of more than five percent
of the outstanding shares of the Company's Common Stock, (ii) each of the
Company's directors and the executive officers named in the "Executive
Compensation -- Summary Compensation Table," and (iii) all current directors and
executive officers as a group.
Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934 (the "Exchange Act"). Under this rule,
certain shares may be deemed to be beneficially owned by more than one person
(if, for example, persons share the power to vote or the power to dispose of the
shares). In addition, shares are deemed to be beneficially owned by a person if
the person has the right to acquire shares (for example, upon exercise of an
option) within 60 days of the date as of which the information is provided; in
computing the percentage ownership of any person, the amount of shares is deemed
to include the amount of shares beneficially owned by such person (and only such
person) by reason of these acquisition rights. As a result, the percentage of
outstanding shares of any person as shown in the following table does not
necessarily reflect the person's actual voting power at any particular date.
4
<PAGE> 8
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED (1)(2)
- ---------------------------------------------------- ------------------------------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE OWNERSHIP
- ---------------------------------------------------- -------------------------- -------------------------
<S> <C> <C>
Stephen A. Allott (3)........................... 84,637 *
Disraeli House
90 Putney Bridge Road
London, U.K. SW18 1DA
David N. Dorrance (4)........................... 75,500 *
Disraeli House
90 Putney Bridge Road
London, U.K. SW18 1DA
Mark J. Peach (5)............................... 68,020 *
Disraeli House
90 Putney Bridge Road
London, U.K. SW18 1DA
Timothy J. Tokarsky (6).......................... 67,000 *
730 3rd Avenue, 4th Floor
New York, NY 10
Christopher J. Dawes............................. 25,025 *
139 Townsend Street
San Francisco, CA 94107
Angela Dawes..................................... 1,422,913 9.1%
14875 Landmark Blvd., Suite 216
Dallas, TX 75240
Michael E.W. Jackson............................. 55,341 *
Elderstreet Investments Ltd.
32 Bedford Road
London WC1R 4HE
David C. Schwab.................................. 112,284 *
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
Directors and Executive Officers as a group
(10 persons) (7)................................ 2,032,653 12.7%
</TABLE>
- ----------
* Less than one percent of the outstanding shares of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of November 25, 1998 are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing percentage ownership of each other person. Except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock. To the
Company's knowledge, the entities named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Percentage ownership is based on 15,615,046 shares of Common Stock
outstanding on November 25, 1998.
(3) Includes 84,637 shares of Common Stock issuable upon exercise of options
that are currently exercisable or exercisable within 60 days of November 25,
1998.
(4) Includes 75,500 shares of Common Stock issuable upon exercise of options
that are currently exercisable or exercisable within 60 days of November 25,
1998.
5
<PAGE> 9
(5) Includes 68,020 shares of Common Stock issuable upon exercise of options
that are currently exercisable or exercisable within 60 days of November 25,
1998.
(6) Includes 67,000 shares of Common Stock issuable upon exercise of options
that are currently exercisable or exercisable within 60 days of November 25,
1998.
(7) Includes 417,090 shares of Common Stock issuable upon exercise of options
that are currently exercisable or exercisable within 60 days of November 25,
1998.
6
<PAGE> 10
COMPENSATION REPORT
REPORT OF EXECUTIVE COMPENSATION
This Report describes the compensation policies and rationale applied to the
compensation paid to the Company's executive officers for the fiscal year ended
September 30, 1998.
PURPOSE
For the 1998 fiscal year the Board of Directors, with the recommendation of
the Compensation Committee, established the level of base salary and bonus
programs to be paid to the Chief Executive Officer and other executive officers
of the Company and administered the Company's 1997 Stock Option/Stock Issuance
Plan and the Employee Stock Purchase Plan. The Compensation Committee
administered the Company's 1997 Stock Option/Stock Issuance Plan with respect to
the Company's executive officers. In addition, the Board approved the individual
bonus programs to be in effect for the Chief Executive Officer and other
executive officers and certain other key employees each fiscal year.
For the 1998 fiscal year, the process used to determine executive officer
compensation levels was based upon the Board's subjective judgment. Among the
factors considered by the Board were the recommendations of the Chief Executive
Officer, Chief Financial Officer and Compensation Committee with respect to the
compensation of the Company's executive officers. However, the Board made the
final compensation decisions for such officers.
GENERAL COMPENSATION POLICY
The Company's executive compensation policy is to offer the Company's
executive officers competitive compensation opportunities based upon increasing
stockholder value and individual achievement of defined objectives. The policy
is competitive in order to recruit, retain and motivate people of needed
capabilities. It is the Company's objective to have compensation be highly
competitive with that of comparable public software companies (the "Peer
Companies"). Compensation should include meaningful equity in the Company, which
strengthens the mutuality of interests between the executive officers and the
stockholders. Each executive officer's compensation package is generally
comprised of three elements: (i) base salary, (ii) cash incentive bonuses, and
(iii) long-term common stock-based incentive awards.
BASE SALARY
The base salary for each executive officer is set on the basis of personal
performance and a review of comparable positions at the Peer Companies. The
level of base salary set for such executive officers to date has been comparable
to the average of the surveyed compensation data for the Peer Companies.
