SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: DECEMBER 31, 1999
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)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
As disclosed in the Micromuse Inc. ("Micromuse") Form 10-K as filed with the
Securities and Exchange Commission on December 28, 1999, Micromuse entered into
an agreement on November 2, 1999, and subsequently closed the agreement on
December 28, 1999, to acquire all of the outstanding common and preferred shares
of Calvin Alexander Networking, Inc. ("CAN"), a privately-held company that
develops leading-edge network auto-discovery technology. Under the terms of the
acquisition agreement, Micromuse issued approximately $43 million worth of its
common stock to acquire CAN. The transaction was accounted for under the
purchase method of accounting and was treated as a tax-free reorganization for
federal income tax purposes. Certain agreements have been made to promote the
retention and motivation of CAN employees. A portion of the consideration for
the transaction is subject to a one-year lock-up agreement and a one-year price
guarantee.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The following financial statements of the business acquired are filed as part of
this report, where indicated.
Page
(a) Financial Statements of Business Acquired:
Independent Auditors' Report 3
Balance Sheet as of September 30, 1999 4
Statements of Operations for the three months and the period
October 28, 1998 (date of inception) through December 31,
1999 (unaudited), and the period October 28, 1998 (date of
inception) through September 30, 1999 5
Statements of Cash Flows for the three months and the period
October 28, 1998 (date of inception) through December 31,
1999 (unaudited), and the period October 28, 1998 (date
of inception) through September 30, 1999 6
Notes to Financial Statements 7
(b) Pro forma Financial Information:
Unaudited Pro Forma Combined Condensed Statement of
Operations for the year ended September 31, 1999 11
Unaudited Pro Forma Combined Condensed Statement of
Operations for the three months ended December 31, 1999 12
Notes to Pro Forma Financial Statements 13
(c) Exhibits 14
Signature 16
2
<PAGE>
To the Board of Directors and
Stockholders Calvin Alexander Networking, Inc.
We have audited the accompanying balance sheet of Calvin Alexander
Networking, Inc. (a development stage company) as of September 30,
1999, and the related statements of operations and accumulated
deficit, and cash flows for the period October 28, 1998 (date of
inception) through September 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Calvin Alexander Networking,
Inc. and the results of its operations and its cash flows for the period October
28, 1998 (date of inception) through September 30, 1999, in conformity with
generally accepted accounting principles.
Bloom Hochberg & Co., P.C.
New York, New York
November 30, 1999
3
<PAGE>
CALVIN ALEXANDER NETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
ASSETS
September 30,
CURRENT ASSETS: 1999
------
Cash $ 356,696
Other current assets 10,500
-----------
Total current assets 367,196
PATENTS AND TRADEMARKS, at cost, net of
accumulated amortization of $780 22,547
PROPERTY AND EQUIPMENT, at cost net of
accumulated depreciation (Notes A(2) and C)) 101,383
SECURITY DEPOSITS 63,317
-----------
TOTAL ASSETS $ 554,443
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses and other current liabilities $ 111,362
-----------
COMMITMENTS AND CONTINGENCIES (Note F):
STOCKHOLDERS' EQUITY (Note B):
Common stock: par value $.01 per share;
authorized 2,600,000 shares, issued and
outstanding 1,800,000 shares 18,000
Convertible series A preferred stock: par
value $.01 per share; authorized 400,000
shares, issued and outstanding 200,000
shares; liquidation preference $999,980 2,000
Paid-in-capital, net of related expenses 1,008,797
Due from stockholders (50,000)
Deficit accumulated during the
development stage (535,716)
-----------
Total stockholders' equity 443,081
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 554,443
===========
See notes to financial statements.
4
<PAGE>
CALVIN ALEXANDER NETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Period from
October 28, 1998
(inception Period from
date) Three months October 28, 1998
through ended (inception date)
September December through December
30, 1999 31, 1999 31, 1999
--------- --------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUE $ -- $ -- $ --
--------- --------- ---------
COSTS AND EXPENSES:
Salaries 226,634 111,081 337,715
Payroll taxes 19,493 7,849 27,342
Rent 41,737 8,290 50,027
Professional fees 112,700 98,383 211,083
Travel and entertainment 28,122 8,403 36,525
Advertising and promotion 34,919 792 35,711
Depreciation and amortization (Notes A(2)
and C) 10,924 1,200 12,124
Other general and administrative expenses 65,169 67,759 132,928
--------- --------- ---------
Total costs and expenses 539,698 303,757 843,455
--------- --------- ---------
LOSS FROM OPERATIONS (539,698) (303,757) (843,455)
Interest income 4,662 535 5,197
Income taxes (Note A(3)) (680) -- (680)
--------- --------- ---------
NET LOSS (535,716) (303,222) (838,938)
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE:
Beginning of the period -- (535,716) --
--------- --------- ---------
End of the period $(535,716) $(838,938) $(838,938)
========= ========= =========
</TABLE>
See notes to financial statements.
