<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________ .
Commission file number 000-23783
MICROMUSE INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3288385
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
139 TOWNSEND STREET
SAN FRANCISCO, CALIFORNIA 94107
(415) 538-9090
(Address, including ZIP code, and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
15,879,925 shares of Common Stock, $0.01 par value, were outstanding as of
January 31, 1999.
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MICROMUSE INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at December 31, 1998 and
September 30, 1998 3
Condensed Consolidated Statements of Operations for the three
months ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the three
months ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantative and Qualitative Disclosures About Market Risk Derivatives
and Financial Investments 14
PART II - Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MICROMUSE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,056 $ 22,798
Short-term investments 35,156 40,452
Accounts receivable 6,213 6,495
Prepaid expenses and other current assets 1,129 1,374
-------- --------
Total current assets 57,554 71,119
Property and equipment, net 3,531 2,968
Long-term investments 9,498 6,557
-------- --------
$ 70,583 $ 80,644
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,056 $ 2,073
Accrued expenses 4,373 3,327
Deferred revenue 5,540 7,526
-------- --------
Total current liabilities 10,969 12,926
Stockholders' equity:
Preferred stock; $0.01 par value; 5,000 shares authorized
no shares issued and outstanding -- --
Common stock; $0.01 par value; 60,000 shares authorized;
16,160 and 16,049 shares outstanding as of December 31,
and September 30, 1998, respectively 161 160
Additional paid-in capital 79,363 79,159
Treasury stock, at cost: 500 shares at December 31, 1998 (9,540) --
Deferred compensation (145) (159)
Accumulated other comprehensive losses (144) (42)
Accumulated deficit (10,081) (11,400)
-------- --------
Total stockholders' equity 59,614 67,718
-------- --------
$ 70,583 $ 80,644
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements
3
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MICROMUSE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
License $ 8,527 $ 3,735
Maintenance and services 2,301 1,094
-------- --------
Total revenues 10,828 4,829
Cost of revenues:
License 510 315
Maintenance and services 1,307 762
-------- --------
Total cost of revenues 1,817 1,077
-------- --------
Gross profit 9,011 3,752
Operating expenses:
Sales and marketing 5,348 3,144
Research and development 1,740 1,069
General and administrative 1,373 892
-------- --------
Total operating expenses 8,461 5,105
-------- --------
Income (loss) from operations 550 (1,353)
Other income, net 916 50
-------- --------
Income (loss) before income taxes 1,466 (1,303)
Income taxes 147 --
-------- --------
Net income (loss) 1,319 (1,303)
-------- --------
Accretion on redeemable convertible
preferred stock -- (890)
-------- --------
Net income (loss) applicable to holders
of common stock $ 1,319 $ (2,193)
======== ========
Basic and diluted net income (loss) per share $ 0.08 $ (0.35)
Weighted average shares used in computing:
Basic net income (loss) per share 15,862 6,183
Diluted net income (loss) per share 17,120 6,183
</TABLE>
See accompanying notes to the condensed consolidated financial statements
4
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MICROMUSE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
December 31,
--------------------------
1998 1997
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,319 $ (1,303)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 362 286
Amortization of deferred employee compensation 14 14
Changes in operating assets and liabilities:
Accounts receivable 282 (1,129)
Prepaid expenses and other current assets 245 938
Accounts payable (1,017) (842)
Accrued expenses 1,046 (720)
Deferred revenue (1,986) 2,075
-------- --------
Net cash provided by (used in) operating
activities 265 (681)
-------- --------
Cash flows from investing activities:
Capital expenditures (925) (335)
Proceeds from the sale of investments 2,355 --
-------- --------
Net cash provided by (used in) investing activities 1,430 (335)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 205 10
Purchase of treasury stock (9,540) (5,000)
-------- --------
Net cash used in financing activities (9,335) (4,990)
-------- --------
Effects of exchange rate changes on cash and cash
equivalents (102) (52)
-------- --------
Net decrease in cash and cash equivalents (7,742) (6,058)
Cash and cash equivalents at beginning of period 22,798 13,741
-------- --------
Cash and cash equivalents at end of period $ 15,056 $ 7,683
======== ========
Supplemental disclosures of cash flow information:
Noncash financing activities:
Accretion on redeemable convertible preferred stock -- 890
</TABLE>
See accompanying notes to the condensed consolidated financial statements
5
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MICROMUSE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements are the unaudited historical
financial statements of Micromuse Inc. and subsidiaries (the "Company") and
reflect all adjustments (consisting only of normal recurring accruals) that, in
the opinion of management, are necessary for a fair presentation of interim
period results. These condensed consolidated financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's Form 10-K and Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission on December 29, 1998 and July 28, 1998,
respectively. The September 30, 1998 consolidated balance sheet included herein
was derived from audited financial statements, but does not include all
disclosures, including notes, required by generally accepted accounting
principles.