ANNUAL INCENTIVE COMPENSATION
Each year the Board or Compensation Committee will establish a set of
objectives for each executive officer, one based on Company performance and the
second based on achievement of individual objectives. At the end of the fiscal
year, the Board or Compensation Committee will evaluate the objectives to
determine whether the specified objectives were met and will determine whether
extraordinary accomplishments should be considered in determining the bonus
award. For 1998, target incentives varied by group and each officer's objectives
required achievement of his group's objectives, as well as achievement of
corporate revenue and/or corporate bookings. For 1998, actual bonuses paid
reflected an individual's accomplishment of both corporate and functional
objectives, with approximately equal weight being given to achievement of
corporate and functional objectives.
LONG-TERM INCENTIVE COMPENSATION
During the 1998 fiscal year, the Compensation Committee, in its discretion,
made option grants to Mark J. Peach, David N. Dorrance and Peter Shearan under
the 1997 Stock Option/Stock Issuance Plan. The size of each grant was set at a
level that together with past option grants the Board and the Compensation
Committee deemed appropriate to create a meaningful opportunity for stock
ownership based upon the individual's current position with the Company.
However, other factors considered include: the individual's potential for future
responsibility, the individual's performance in the recent period, and the
number of unvested options held by the individual at the time of the new grant.
7
<PAGE> 11
The grants are designed to align the interests of the executive officer with
those of the stockholders and provide each individual with a significant
incentive to manage the Company from the perspective of an owner with an equity
stake in the business. Each grant allows the officer to acquire shares of the
Company's Common Stock at a fixed price per share (the market price on the grant
date) over a specified period of time. The option generally vests in periodic
installments over a four-year period, contingent upon the executive officer's
continued employment with the Company. Accordingly, the option will provide a
return to the executive officer only if he remains in the Company's employ, and
then only if the market price of the Company's Common Stock appreciates over the
option term.
CEO COMPENSATION
The annual base salary for Mr. Dawes, the Company's former Chairman of the
Board and former President and Chief Executive Officer, was established by the
Board based on the Board's subjective evaluation of Mr. Dawes' personal
performance of his duties. Mr. Dawes was not granted an option in fiscal 1998.
TAX LIMITATION
Under the federal tax laws, a publicly held company such as Micromuse Inc.
will not be allowed a federal income tax deduction for compensation paid to
certain executive officers to the extent that compensation exceeds $1 million
per officer in any year. It is not expected that the compensation to be paid to
the Company's executive officers for the 1998 fiscal year will exceed the $1
million limit per officer. In order to qualify option grants under the Company's
1997 Stock Option/Stock Issuance Plan for an exemption available to
performance-based compensation, the stockholders have approved certain
provisions of the Plan, including a limit on the maximum number of option shares
that any one participant may receive each calendar year. Accordingly, any
compensation deemed paid to an executive officer when he exercises an
outstanding option under the 1997 Stock Option/Stock Issuance Plan with an
exercise price equal to the fair market value of the option shares on the grant
date should qualify as performance-based compensation that will not be subject
to the $1 million limitation.
BOARD OF DIRECTORS
Stephen A. Allott
Angela Dawes
David C. Schwab
Michael E.W. Jackson
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors was formed in
February, 1998 and the members of the Compensation Committee are Messrs. Jackson
and Schwab. None of the members of the Compensation Committee was at any time
during the 1998 fiscal year or at any other time an officer or employee of the
Company. No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee.
8
<PAGE> 12
STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return on
the Company's Common Stock between February 13, 1998 (the date the Company's
Common Stock commenced public trading) and September 30, 1998, with the
cumulative total return of (i) the S&P 500 Index and (ii) the Nasdaq Stock
Market - U.S. Index, over the same period. This graph assumes the investment of
$100.00 on February 13, 1998 in the Company's Common Stock, the S&P 500 Index
and the Hambrecht & Quist Software Index, and assumes the reinvestment of
dividends, if any.
The comparisons shown in the graph below are based upon historical data and
the Company cautions that the stock price performance shown in the graph below
is not indicative of, nor intended to forecast, the potential future performance
of the Company's Common Stock. Information used in the graph was obtained from
Standard & Poor's Compustat Total Return Service, a source believed to be
reliable, but the Company is not responsible for any errors or omissions in such
information.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG MICROMUSE INC.,
THE S&P 500 INDEX AND THE NASDAQ STOCK MARKET - U.S. INDEX
[GRAPH]
TOTAL SHAREHOLDER RETURN
<TABLE>
<CAPTION>
--------------------------------------------------
13-FEB-98 SEP 98
--------------------------------------------------
<S> <C> <C>
MICROMUSE INC. 100 148.96
--------------------------------------------------
S&P 500 INDEX 100 100.20
--------------------------------------------------
NASDAQ 100 103.78
--------------------------------------------------
</TABLE>
The Company effected its initial public offering on February 12, 1998 at a
per share price of $12.00. The graph above, however, commences with the closing
price of $18.88 per share on February 13, 1998 -- the date the Company's Common
Stock commenced public trading.
Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act of 1933, as amended, or the
Exchange Act, as amended, that might incorporate this Proxy Statement or future
filings made by the Company under those statutes, the Compensation Report and
Stock Performance Graph are not deemed filed with the Securities and Exchange
Commission and shall not be deemed incorporated by reference into any of those
prior filings or into any future filings made by the Company under those
statutes.