5
<PAGE>
CALVIN ALEXANDER NETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
October 28, 1998
(inception Three Period from
date) months October 28, 1998
through ended (inception date)
September December through December
30, 1999 31, 1999 31, 1999
--------- --------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CHANGE IN CASH:
Cash flows from operating activities:
Net loss $(535,716) $(303,222) $(838,938)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 10,924 1,200 12,124
Loss on disposition of assets -- 32,573 32,573
Change in other current assets (10,500) 10,437 (63)
Change in security deposits (63,317) 4,400 (58,917)
Change in accrued expenses 111,362 (58,349) 53,013
--------- --------- ---------
Net cash used in operating activities (487,247) (312,961) (800,208)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (111,527) -- (111,527)
Costs of obtaining patents and trademarks (23,327) -- (23,327)
--------- --------- ---------
Net cash used in investing activities (134,854) -- (134,854)
--------- --------- ---------
Cash flows from financing activities:
Contributions of capital, net of related
expenses 978,797 -- 978,797
--------- --------- ---------
Net increase (decrease) in cash 356,696 (312,961) 43,735
Cash, beginning of the period -- 356,696 --
--------- --------- ---------
Cash, end of the period $ 356,696 $ 43,735 $ 43,735
========= ========= =========
</TABLE>
See notes to financial statements.
6
<PAGE>
CALVIN ALEXANDER NETWORKING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 28, 1998 (DATE OF INCEPTION)
THROUGH SEPTEMBER 30, 1999
(Note A) Organization and Summary of Significant Accounting Policies:
(1) Organization:
Calvin Alexander Networking, Inc. (the "Company") has been in the
development state since its inception on October 28, 1998. It is primarily
engaged in the development of software that finds and identifies problems
in computer networks.
(2) Property, Equipment and Depreciation:
Property and equipment are recorded at cost. Depreciation is computed
using accelerated methods over the estimated useful lives of the assets.
When properties are retired, or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts, and the
resulting gain or loss is credited or charged to operations. The policy of
the Company is to charge amounts expended for maintenance and repairs to
expense and to capitalize expenditures for major replacements and
betterments.
(3) Income Taxes:
The Company has adopted Statement of Financial Accounting Standards No.
109 (SFAS No. 109). SFAS No. 109 requires the recognition of deferred tax
assets and liabilities for the future tax consequences attributable to
differences between the financial statement carrying amount of existing
assets and liabilities and their respective tax bases. It also requires an
adjustment of deferred tax balances for tax rate changes.
(4) Use of Estimates:
The preparation of 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
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
7
<PAGE>
(Note A) Organization and Summary of Significant Accounting Policies
(continued):
(5) Advertising and Promotion Costs:
The Company expenses advertising and promotion costs as incurred.
(6) Research and Development Costs:
Research and development costs are charged to operations when incurred and
are included in operating expenses.
(Note B) Stockholders' Equity:
Capital stock consists of the following at September 30, 1999:
Common stock issued to founders: par value $.01 per share;
authorized 2,600,000 shares, issued and outstanding 1,800,000
shares $18,000
Cumulative, convertible, series A preferred stock at a rate per
annum equal to the discount rate charged by the Federal Reserve
Banks: par value $.01 per share; authorized 400,000 shares,
issued and outstanding 200,000 shares; each share of preferred
stock is convertible into one share of common stock at the
option of the holder. $ 2,000
(Note C) Property and Equipment:
The following is a summary of property and equipment as of September 30, 1999:
Depreciable Accumulated Net Book
Life Cost Depreciation Value
---- ---- ------------ -----
Computer equipment 5 years $ 83,556 $ 4,955 $ 78,601
Furniture and fixtures 7 years 27,971 5,189 22,782
-------- ------- --------
Totals $111,527 $10,144 $101,383
======== ======= ========
Depreciation expense amounted to $10,144.
(Note D) Concentration of Risk:
The Company maintains cash accounts at a high quality financial
institution. While the Company attempts to limit any financial exposure,
its deposit balances may, at times, exceed federally insured limits. The
Company has not experienced any losses on such accounts.