The results of operations for the current interim period are not necessarily
indicative of results to be expected for the entire current year or other future
interim periods.
Use of Estimates
The preparation of condensed 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 condensed 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.
Investments
The Company has invested in certain marketable securities that are categorized
as held-to-maturity. The fair value of these investments, which are accounted
for using the amortized cost-basis of accounting, approximates their respective
carrying value defined as the amount at which the instrument could be exchanged
in a current transaction between willing parties.
Per Share Data
Basic net income (loss) per share is calculated using the weighted-average
number of common shares outstanding during the period. Diluted net income (loss)
per share is calculated using 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 conversion of the redeemable
convertible preferred stock and the assumed exercise of outstanding options to
purchase common stock using the treasury stock method. Excluded from the
computation of the loss per share for the quarter ended December 31, 1997 were
approximately 4.5 million shares of redeemable convertible preferred stock and
options to acquire 1.4 million shares of common stock, with a weighted average
exercise price of $2.56 per share, because their effect would be anti-dilutive.
A reconciliation of the numerators and denominators used in the basic and
diluted net income (loss) per share amounts follows:
6
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MICROMUSE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Three months ended
December 31,
1998 1997
------- -------
<S> <C> <C>
Numerator for basic and diluted net income (loss)
applicable to holders of common stock $ 1,319 $(2,193)
======= =======
Denominator for basic net income (loss) per
share - weighted-average shares outstanding 15,862 6,183
Effect of dilutive common stock options 1,258 --
------- -------
Denominator for diluted net income (loss)
per share 17,120 6,183
======= =======
</TABLE>
Recent Pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under SFAS No. 133, entities are required to carry all
derivative instruments in the balance sheet at fair value. The accounting for
changes in the fair value of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and, if so, the
reason for holding it. The Company must adopt SFAS No. 133 by July 1, 1999.
The Company does not anticipate that SFAS No. 133 will have an effect on its
financial statements.
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 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.
7
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MICROMUSE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. COMMON STOCK REPURCHASE PROGRAM
In October 1998, the Board of Directors authorized the repurchase of up to 1.5
million shares, or approximately 9% percent of the Company's outstanding common
stock. As of December 31, 1998, the Company had repurchased 500,000 shares of
its outstanding common stock for approximately $9.5 million pursuant to the
repurchase program. The repurchased shares are held as treasury stock and are
available for general corporate purposes including funding the Company's stock
option and employee stock purchase plans. In January 1999, the Company announced
the termination of the repurchase program.
8
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MICROMUSE INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the condensed
consolidated historical financial information and the notes thereto included in
Item 1 of this Quarterly Report on Form 10-Q and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Form 10-K and Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission on December 29, 1998 and July 28, 1998,
respectively.
The statements contained in this Form 10-Q that are not purely historical are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's expectations,
beliefs, hopes, intentions or strategies regarding the future. All
forward-looking statements in this Form 10-Q are based upon information
available to the Company as of the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. Actual results could
differ materially from the Company's current expectations. Factors that could
cause or contribute to such differences include, but are not limited to:
variation in demand for the Company's software products and services; the level
and timing of sales; the extent of product and price competition; introductions
or enhancements of products or delays in introductions or enhancements of
products; hiring and retention of personnel; changes in the mix of products and
services sold; general domestic and international economic and political
conditions; and other factors and risks discussed in "Risk Factors" in the
Company's Form 10-K and Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission on December 29, 1998 and July 28, 1998,
respectively, and elsewhere in this Quarterly Report.
OVERVIEW
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.
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. 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.
9
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MICROMUSE INC.