9
<PAGE> 13
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, 1998 exceeded $100,000 (collectively, the "Named Executive Officers"), for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal year ended September 30, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------
AWARDS
------------
SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- ----------------------------- ------ --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Christopher J. Dawes(1)...... 1998 $170,000 $167,000 $54,419(2) - $8,500(3)
Former President and Chief 1997 187,500 157,495 35,514(4) - 8,093(3)
Executive Officer
Stephen A. Allott (5)........ 1998 226,716 9,767 13,158(6) - -
President and Chief 1997 161,581 - - 19,033 -
Financial Officer
David N. Dorrance............ 1998 149,561 233,524 24,986(7) 20,000 -
Senior Vice President, 1997 32,158(8) - - - -
Sales
Mark J. Peach................ 1998 150,365 1,643 30,194(9) 10,000 -
Senior Vice President, 1997 108,614 - 10,541(10) 15,320 -
Development
Timothy J. Tokarsky.......... 1998 175,000 - - - -
Vice President, Business 1997 108,814 - - 77,000 -
Development
</TABLE>
- --------------
(1) Mr. Dawes ceased to be President and Chief Executive Officer in October,
1998 and ceased to be a Director in November, 1998.
(2) Includes $9,916 car allowance, $2,533 fuel payment, $11,584 payment for tax
preparation fees, $7,106 payment for a golf club membership, $8,713 payment
for a chauffeur and $12,918 for security services.
(3) Company's contributions made to the Company's U.K. pension plan which is a
defined contribution plan.
(4) Includes $14,162 car allowance, $6,530 payment for a golf club membership
and $12,975 payment for accounting fees.
(5) Mr. Allott was appointed President in October, 1998.
(6) Includes $13,158 car allowance.
(7) Includes $22,930 car allowance and $2,056 fuel payment.
(8) Mr. Dorrance commenced employment in June, 1997.
(9) Includes $26,755 car allowance and $3,439 fuel payment.
(10) Includes $8,694 car allowance.
10
<PAGE> 14
OPTION GRANTS
The following table contains information concerning the stock option grants
made to each of the Named Executive Officers in the fiscal year ended September
30, 1998. No stock appreciation rights were granted to these individuals during
such year.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANT REALIZABLE VALUE
-------------------------------- AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED APPRECIATION
UNDERLYING TO
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM(4)
GRANTED IN PRICE EXPIRATION -------------------
NAME (#)(1) 1998(2) ($/SH)(3) DATE 5% ($) 10% ($)
- ------------------------------------------------------------------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Christopher J. Dawes............... 0 - - - - -
Stephen A. Allott ................. 0 - - - -
David N. Dorrance.................. 20,000(5) 4.3% $8.00 01/20/05 $65,136 $151,795
Mark J. Peach ..................... 10,000(5) 2.15 7.00 10/23/04 28,497 66,410
Timothy J. Tokarsky................ 0 - - - - -
</TABLE>
- --------------
(1) On October 8, 1998, the Company granted Messrs. Allott and Peach option
shares at an exercise price of $8.75 per share, which is the closing price,
as reported by the Nasdaq National Market System on the option grant date.
Specifically, the Named Executive Officers received the following number of
option shares: Mr. Allott - 100,000 shares; and Mr. Peach - 25,000 shares.
(2) Based on an aggregate of 465,924 option shares granted in fiscal 1998.
(3) The exercise price per share of options granted represented the fair market
value of the underlying shares of Common Stock on the option grant date,
which is equal to the closing price, as reported by the Nasdaq National
Market System on the option grant date. 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 broker-assisted 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.
(4) 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.
(5) 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.
11
<PAGE> 15
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 1998, and no stock appreciation rights
were outstanding at the end of that year.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
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................................ 73,817 10,820 $1,105,645 $ 152,833
David N. Dorrance................................ 20,313 64,687 286,921 803,704
Mark J. Peach.................................... 73,095 19,925 1,072,430 236,441
Timothy J. Tokarsky.............................. 15,400 61,600 217,525 870,100
</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. Please see
footnote 5 to the Option Grant Table for more details.
(2) Based on the fair market value of the Company's Common Stock at fiscal year
end ($16.625 per share), and such value is equal to the closing price, as
reported by the Nasdaq National Market System, less the exercise price
payable for such shares.
12
<PAGE> 16
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company's executive officers have standard offer letters with the Company
that set forth their base salary, option grant and eligibility to participate in
employee benefit programs available to similarly situated employees. The
Company's executive officers do not have any severance agreements with the
Company, and their employment may be terminated at any time at the discretion of
the Board of Directors. Mr. Allott's offer letter also provides that he must
give the Company three months of notice prior to a resignation.
Upon a Corporate Transaction, the vesting of each outstanding option shall
automatically accelerate so that each such option shall become fully vested and
exercisable (and applicable repurchase rights shall lapse), except to the extent
any such option is assumed or replaced with a comparable option or cash
incentive program by the successor corporation. In addition, the Plan
Administrator, the Board or an authorized committee, shall have the discretion
to provide for the automatic vesting acceleration of any options upon the
occurrence of a Corporate Transaction or Change in Control or upon an
involuntary termination following such a transaction. See "Proposal 2 -
Amendment to the 1997 Stock Option/Stock Issuance Plan."
PROPOSAL NO. 2 -- AMENDMENT TO THE 1997 STOCK OPTION/STOCK ISSUANCE PLAN
The Micromuse Inc. 1997 Stock Option/Stock Issuance Plan (the "Option Plan")
was created in order to assist the Company in the recruitment, retention and
motivation of key employees who are experienced, highly qualified and in a
position to make material contributions to the Company's success. The limited
number of skilled and experienced employees in this industry are in demand by a
growing number of employers. The Company believes that stock options are
critical in attracting and retaining these key contributors.
