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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended September 30, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ____________ .
Commission File No. 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 of Principal Executive Office,
including ZIP code, and telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the Registrant's common stock, $.01 par value,
held by non-affiliates of the Registrant on November 30, 2000 was approximately
$3.1 billion. As of November 30, 2000, there were 70,880,356 shares of
Registrant's common stock (adjusted for the two-for-one stock split effective
December 2000), $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement (the "Proxy Statement") to
be mailed to stockholders in connection with its 2000 annual meeting of
stockholders scheduled to be held on February 1, 2001, are incorporated by
reference into Part III of this report. Except as expressly incorporated by
reference, the Registrant's Proxy Statement shall not be deemed to be part of
this report.
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MICROMUSE INC.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures 46
PART III
Item 10. Directors and Executive Officers of the Registrant 46
Item 11. Executive Compensation 47
Item 12. Security Ownership of Certain Beneficial Owners and Management 47
Item 13. Certain Relationships and Related Transactions 47
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 47
Signatures 48
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PART I
This document contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements. Factors that might cause
such differences include, but are not limited to, fluctuations in customer
demand, the Company's ability to manage its growth, risks associated with
competition and risks identified in the Company's Securities and Exchange
Commission filings, including, but not limited to, those discussed elsewhere in
this Form 10-K under the heading "Risk Factors."
Item 1. Business
Micromuse develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable realtime fault
management and service assurance -- the effective monitoring and management of
multiple elements underlying a network-based service delivery infrastructure.
The infrastructure might include network devices, computing systems and other
managed environments. Our Netcool(R) product suite collects, normalizes and
consolidates high volumes of event information from heterogeneous network
management environments into a high-speed in-memory database that de-duplicates
and correlates the resulting data in real-time, and then rapidly distributes
graphical views of the information to operators and administrators responsible
for monitoring service levels. Netcool's unique architecture allows for the
rapid, programmerless association of devices and specific attributes of those
devices to the business services they impact. This readily enables
administrators to create and modify their service views during systems
operations to monitor particular business services or customer networks, rapidly
identify which users are affected by which network faults, pinpoint sources of
network problems, automate operator responses, facilitate problem resolution and
report on the results.
We market and distribute to customers through our own sales force, OEMs,
value-added resellers and systems integrators. We have distribution agreements
with Cisco Systems, CTC (Itochu), Datacraft, Ericsson Data Services, and
Unisphere (Siemens), among others. As of September 30, 2000, we had more than
870 customers operating in and serving a variety of industries. Micromuse
customers include AirTouch, America Online, AT&T, BT, Cable & Wireless, Cellular
One, Charles Schwab, Deutsche Telekom, Digex, EarthLink, GTE, ITC^DeltaCom, MCI
Worldcom, NextLink, and a number of financial investment concerns.
Micromuse operates as a single operating segment, and further geographic and
segment information is included in Note 7 of the Notes to Consolidated Financial
Statements included in this Form 10-K.
Products and Technology
Netcool(R) Suite Overview
Micromuse's Netcool suite helps telecommunications firms, Internet service
providers, and business-oriented enterprises maintain the uptime of
network-based customer services and applications. It is designed to monitor
large-scale networks in realtime, allowing network operators to quickly identify
and address problems before they lead to trouble.
To match the diversity of any network, the Netcool suite includes an open
architecture and a library of off-the-shelf software modules that collect event
information from more than 250 network environments. These environments include
management applications, voice or data networking equipment, Internet and
wide-area services, and computer systems.
Because it is easy to use, deploys quickly, scales as the network grows, and
provides a rapid return on investment, the Netcool suite is suited for the
highly demanding service provider industries, including:
>> Long-distance carriers
>> Local-exchange voice carriers
>> Cellular service providers
>> Cable TV service providers
>> Internet service providers
>> Large-scale corporate enterprises
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Netcool/OMNIbus(TM)
Micromuse developed the Netcool/OMNIbus, our flagship application, in 1994 to
help one the world's largest network service providers manage service levels and
maintain high availability of their voice, data, and Internet services.