8
<PAGE>
(Note E) Income Taxes:
The loss for income tax purposes will be substantially less than the loss
in the accompanying financial statements, due to differences in treatment
of research and development costs. However, no deferred tax assets have
been established herein, due to the uncertainty of the Company earning
significant taxable income in the future.
(Note F) Commitments and Contingencies:
The Company leases office space under an agreement which expires during
September, 2009. This agreement provides for base rent plus additional
charges, as defined, including real estate taxes over base amounts. Future
minimum lease payments payable for each of the next five years and in the
aggregate are as follows:
2000 $ 224,000
2001 230,000
2002 246,000
2003 257,000
2004 265,000
Thereafter 1,810,000
----------
$3,032,000
==========
In April, 1999 the Company entered into employment contracts with two
officers. Under the terms of the contracts, each officer shall receive an
annual base salary of $100,000. The term of the agreements is three years.
(Note G) Subsequent Event:
On November 3, 1999 Micromuse, Inc. agreed to purchase all the
outstanding stock of the Company for approximately $43 million of
Micromuse, Inc. stock. The closing is subject to approval by the
Company's stockholders.
9
<PAGE>
MICROMUSE INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements give
effect to the acquisition by Micromuse of all of the outstanding common and
preferred shares of CAN in a business combination accounted for by the purchase
method of accounting.
The unaudited pro forma combined condensed statements of operations give effect
to the business combination as if it had occurred on October 1, 1998. The pro
forma adjustments are based upon available information and certain assumptions
that management believes are reasonable under the circumstances. In the opinion
of management, all adjustments have been made that are necessary to present
fairly the pro forma data. In connection with the transaction, Micromuse
recorded a charge of $11.1 million representing the fair value of in-process
research and development acquired from CAN. This one-time charge is excluded
from the pro forma results of operations.
The following unaudited pro forma combined condensed financial statements are
not necessarily indicative of the future results of operations of Micromuse or
the results of operations which would have resulted had Micromuse and CAN been
combined during the periods presented. In addition, the pro forma results are
not intended to be a projection of future results. The unaudited pro forma
combined condensed financial statements should be read in conjunction with the
Micromuse Quarterly Report on Form 10-Q, Form S-3 and Form 10-K as filed with
the Securities and Exchange Commission on February 15, 2000, February 2, 2000
and December 28, 1999, respectively, and the financial statements of CAN
appearing elsewhere in this Form 8-K.
10
<PAGE>
MICROMUSE INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the year ended September 30, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Micromuse CAN (c) Adjustments Combined
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
License $43,692 $ -- $ -- $ 43,692
Maintenance and services 14,378 -- -- 14,378
------- ----- ------- --------
Total revenues 58,070 -- -- 58,070
Cost of revenues:
License 2,379 -- -- 2,379
Maintenance and services 7,465 -- -- 7,465
------- ----- ------- --------
Total cost of revenues 9,844 -- -- 9,844
------- ----- ------- --------
Gross profit 48,226 -- -- 48,226
Operating expenses:
Sales and marketing 27,420 41 -- 27,461
Research and development 9,453 384 -- 9,837
Amortization of goodwill and purchased
intangible assets -- -- 6,380(a) 6,380
General and administrative 5,998 115 -- 6,113
Nonrecurring executive recruiting costs 720 -- -- 720
------- ----- ------- --------
Total operating expenses 43,591 540 6,380 50,511
------- ----- ------- --------
Income (loss) from operations 4,635 (540) (6,380) (2,285)
Other income, net 4,091 5 -- 4,095
------- ----- ------- --------
Income (loss) before income taxes 8,726 (535) (6,380) 1,810
Income tax provision 840 1 -- 840
------- ----- ------- --------
Net income (loss) $ 7,886 $(536) $(6,380) $ 970
======= ===== ======= ========
Per share data:
Basic net income $ 0.50 $ 0.06
Diluted net income $ 0.45 $ 0.05
Weighted average shares used in computing:
Basic net income per share 15,909 16,348
Diluted net income per share 17,504 17,943
</TABLE>
See accompanying notes to the unaudited pro forma combined condensed
financial statements
11
<PAGE>
MICROMUSE INC.
UNAUDITEDPRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS For
the three months ended December 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Micromuse CAN Adjustments Combined
--------- ------ ----------- --------
<S> <C> <C> <C> <C>
Revenues:
License $ 16,313 $ -- $ -- $16,313
Maintenance and services 6,018 -- -- 6,018
-------- ----- --------- -------
Total revenues 22,331 -- -- 22,331
Cost of revenues:
License 848 -- -- 848
Maintenance and services 2,994 -- -- 2,994
-------- ----- --------- -------
Total cost of revenues 3,842 -- -- 3,842
-------- ----- --------- -------
Gross profit 18,489 -- -- 18,489
Operating expenses:
Sales and marketing 9,803 9 -- 9,812
Research and development 3,295 217 -- 3,512
Purchased in-process R&D 11,066 -- (11,066)(b) --
Amortization of goodwill and
purchased intangible assets 34 -- 1,561 (a) 1,595
General and administrative 2,226 84 -- 2,310
-------- ----- --------- -------
Total operating expenses 26,424 310 (9,505) 17,229
-------- ----- --------- -------
Income (loss) from operations (7,935) (310) 9,505 1,260
Other income, net 815 7 -- 822
-------- ----- --------- -------
Income (loss) before income taxes (7,120) (303) 9,505 2,082
Income tax provision 1,472 -- -- 1,472
-------- ----- --------- -------
Net income (loss) $ (8,592) $(303) $ 9,505 $ 610
======== ===== ========= =======
Per share data:
Basic net income (loss) $ (0.53) $ 0.04
Diluted net income (loss) $ (0.53) $ 0.03
Weighted average shares used
in computing:
Basic net income (loss) per share 16,282 16,711
Diluted net income (loss) per share 16,282 19,134
</TABLE>
See accompanying notes to the unaudited pro forma combined condensed
financial statements
12
<PAGE>
MICROMUSE INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
On November 2, 1999, Micromuse entered into and subsequently closed on December
28, 1999, an agreement to acquire all of the outstanding common and preferred
shares of Calvin Alexander Networking, Inc. ("CAN"), a privately-held company
that develops leading-edge network auto-discovery technology. Under the terms of
the acquisition agreement, Micromuse issued approximately $43 million worth of
its common stock to acquire CAN. The transaction was accounted for under the
purchase method of accounting and was treated as a tax-free reorganization for
federal income tax purposes. Certain agreements have been made to promote the
retention and motivation of CAN employees. A portion of the consideration for
the transaction is subject to a one-year lock-up agreement and a one-year price
guarantee.
A summary of the allocation of the purchase price is as follows (in millions):
In-process research and development $11.1
Net tangible assets 0.2
Intangible assets:
Assembled workforce 0.3
Core technology 5.7
Goodwill 25.7
-----
Total intangible assets 31.7
-----
Total $43.0
=====
At the time of the acquisition, the estimated aggregate fair value of CAN's
research and development efforts that had not reached technological feasibility
as of the acquisition date and had no alternative future uses was estimated by
the Company's management to be $11.1 million, and was expensed at the
acquisition date. Goodwill, which represents the excess of the purchase price
over the fair value of identifiable tangible and intangible assets acquired less
liabilities assumed, is being amortized over the estimated life of five years.
The unaudited Micromuse balance sheet as of December 31, 1999 is included in the
December 31, 1999 Form 10-Q as filed with the Securities and Exchange Commission
on February 15, 2000.
Pro Forma Adjustments:
(a) These adjustments represent, for each period presented, the amortization
of goodwill and purchased intangible assets over the estimated useful
lives of three to five years.
(b) To eliminate the one-time charge resulting from the acquisition of
in-process research and development.
(c) The financial statements are for the period from October 28, 1998 (date of
inception) to September 30, 1999.
13
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
10.11+ Agreement and Plan of Reorganization by and among Micromuse Inc.,
CAN Acquisition Corp. and Calvin Alexander Networking, Inc.
23.1 Consent of Bloom Hochberg & Co., P.C.
+ Incorporated by reference from the exhibit of the same number in the
Registrant's Form 10-K as filed with the SEC on December 28, 1999.
14
<PAGE>
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 25, 2000.
MICROMUSE INC.
(Registrant)
By: /s/ STEPHEN A. ALLOTT
-------------------------------------
Stephen A. Allott
Director, President and Chief
Financial Officer (Principal
Financial Officer and Duly
Authorized Officer)
15
EXHIBIT 23.1
CONSENT OF BLOOM HOCHBERG & CO., P.C.
We consent to the incorporation herein by reference of our report dated November
30, 1999, relating to the balance sheet of Calvin Alexander Networking, Inc. as
of September 30, 1999, and the related statements of operations, stockholders'
deficit, and cash flows for the period October 28, 1998 (date of inception)
through September 30, 1999.
Bloom Hochberg & Co., P.C.
New York, New York
February 23, 2000