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:
<TABLE>
<CAPTION>
Three months ended
December 31,
------------------
AS A PERCENTAGE OF TOTAL REVENUES: 1998 1997
------ ------
<S> <C> <C>
Revenues:
License 78.7% 77.3%
Maintenance and services 21.3 22.7
----- -----
Total revenues 100.0 100.0
Cost of revenues:
License 4.7 6.5
Maintenance and services 12.1 15.8
----- -----
Total cost of revenues 16.8 22.3
----- -----
Gross profit 83.2 77.7
Operating expenses:
Sales and marketing 49.4 65.1
Research and development 16.0 22.1
General and administrative 12.7 18.5
----- -----
Total operating expenses 78.1 105.7
----- -----
Income (loss) from operations 5.1 (28.0)
Other income, net 8.4 1.0
----- -----
Income (loss) before income taxes 13.5 (27.0)
Income taxes 1.3 --
----- -----
Net income (loss) 12.2 (27.0)
Accretion on redeemable convertible
preferred stock -- (18.4)
----- -----
Net income (loss) applicable to holders
of common stock 12.2 (45.4)
===== =====
AS A PERCENTAGE OF RELATED REVENUES:
Cost of license revenues 6.0% 8.4%
Cost of maintenance and services revenues 56.8 69.7
</TABLE>
Revenues. The Company's revenues increased to $10.8 million in the quarter ended
December 31, 1998 from $4.8 million in the quarter ended December 31, 1997.
License revenues increased to $8.5 million in the quarter ended December 31,
1998 from $3.7 million for the quarter ended December 31, 1997. The growth of
license revenues was primarily due to an increase in the number of product
licenses sold, reflecting the increased acceptance of Netcool/OMNIbus and the
expansion of the Company's sales organizations and product offering. Maintenance
and services revenues increased to $2.3 million in the quarter ended December
31, 1998 from $1.1 million in the quarter ended December 31, 1997. The increase
in maintenance and services revenues was 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
10
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MICROMUSE INC.
revenue increased to 79% in the quarter ended December 31, 1998 from 77% in the
same period of the prior year, due primarily to an increased focus by the
Company in generating license revenues.
Cost of Revenues. The cost of license revenues consists primarily of technology
license fees paid to third-party software vendors and production costs. Cost of
license revenue as a percentage of license revenues decreased to 6% in the first
quarter of fiscal 1999 from 8% in the same period of the prior year due to
economies of scale. The 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
as a percentage of maintenance and services revenues decreased to 57% in the
first quarter of fiscal 1999 from 70% in the same period of the prior year. This
decline, which was principally due to a proportionally greater percentage of
higher-margin maintenance revenues, was partially offset by increased personnel,
facilities, and travel costs associated with expanding the customer support and
technical service organizations.
Sales and Marketing Expenses. Sales and marketing expenses increased to $5.3
million in the quarter ended December 31, 1998 from $3.1 million in the quarter
ended December 31, 1997. This increase was 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 to 49% in the
first quarter of fiscal 1999 from 65% in the same period of the prior year. This
reduction was primarily due to net revenues increasing at a faster rate than
sales and marketing expenses.
Research and Development Expenses. Research and development expenses increased
to $1.7 million in the quarter ended December 31, 1998 from $1.1 million in the
quarter ended December 31, 1997. This increase was the 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 to 16% in the
first quarter of fiscal 1999 from 22% in the same period of the prior year. This
reduction was primarily due to net revenues increasing at a faster rate than
research and development expenses.
General and Administrative Expenses. General and administrative expenses
increased to $1.4 million in the quarter ended December 31, 1998 from $892,000
in the quarter ended December 31, 1997. This increase was primarily due to
increased personnel costs, professional fees, facilities costs and associated
expenses to support the Company's increased scale of operations. General and
administrative expenses as a percentage of revenues declined to 13% in the first
quarter of fiscal 1999 from 19% in the same period of the prior year. This
reduction was primarily due to net revenues increasing at a faster rate than
general and administrative expenses.
Other Income, net. Other income increased to $916,000 in the quarter ended
December 31, 1998 from $50,000 in the quarter ended December 31, 1997. Other
income for the quarter ended December 31, 1998 includes the interest earned from
the proceeds raised from the Company's public offerings. The interest earned in
the same period of the prior year was partially offset by the imputed interest
expense related to the issuance of a warrant to purchase 1.5 million shares of
Series A preferred stock at a per share exercise price of $2.00 issued in
connection with the provision of a line of credit to the Company.
11
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MICROMUSE INC.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had $15.1 million in cash and cash
equivalents and $44.7 million in marketable securities. The net use of cash and
cash equivalents in the first quarter of fiscal 1999 was due primarily to the
$9.5 million used to purchase treasury stock and the decline in deferred
revenues. The decline in deferred revenues reflects principally the delivery of
previously undelivered product. These uses were partially offset by net income
of $1.3 million and the proceeds from the sale of investments.