Based on an open client-server architecture, Netcool/OMNIbus provides an
off-the-shelf solution that is easy to implement, operate and customize. Netcool
delivers flexibility and versatility as it accommodates virtually any networking
environment right out of the box - from distributed heterogeneous environments
to legacy systems and voice equipment. Its library of more than 250 Netcool
Probes & Monitors collect event information from network environments such as
SNMP and non-SNMP management applications, voice or data networking equipment,
Internet wide-area services, and computer systems and databases.
Netcool/OMNIbus monitors networks for events - common network occurrences such
as alerts, alarms, or other faults. It then reports them in customizable
graphical and text formats. Netcool lets operators in the network operations
center (NOC) graphically see what's happening inside the network in realtime,
often enabling them to respond to problems before they cause outages in service.
It can also automatically notify operators and designated technicians of events
via email and paging.
How Netcool/OMNIbus Works. Once collected, event information is pushed by the
Netcool Probes & Monitors into the Netcool ObjectServer(TM), the core component
of the Netcool suite. The Netcool ObjectServer is a high-speed, in-memory
database that maintains a central overview of events in one easy-to-read format.
Using a point-and-click interface, operators can group events according to the
business services they could potentially impact. Operators can react to events
in realtime by displaying Netcool EventLists(TM), or monitor the availability of
business services using service-level histogram summaries.
Netcool/OMNIbus's color-coded EventLists and histograms let operators identify
problems. For example, they display critical events (i.e. those which have
surpassed a pre-determined threshold) as red and less critical ones as green. In
addition, Netcool/OMNIbus lets operators build personalized views of event data
and service so they can view overall service availability and drill down to
reveal specific details. They can also produce a variety of reports on
user-defined criteria, such as services, business unit, operator, ticket number
etc
Netcool/OMNIbus also helps providers expand their network services without
incurring an increase in operating staff by streamlining the event management
process. Operators receive event messages in a standardized format, allowing
them to identify the location, platforms, applications, and users involved.
Built for Growth. The Netcool ObjectServer is scalable, built to grow as the
customer's network grows. In addition, Netcool helps IT service providers
leverage the Internet - they can access Netcool EventLists and service views
over the Web, or manage services on Internet Protocol (IP) based networks.
Numerous customers currently use the Netcool suite to monitor the availability
of business services on IP networks ranging from Web sites and e-mail to
mission-critical, firewall-secured intranets and extranets. And because Netcool
combines IP events with voice and other non-IP events, it can also support
emerging service technologies.
Netcool/OMNIbus for Voice Networks
Providers of carrier-grade voice services must typically dhere to a high
standard of service availability and performance to meet evolving customer
needs. To succeed, they must bridge the technology gap between traditional,
circuit-switched voice networks and emerging, convergence-oriented technologies
such as all-optical networking, DSL and Voice over IP.
Voice network providers worldwide use Micromuse Netcool software for realtime
fault and service-level management, capable of managing both traditional and
cutting-edge telecommunications technologies. Micromuse applied its extensive
voice networks expertise to enhance Netcool technology for voice network
providers and bundled the sophisticated new management capabilities into
Netcool/OMNIbus for Voice Networks. The new solution set combines Netcool voice
management technology with of new management and administration features.
Netcool/OMNIbus for Voice Networks resides on top of the network and monitors
voice devices without hindering their performance or other management
applications.
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Netcool/Reporter
Netcool/Reporter is a query and reporting tool that provides interaction with
Netcool data archived in Informix, Oracle, Sybase, or Microsoft SQL Server
databases. The multi-threaded Java-based application allows network operations
center personnel to analyze key historical information over the Web using
standard Web browsers. In addition, it allows the creation of a wide variety of
charts, graphs, or text-based reports.
How Netcool/Reporter Works. Netcool/Reporter provides a Gateway that produces
Netcool ObjectServer data in reportable format. Netcool/Reporter can report on
any element or event that can be collected by the ObjectServer. The Gateway
constantly updates the designated database with ObjectServer data.
Typically used by NOC managers, Netcool/Reporter provides immediate access to
accurate, historical and realtime data about the network operations as captured
by Netcool. For example, it can capture and present metrics, such as response
time for specific events, in hourly, daily, weekly or monthly summaries. It can
also present high-level management views by depicting event data by time,
severity, status, etc. allowing managers to pinpoint problem areas. Drill-down
features let managers view granularity behind the bar graphs or pie charts, such
as the particular events contributing to the bar.