The stockholders are being asked to vote on a proposal to approve an
amendment to the Option Plan to increase the number of shares available for
issuance. The proxy holders intend to vote all proxies received by them FOR the
Amendment to the Option Plan.
The Option Plan was adopted on March 7, 1997 and approved by the stockholders
on March 8, 1997 and was amended several times to provide for an increase in the
number of shares authorized for issuance under the Option Plan. The Board and
the stockholders approved an amendment to the Option Plan on January 20, 1998 to
provide for automatic annual increases in the share reserve and to make certain
other changes. The Option Plan was also amended on May 18, 1998 to change the
composition of the Stock Option Committee.
The Board of Directors believes that option grants and stock issuances under
the Option Plan play a critical role in the Company's efforts to attract, employ
and retain employees, directors, and consultants of outstanding ability. The
principal terms and provisions of the Option Plan are summarized below. The
summary, however, is not intended to be a complete description of all the terms
of the Option Plan. A copy of the Option Plan will be furnished by the Company
to any stockholder upon written request to the Secretary of the Company at the
executive offices in San Francisco, California.
Structure. The Option Plan is divided into:
(i) the Option Grant Program, under which eligible persons may be granted
options to purchase shares of Common Stock at an exercise price of at least 85%
of their fair market value on the grant date (to the extent required under
applicable tax or securities laws) and
(ii) the Stock Issuance Program, under which such persons may be issued
shares of Common Stock directly through the purchase of such shares at a price
of at least 85% of their fair market value at the time of their issuance or as a
bonus tied to the performance of services.
Administration. The Compensation Committee of the Board, which is comprised
of two or more non-employee Board members, may administer the Option Plan.
Committee members serve for such period of time as the Board may determine. The
Option Plan may also be administered with respect to optionees who are not
executive officers subject to the short-swing profit rules of Federal securities
laws by the Board or the Stock Option Committee. The Stock Option Committee is
comprised of one or more Board members. The Stock Option Committee may only
grant options to newly hired non-officer employees for up to 7,000 option
shares.
Subject to the terms of the Option Plan, the Plan Administrator (Compensation
Committee or Board, as applicable) has full authority to determine the:
13
<PAGE> 17
o Eligible individuals who are to receive grants under the Option Plan,
o Number of shares to be covered by each granted option,
o Date or dates on which the option is to become exercisable,
o Maximum term for which the option is to remain outstanding,
o Whether the granted option will be an incentive stock option ("Incentive
Option") that satisfies the requirements of Internal Revenue Code Section
422 or a non-statutory option not intended to meet such requirements, and
o Remaining provisions of the option grant.
The Stock Option Committee acts as Plan Administrator in very specific
circumstances and is governed by specific rules. The Stock Option Committee may
only make option grants to non-officer employees for options covering up to
7,000 shares.
Eligibility.
o Employees (including officers)
o Consultants and independent contractors and
o Non-employee members of the Board or the board of directors of any
subsidiary corporation
are eligible to receive option grants or stock issuances under the Option Plan.
As of November 25, 1998, approximately 199 persons (including seven executive
officers) were eligible to participate in the Option Plan.
Securities Subject to Option Plan.
o Subject to the adoption of Proposal 2, the maximum number of shares of
Common Stock that may be issued over the term of the Option Plan is
3,312,600 shares.
o The number of shares of Common Stock available for issuance under the Option
Plan automatically increases on October 1 of each fiscal year, starting in
1999, by a number equal to the lesser of 5% of the shares of Common Stock
then outstanding or 1,000,000 shares.
o The Company requests a share increase of 800,000 shares because:
1. The Company anticipates that it will hire approximately 25 employees per
quarter;
2. The Company needs to hire a new chief executive officer;
3. The Company needs to hire several key executives, including a vice
president of marketing;
4. The Company needs to recruit, retain and motivate these employees and
officers; and
5. The Company would like to reward exceptional performance.
o Thus, the Company requests a share increase of 800,000 shares (approximately
5% of the Company's outstanding shares) under the Option Plan to enable the
Company to hire, retain and motivate new employees during fiscal 1999,
including the recruitment of a new chief executive officer.
o Therefore, assuming that the stockholders approve Proposal 2, the number of
shares of Common Stock available for issuance under the Option Plan would
increase to 3,312,600 shares.
o Please see "Option Plan Amendments" below for a specific explanation of the
number of shares available for future option grant.
No one person participating in the Option Plan may receive options and direct
stock issuances for more than 500,000 shares of Common Stock per calendar year.
Should an option expire or terminate for any reason prior to exercise in
full, the shares subject to the portion of the option not so exercised will be
available for subsequent option grants under the Option Plan.
OPTION GRANT PROGRAM
Price and Exercisability. The option exercise price per share of an Incentive
Option must be at least 100% of the fair market value of the Common Stock on the
grant date and, of a non-statutory option, at least 85% of the fair market value
of the Common Stock on the grant date, to the extent required under applicable
tax or securities laws. Options granted under the Option Grant Program become
exercisable at such time or times and during such period as the Plan
Administrator may determine and as described in the option agreement.
14
<PAGE> 18
The exercise price may be paid in:
o Cash
o Check made payable to the Company or
o Shares of Common Stock.