The net use of cash and cash equivalents in the first quarter of the prior year
was due primarily to the $5.0 million used to purchase treasury stock, the
decrease in accounts payable and accrued expenses, the net loss and the increase
in accounts receivable. The decrease in accounts payable and accrued expenses
was due to the timing of payments. The increase in accounts receivable reflects
the sequential increase in revenues. These uses were partially offset by the
increase in deferred revenues and the decrease in prepaid expenses. The increase
in deferred revenues includes additional maintenance plans related to the
growing installed base of customers. The decrease in prepaid expenses was due to
the utilization of advances related to tradeshow events that occurred during the
quarter.
The Company believes that its current cash balances 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
A significant amount of the demand that the Company has experienced in recent
years for applications software may be generated by customers in the process of
replacing and upgrading applications in order to accommodate the change in date
to the Year 2000. Once such customers have completed their preparations, the
software industry and the Company may experience a significant deceleration from
the strong annual growth rates recently experienced in the applications software
marketplace.
Although the Company has designed and tested its products to be Year 2000
compliant, there can be no assurance that the Company's current products do not
contain undetected errors or defects associated with Year 2000 date functions
that may result in material costs to the Company. In addition, certain
components of the Company's products process timestamp information from
third-party applications or local operating systems. As a result, if such
third-party applications or local operating systems are not Year 2000 compliant,
the Company's products that process such timestamp information may not be Year
2000 compliant. The Company is currently evaluating Year 2000-related risks and
corrective actions in connection with such third-party applications and local
operating systems.
12
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MICROMUSE INC.
Some commentators have stated that a significant amount of litigation will arise
out of Year 2000 compliance issues, and the Company is aware of a growing number
of lawsuits against other software vendors. Because of the unprecedented nature
of such litigation, it is uncertain to what extent the Company may be affected
by it. In addition, in the Company's standard license agreements, the Company
provides certain warrants to licensees that its software routines and programs
are Year 2000 compliant. If any of the Company's licensees experience Year 2000
problems, such licensees 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. With
respect to its internal information technology systems (including information
technology-based office facilities such as data and voice communications, and
building management and security systems), the Company is currently evaluating
the adoption of standard industry practices, as published by the British
Standards Institute, in preparing for the Year 2000 date change. The Company's
Year 2000 internal readiness program primarily covers: taking inventory of
hardware, software and embedded systems, assessing business and customer
satisfaction risks associated with such systems, creating action plans to
address known risks, executing and monitoring action plans, and contingency
planning. The Company currently is conducting (i) a review of its vendors and
service providers to evaluate Year 2000 readiness and (ii) ongoing risk
analysis. The Company expects to substantially complete Year 2000 readiness
preparations at the end of the first quarter of calendar 1999 with respect to
its core business and software systems and at the end of the second quarter of
calendar 1999 with respect to its hardware systems. In each case, the Company
expects to continue extensive testing through calendar 1999. The Company does
not expect the total costs associated with preparing its internal systems for
the Year 2000 to exceed $350,000. Although the Company does not currently
believe that it will experience material disruptions in its business associated
with preparing its internal systems for the Year 2000, there can be no
assurances that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal systems, which are composed of third-party
software, third-party hardware that contains embedded software and the Company's
own software products. The most reasonably likely worst case scenarios would
include: (i) corruption of data contained in the Company's internal information
systems, (ii) hardware failure and (iii) the failure of infrastructure services
provided by government agencies and other third parties (e.g., electricity,
phone service, water transport, internet services, etc.). The Company is in the
process of conducting its contingency planning for high-risk areas at this time
and is scheduled to commence contingency planning for medium to low-risk areas
in January 1999. The Company expects its contingency plans to include, among
other things, manual "work-arounds" for software and hardware failures, as well
as substitution of systems, if necessary.
Various European countries introduced 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.
13
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MICROMUSE INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVES AND FINANCIAL INSTRUMENTS
FOREIGN CURRENCY HEDGING INSTRUMENTS
The Company transacts business in various foreign currencies. Accordingly, the
Company is subject to exposure from adverse movements in foreign currency
exchange rates. This exposure is primarily related to local currency
denominated revenues and operating expenses in the U.K. However, as of
December 31, 1998, the Company had no hedging contracts outstanding.