Options may also be exercised through a same-day sale program, under which a
designated brokerage firm effects the immediate sale of the shares purchased
under the option and pays over to the Company, out of the sale proceeds on the
settlement date, sufficient funds to cover the exercise price for the purchased
shares plus all applicable withholding taxes.
The Compensation Committee or Board may also authorize a Company loan to the
optionee (including an officer or director) to pay the exercise price. The terms
and conditions of any such loan will be established by the Compensation
Committee or Board in its sole discretion.
No optionee is to have any stockholder rights with respect to the option
shares until the optionee has exercised the option, paid the exercise price and
become a holder of record of the shares. Options are not assignable or
transferable other than by will or the laws of descent and distribution, and
during the optionee's lifetime, the option may be exercised only by the
optionee.
Termination of Service. Any option held by the optionee at the time of
cessation of service will not remain exercisable beyond the designated
post-service exercise period. Under no circumstances, however, may any option be
exercised after the specified expiration date of the option term. Each such
option will normally during such limited period be exercisable only as to the
vested shares of Common Stock at the time of cessation of service. The
Compensation Committee or Board has complete discretion to extend the
exercisability period following the optionee's cessation of service and/or to
accelerate the exercisability and vesting of such options in whole or in part.
Such discretion may be exercised at any time while the options remain
outstanding, whether before or after the optionee's actual cessation of service.
The shares of Common Stock acquired upon the exercise of one or more options
may be subject to repurchase 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 Committee or Board has complete discretion in establishing the
vesting schedule to be in effect for any such unvested shares and may cancel the
Company's outstanding repurchase rights with respect to those shares at any
time, thereby accelerating the vesting of the shares subject to the canceled
rights.
Incentive Options. Incentive Options may only be granted to employees of the
Company or any subsidiary corporation. During any calendar year, the aggregate
fair market value (determined as of the grant date(s)) of the Common Stock for
which one or more options granted to any employee under the Option Plan (or any
other option plan of the Company or its subsidiary corporations) may for the
first time become exercisable as Incentive Options shall not exceed $100,000.
Tandem Stock Appreciation Rights. One or more optionees may be granted the
right to elect between the exercise of the underlying option for shares of
Common Stock and the surrender of that option in exchange for a cash
distribution from the Company equal to the excess of (a) the fair market value
(on the option surrender date) of the number of vested shares under the
surrendered option (or surrendered portion thereof) over (b) the option exercise
price payable for such shares. This stock appreciation right is exercisable upon
terms established by the Board or Compensation Committee.
Limited Stock Appreciation Rights. One or more officers of the Company
subject to the short-swing profit restrictions of the Federal securities laws
may be granted limited stock appreciation rights in connection with their option
grants under the Option Plan. Any option with such a limited stock appreciation
right may be surrendered by the holder, to the extent vested, upon the
successful completion of a hostile tender offer for more than 50% of the
Company's outstanding voting stock. In return, the officer will be entitled to a
cash distribution from the Company in an amount per canceled option share equal
to the excess of (i) the highest price per share of Common Stock paid in the
tender offer over (ii) the option exercise price.
STOCK ISSUANCE PROGRAM
Shares may be sold under the Stock Issuance Program at a price per share of
at least 85% of fair market value, payable in cash or through a promissory note
payable to the Company. Shares may also be issued solely as a bonus for past
services.
The issued shares may either be immediately vested upon issuance or subject
to a vesting schedule tied to the performance of service or the attainment of
performance goals. The Board or Compensation Committee will, however, have the
discretionary authority at any time to accelerate the vesting of any and all
unvested shares.
15
<PAGE> 19
GENERAL PROVISIONS
Acceleration of Vesting/Termination of Repurchase Rights. If one of the
following transactions (a "Corporate Transaction") occurs:
(i) the sale, transfer, or other disposition of all or substantially all
of the Company's assets in complete liquidation or dissolution of the
Company, or
(ii) a merger or consolidation in which securities with more than 50% of
the total combined voting power of the Company's outstanding securities are
transferred to a person or persons other than the persons holding those
securities immediately before such transaction,
each outstanding option under the Option Plan will, immediately before the
effective date of the Corporate Transaction, become fully vested and exercisable
for all of the option shares. Any repurchase right will also terminate at that
time.
However, the vesting of an outstanding option will not accelerate if and
to the extent:
(i) such option is, in connection with the Corporate Transaction, either
to be assumed by the successor corporation (or parent) or to be replaced with
a comparable option to purchase shares of the capital stock of the successor
corporation (or parent),
(ii) such option is to be replaced with a cash incentive program of the
successor corporation that preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such option or
(iii) the acceleration of such option is subject to other limitations
imposed by the Board or Compensation Committee at the time of the option
grant.
Immediately following the consummation of the Corporate Transaction, all
outstanding options will terminate and cease to be exercisable, except to the
extent assumed by the successor corporation.
Also upon a Corporate Transaction, the Company's outstanding repurchase
rights applicable to shares obtained under option exercises or shares directly
issued under the Option Plan will terminate automatically unless assigned to the
successor corporation.
For any options that are assumed or replaced in the Corporate Transaction and
do not otherwise accelerate at that time, the Board or Compensation Committee
may accelerate the vesting if the optionee experiences an involuntary
termination within 18 months following the effective date of such Corporate
Transaction. Any options so accelerated will remain exercisable for fully vested
shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the one-year period measured from the effective date of the
involuntary termination.
If one of the following transactions ("Change in Control") occurs:
(i) any person or related group of persons (other than the Company or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) acquires beneficial ownership
of more than 50% of the Company's outstanding voting stock without
the Board's recommendation, or
(ii) there is a change in Board membership over a period of 36 consecutive
months or less such that a majority of the Board members ceases by
reason of a proxy contest, to be comprised of individuals who (a)
have been Board members continuously since the beginning of such
period or (b) have been elected or nominated for selection as Board
members by the continuing Board members,
the Board or Compensation Committee has the discretion to accelerate the vesting
of outstanding options and terminate the Company's outstanding repurchase
rights. The Board or Compensation Committee also has the discretion to terminate
the Company's outstanding repurchase rights if the optionee terminates service
within a specified period following the Change in Control.
16
<PAGE> 20
The acceleration of vesting of options in the event of a Corporate
Transaction or Change in Control may be seen as an anti-takeover provision and
may have the effect of discouraging a merger proposal, a takeover attempt, or
other efforts to gain control of the Company.
Valuation. For purposes of establishing the option exercise price, stock
issuance purchase price and for all other valuation purposes under the Option
Plan, the fair market value of a share of Common Stock on any relevant date will
be the closing price per share of Common Stock on that date, as such price is
reported on the Nasdaq National Market System. The closing price of the Common
Stock on November 25, 1998 was $20.75 per share.
Changes in Capitalization. In the event any change is made to the Common
Stock issuable under the Option Plan, such as a stock split, stock dividend,
combination of shares, exchange of shares, or other change affecting the
outstanding Common Stock as a class without the Company's receipt of
consideration, appropriate adjustments will be made to:
(i) the maximum number and/or class of securities issuable under the
Option Plan,
(ii) the maximum number and/or class of securities for which any one
person may be granted options and direct stock issuances per
calendar year,
(iii) the maximum number and/or class of securities for which the share
reserve is to increase automatically each year, and
(iv) the number and/or class of securities and the exercise price per
share in effect under each outstanding option in order to prevent
the dilution or enlargement of benefits thereunder.
Each outstanding option that is assumed in connection with a Corporate
Transaction will be appropriately adjusted to apply and pertain to the number
and class of securities that would have been issued in connection with the
Corporate Transaction to the option holder had the option been exercised
immediately before the Corporate Transaction. Appropriate adjustments will also
be made to the option exercise price payable per share and to the class and
number of securities available for future issuance under the Option Plan on both
an aggregate and a per-participant basis.
Option Plan Amendments. The Board may amend or modify the Option Plan in any
and all respects whatsoever. The approval of the stockholders will be obtained
to the extent required by applicable law.
Unless sooner terminated by the Board, the Option Plan will in all events
terminate on March 6, 2006. Any options outstanding at the time of such
termination will remain in force and be governed by the option agreements and
the Option Plan that is effective on the option grant date.
As of November 25, 1998:
o Options covering 1,886,754 shares were outstanding under the Option Plan;
o 264,832 shares remained available for future option grant (but see next
paragraph);
o 361,014 shares have been issued under the Option Plan;
o The expiration dates for all such options range from March 31, 2004 to
November 23, 2008.
The Company has signed offer letters with employees who are expected to start
January 1, 1999 and based on the commitments with these new employees, the
number of shares available for future option grant on January 1, 1999 will only
be 98,432 shares.
No options have been granted on the basis of the proposed share increase.
Because the Option Plan is discretionary, benefits to be received by individual
optionees are not determinable. The table below shows, as to each of the
executive officers named in the Summary Compensation Table and the various
indicated individuals and groups, (i) the number of shares of Common Stock for
which options have been granted under the Option Plan for the one year period
ending September 30, 1998 plus the period through November 25, 1998 and (ii) the
weighted average exercise price payable per share. No direct stock issuances
were made under the Option Plan during this period.
17
<PAGE> 21
NEW PLAN BENEFITS AND OPTION GRANT TABLE
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTION EXERCISE PRICE OF
NAME AND POSITION SHARES GRANTED OPTIONS
----------------- --------- -----------------
<S> <C> <C>
Christopher J. Dawes........................ 0 0
Stephen A. Allott........................... 184,637 $ 5.54
David N. Dorrance........................... 85,000 $ 3.79
Mark J. Peach............................... 118,020 $ 3.87
Timothy J. Tokarsky......................... 77,000 $ 2.50
Executive Officers as a group (7 persons)... 614,106 $ 5.25
Non-employee directors as a group
(2 persons)............................... 0 0
All employees, including current officers
who are not executive officers, as a group
(approximately 199 persons)............... 1,886,754 $ 6.26
</TABLE>
- ----------
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS AND OTHER RIGHTS GRANTED UNDER THE
OPTION PLAN
Options granted under the Option Plan may be either incentive stock options
that satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options that are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
Incentive Stock Options. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized at
the time the option is exercised. However, the excess of the fair market value
of the purchased shares over the exercise price paid for the shares on the date
of exercise will be includable in alternative minimum taxable income. In
addition, the optionee will recognize taxable income in the year in which the
purchased shares are sold or otherwise made the subject of disposition.