The Company currently does not use financial instruments to hedge local currency
denominated operating expenses in the U.K. Instead, the Company believes that a
natural hedge exists, in that local currency revenues will substantially offset
the local currency denominated operating expenses. The Company assesses the need
to utilize financial instruments to hedge currency exposures on an ongoing
basis.
The Company does not use derivative financial instruments for speculative
trading purposes, nor does the Company hedge its foreign currency exposure in a
manner that entirely offsets the effects of changes in foreign exchange rates.
The Company regularly reviews its hedging program and may as part of this
review determine at any time to change its hedging program.
FIXED INCOME INVESTMENTS
The Company's exposure to market risks for changes in interest rates relate
primarily to investments in debt securities issued by U.S. government agencies
and corporate debt securities. The Company places its investments with high
credit quality issuers and, by policy, limits the amount of the credit exposure
to any one issuer.
The Company's general policy is to limit the risk of principal loss and ensure
the safety of invested funds by limiting market and credit risk. All highly
liquid investments with a maturity of three months or less at the date of
purchase are considered to be cash equivalents; investments with maturities
between three months or less are considered cash equivalents; investments with
maturities between three and twelve months are considered to be short-term
investments; investments with maturities in excess of twelve months are
considered to be long-term investments. The weighted average pre-tax interest
rate on the investment portfolio is approximately 5.6%. The Company does not
expect any material loss with respect to its investment portfolio.
14
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MICROMUSE INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceeding.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on January 28, 1999 in San
Francisco, California. Of the 15,635,763 shares outstanding as of the record
date, 12,147,779 shares were present or represented by proxy at the meeting. The
following matters were submitted to a vote of security holders:
(1) To elect the following to serve as Directors of the Company:
<TABLE>
<CAPTION>
VOTES
NOMINEE VOTES FOR ABSTAINING
----------------- ---------- ----------
<S> <C> <C>
Stephen A. Allott 12,147,504 275
Angela Dawes 12,147,504 275
David C. Schwab 12,147,504 275
</TABLE>
(2) To amend the 1997 Stock Option/Stock Issuance Plan to provide for an
increase of 800,000 shares:
<TABLE>
<S> <C>
Votes For 5,845,811
Votes Against 4,654,688
Votes Abstaining 25,713
Non Votes 1,621,567
</TABLE>
(3) To ratify the Company's appointment of KPMG as independent accountants
for the Company for the Company for the fiscal year ending September 30,
1999.
<TABLE>
<S> <C>
Votes For 12,116,560
Votes Against 30,863
Votes Abstaining 356
</TABLE>
ITEM 5. OTHER INFORMATION.
Not applicable.
15
<PAGE> 16
MICROMUSE INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- ---------------------------------------------------------------------------------------
<S> <C>
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.
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.
27.1 Financial Data Schedule
</TABLE>
+ Incorporated by reference from the exhibit of the same
number in the Registrant's Registration Statement on Form S-1
(Registration No. 333-42177) as filed with the SEC on February 12,
1998.
++ Incorporated by reference from the exhibit of the same
number in the Registrant's Registration Statement on Form S-1
(Registration No. 333-58975) as filed with the SEC on July 28,
1998.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
December 31, 1998.
16
<PAGE> 17
MICROMUSE INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on February 11, 1999.
MICROMUSE INC.
(Registrant)
By: /s/ STEPHEN A. ALLOTT
--------------------------------------------
Stephen A. Allott
Director, President and Chief Financial Officer
(Principal Executive and Financial Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOUND ON PAGES 3 AND 4 OF THIS FORM 10-Q, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,056
<SECURITIES> 44,654
<RECEIVABLES> 6,366
<ALLOWANCES> (153)
<INVENTORY> 0
<CURRENT-ASSETS> 57,554
<PP&E> 6,750
<DEPRECIATION> (3,219)
<TOTAL-ASSETS> 70,583
<CURRENT-LIABILITIES> 10,969
<BONDS> 0
0
0
<COMMON> 69,984
<OTHER-SE> (10,370)
<TOTAL-LIABILITY-AND-EQUITY> 70,583
<SALES> 8,527
<TOTAL-REVENUES> 10,828
<CGS> 510
<TOTAL-COSTS> 10,278
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> 1,466
<INCOME-TAX> 147
<INCOME-CONTINUING> 1,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,319
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