1. Individual: For Federal tax purposes, dispositions are divided into two
categories: (i) qualifying and (ii) disqualifying.
o The optionee will make a qualifying disposition of the purchased shares
if the sale or other disposition of such shares is made after the optionee has
held the shares for more than 2 years after the option grant date and more than
1 year after the exercise date.
o If the optionee fails to satisfy either of these two holding periods
before the sale or other disposition of the purchased shares, then a
disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for such shares. If there is a disqualifying disposition
of the shares, then the excess of (i) the fair market value of those shares on
the date the option was exercised over (ii) the exercise price paid for the
shares will be taxable as ordinary income. Any additional gain recognized upon
the disposition will be a capital gain.
2. Company: If the optionee makes a disqualifying disposition of the
purchased shares, then the Company will be entitled to an income tax deduction
for the taxable year in which such disposition occurs. The Company's deduction
is equal to the amount of taxable income recognized by the optionee. The Company
is allowed a deduction only if the optionee makes a disqualifying disposition of
the purchased shares.
Non-Statutory Options.
1. Individual: No taxable income is recognized by an optionee upon the
grant of a non-statutory option. The optionee will in general recognize ordinary
income in the year in which the option is exercised equal to the excess of the
fair market value of the purchased shares on the exercise date over the exercise
price paid for the shares, and the optionee will be required to satisfy the tax
withholding requirements applicable to such income.
2. Company: The Company will be entitled to a business expense deduction
equal to the amount of ordinary income recognized by the optionee with respect
to the exercised non-statutory option. The deduction will in general be allowed
for the taxable year of the Company in which such ordinary income is recognized
by the optionee.
18
<PAGE> 22
Options with Repurchase Right. Special provisions of the Internal Revenue
Code apply to the acquisition of Common Stock under an option if the purchased
shares are subject to repurchase by the Company. These special provisions may be
summarized as follows:
1. If the shares acquired upon exercise of the option may be repurchased
by the Company at the original exercise price upon the optionee's service
termination before vesting in such shares, the optionee will not recognize any
taxable income at the time of exercise but will have to report as ordinary
income (for non-statutory options) and alternative minimum taxable income (for
incentive stock options), as and when the Company's repurchase right lapses, an
amount equal to the excess of (a) the fair market value of the shares on the
date such repurchase right lapses for such shares over (b) the exercise price
paid for the shares.
2. The optionee may, however, elect under Section 83(b) of the Internal
Revenue Code to include as ordinary income or alternative minimum taxable
income, as applicable, in the year of the option exercise an amount equal to the
excess of (a) the fair market value of the purchased shares on the exercise date
over (b) the exercise price paid for such shares. If the Section 83(b) election
is made, the optionee will not recognize any additional income as and when the
repurchase right lapses.
3. The tax consequence of disposing the option shares will depend on
whether the option is an incentive stock option or non-statutory option, as
described above.
Stock Appreciation Rights. An optionee who is granted a stock appreciation
right will recognize ordinary income in the year of exercise equal to the amount
of the appreciation distribution. The Company will be entitled to a business
expense deduction equal to the appreciation distribution for the taxable year of
the Company in which the ordinary income is recognized by the optionee.
Stock Issuances. The tax principles applicable to direct stock issuances
under the Option Plan will be substantially the same as those summarized above
for the exercise of non-statutory option grants and the discussion of the
repurchase right.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE AMENDMENT TO
THE 1997 STOCK OPTION/STOCK ISSUANCE PLAN.
PROPOSAL NO. 3 -- RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors has appointed the firm of KPMG Peat Marwick LLP,
independent auditors, to audit the financial statements of the Company for the
fiscal year ending September 30, 1999. KPMG Peat Marwick LLP has audited the
Company's financial statements since the fiscal year ended September 30, 1995.
A representative of KPMG Peat Marwick LLP is expected to be present at the
Annual Meeting, will have the opportunity to make a statement if he or she
desires to do so, and will be available to respond to appropriate questions. In
the event the stockholders fail to ratify the appointment, the Board of
Directors will reconsider its selection.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
SELECTION OF KPMG PEAT MARWICK LLP TO SERVE AS THE COMPANY'S INDEPENDENT
AUDITORS FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 1999.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, then President,
Chief Executive Officer and Chairman of the Board 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.
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<PAGE> 23
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 pound sterling1.00 = $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.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The members of the Board of Directors, the executive officers of the Company
and persons who hold more than 10% of the Company's outstanding Common Stock are
subject to the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended, which require them to file reports with
respect to their ownership of the Company's Common Stock and their transactions
in such Common Stock. Based upon (i) the copies of Section 16(a) reports that
the Company received from such persons for their 1998 fiscal year transactions
in the Common Stock and their Common Stock holdings and (ii) the written
representations received from one or more of such persons that no annual Form 5
reports were required to be filed by them for the 1998 fiscal year, the Company
believes that all reporting requirements under Section 16(a) for such fiscal
year were met in a timely manner by its executive officers, Board members and
greater than ten-percent stockholders, except that one late Form 3 was filed by
Michael E.W. Jackson.
FORM 10-K
THE COMPANY WILL MAIL WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF THE
COMPANY'S REPORT ON FORM 10-K FOR FISCAL YEAR 1998, INCLUDING THE FINANCIAL
STATEMENTS, SCHEDULES, AND LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO
MICROMUSE INC., 139 TOWNSEND STREET, SAN FRANCISCO, CALIFORNIA 94107, ATTN:
INVESTOR RELATIONS.
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Stockholder proposals that are intended to be presented at the 2000 Annual
Meeting that are eligible for inclusion in the Company's proxy statement and
related proxy materials for that meeting under the applicable rules of the
Securities and Exchange Commission must be received by the Company no later than
November 29, 1999 in order to be included. Pursuant to new amendments to Rule
14a-4(c) of the Securities Exchange Act of 1934, as amended, if a stockholder
who intends to present a proposal at the 2000 annual meeting of stockholders
does not notify the Company of such proposal on or prior to November 29, 1999,
then management proxies would be allowed to use their discretionary voting
authority to vote on the proposal when the proposal is raised at the annual
meeting, even though there is no discussion of the proposal in the 2000 proxy
statement. The Company currently believes that the 2000 annual meeting of
stockholders will be held during the last week of January 2000. Such stockholder
proposals should be addressed to Micromuse Inc., 139 Townsend Street, San
Francisco, CA 94107, Attn: Investor Relations.
20
<PAGE> 24
OTHER MATTERS
The Board knows of no other matters to be presented for stockholder action at
the Annual Meeting. However, if other matters do properly come before the Annual
Meeting or any adjournments or postponements thereof, the Board intends that the
persons named in the proxies will vote upon such matters in accordance with
their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS
OF MICROMUSE INC.
San Francisco, California
January 6, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE ANNUAL MEETING. IF
YOU DECIDE TO ATTEND THE ANNUAL MEETING AND WISH TO CHANGE YOUR PROXY VOTE, YOU
MAY DO SO AUTOMATICALLY BY VOTING IN PERSON AT THE MEETING.
THANK YOU FOR YOUR ATTENTION TO THIS MATTER. YOUR PROMPT RESPONSE WILL
GREATLY FACILITATE ARRANGEMENTS FOR THE ANNUAL MEETING.
21
<PAGE> 25
PROXY MICROMUSE INC. PROXY
139 TOWNSEND STREET, SAN FRANCISCO CA 94107
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF MICROMUSE INC.
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JANUARY 28, 1999
The undersigned holder of Common Stock, par value $0.01, of Micromuse Inc. (the
"Company") hereby appoints Michael B. Taylor proxy for the undersigned, with
full power of substitution, to represent and to vote as specified in this Proxy
all Common Stock of the Company that the undersigned stockholder would be
entitled to vote if personally present at the Annual Meeting of Stockholders
(the "Annual Meeting") to be held on Thursday, January 28, 1999 at 10:00 a.m.
pacific standard time, at the Sheraton Palace Hotel, 2 New Montgomery Street,
San Francisco, California, 94105 and at any adjournments or postponements of the
Annual Meeting. The undersigned stockholder hereby revokes any proxy or proxies
heretofore executed for such matters.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER AS
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR THE ELECTION OF THE DIRECTORS, FOR PROPOSAL 2 AND FOR
PROPOSAL 3, AND IN ACCORDANCE WITH THE DETERMINATION OF THE BOARD OF DIRECTORS
AS TO ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING. THE
UNDERSIGNED STOCKHOLDER MAY REVOKE THIS PROXY AT ANY TIME BEFORE IT IS VOTED BY
DELIVERING TO THE CORPORATE SECRETARY OF THE COMPANY EITHER A WRITTEN REVOCATION
OF THE PROXY OR A DULY EXECUTED PROXY BEARING A LATER DATE, OR BY APPEARING AT
THE ANNUAL MEETING AND VOTING IN PERSON.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE DIRECTORS,
"FOR" PROPOSAL 2 AND "FOR" PROPOSAL 3. TO VOTE AT THE ANNUAL MEETING IN
ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS OF MICROMUSE INC.,
YOU MAY SIGN AND DATE THE REVERSE SIDE OF THIS CARD WITHOUT CHECKING ANY BOX.
PLEASE MARK, SIGN, DATE AND RETURN THIS CARD PROMPTLY USING THE ENCLOSED
RETURN ENVELOPE. IF YOU RECEIVE MORE THAN ONE PROXY CARD, PLEASE SIGN AND RETURN
ALL CARDS IN THE ENCLOSED ENVELOPE.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
(Reverse)
MICROMUSE INC.
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
1. To elect the following directors to serve for a term ending upon the 2001
Annual Meeting of Stockholders or until their successors are elected and
qualified: Nominees: Stephen A. Allott, Angela Dawes, David C. Schwab
[ ] FOR [ ] WITHHELD [ ] FOR all nominees, except for
nominees written below.
---------------------------------------------------------------------------
NOMINEE EXCEPTION(S)
2. To approve an amendment to the 1997 Stock Option/Stock Issuance Plan to
increase the number of shares available for issuance.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To ratify the appointment of KPMG Peat Marwick LLP as the Company's
independent accountants for the fiscal year ending September 30, 1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Annual Meeting.
The undersigned acknowledges receipt of the accompanying Notice of Annual
Meeting of Stockholders and Proxy Statement.
Date: ________________________________, 1999
Signature: _________________________________
Signature (if held jointly):
____________________________________________
Please date and sign exactly as your name(s)
is (are) shown on the share certificate(s)
to which the Proxy applies. When shares are
held as joint-tenants, both should sign.
When signing as an executor, administrator,
trustee, guardian, attorney-in fact or other
fiduciary, please give full title as such.
When signing as a corporation, please sign
in full corporate name by President or other
authorized officer. When signing as a
partnership, please sign in partnership name
by an authorized person.