SLA Reports. Netcool/Reporter can help proactively prevent problems by
displaying events per node and comparing results over time to illustrate trends
and indicate impending crisis. Customers can create service-level agreement
(SLA) and other custom reports by selecting Netcool-collected objects and
running functions against those objects to produce a variety of report types.
Netcool/Reporter supports full-featured query across 2D and 3D chart types,
including scatter charts, pie charts, line charts, area charts, bar charts,
stacked charts, box charts, grid charts (2D only), and tables.
Netcool/Internet Service Monitors(TM) (Netcool/ISMs)
The efficient management of Internet and IP-based services is now an essential
component of every business, particularly Internet service providers (ISPs),
managed network service providers (MNSPs), other integrated communications
providers, including carriers, and corporate enterprises moving towards
eBusiness. To provide this management control, Micromuse developed
Netcool/Internet Service Monitors (Netcool/ISMs), a modular software suite.
Netcool/ISMs v2.0 is now in production at many of the world's largest IT service
providers.
A Carrier-Class Solution. The Netcool/ISM suite is a carrier-class solution
designed to fully support ISPs and other businesses that rely on critical
Internet services day after day. Out of the box, it provides real-time Internet
availability and response time information for 18 different Internet protocols
and applications by regularly testing each service at user-defined intervals.
The information can be easily graphed against pre-defined service level metrics.
This type of service-level management information is invaluable to ISPs, Web
hosting organizations, and corporations utilizing mission-critical E-commerce
and Web site initiatives.
The Netcool/ISMs 2.0 suite comprises easily deployed software modules that can
be economically distributed to a number of points on the network, in comparison
to competing solutions that are restricted to collecting data from a single,
central point. Distribution of the various Monitors in the Netcool/ISM suite
enables polling and monitoring to be spread across multiple machines on the
network.
The Netcool/ISMs suite has been deployed to support rollout and effective use of
emerging technologies including Voice over IP, Application Hosting, E-commerce,
and the growing prevalence of enterprise portals embracing intranets and
extranets.
Addressing the Technology Gap. Competing tools that merely report HTTP status or
other basic Internet measures on isolated screens are of limited value because
the data they collect cannot be used effectively by other management systems.
This lack of integration hinders effective management in commercial
organizations and makes it impossible for MNSPs and ISPs to measure and comply
with customer-specific service-level agreements (SLAs).
Netcool/ISMs address this gap in functionality, channeling availability and
response time data on 18 Internet protocols and services into the Netcool
ObjectServer. This Netcool ObjectServer, combines the speed of a
high-performance relational database with the flexibility of an object-oriented
framework.
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Once Internet service data is in the ObjectServer, operators can easily
associate Internet response time and availability data with other
Netcool-collected enterprise-wide events and see the "big picture" to determine
the cause of, and solutions to, any problems affecting Web sites. Because the
suite is integrated with Micromuse's core Netcool/OMNIbus application, the need
for a separate staff of Internet specialists is reduced or eliminated.
Netcool/ISMs track Internet service availability and response time
automatically, alerting Netcool operators of potential problems.
Netcool/Impact(TM)
Micromuse introduced Netcool/Impact in 1999, extending the functionality of the
Netcool suite to provide realtime analysis on the impact of specific faults.
Netcool/Impact is a toolkit that allows service providers and corporate
enterprises to determine how Netcool-collected faults will impact IT-based
business processes, network-based services, or any revenue generating system on
the network.
In calendar Q2 2000, Micromuse enhanced this functionality with the release of
Netcool/Impact v2.0. The new version delivers a totally new look and feel with
an enhanced graphical user interface that makes Netcool/Impact even easier to
use while augmenting its ability to tightly integrate with Netcool/OMNIbus and
other applications in the Netcool suite.
Netcool/Impact v2.0 further boosts the system's user friendliness with a Policy
Editor. In addition, Micromuse incorporated a Multiple Document Interface into
Netcool/Impact's user interface, further expanding its capabilities to make data
navigation easier by letting operators simultaneously view and/or edit multiple
Netcool/Impact policies. Netcool/Impact v2.0 also supports several leading
relational databases.
Fundamentally, Netcool/Impact provides operations personnel with the ability to
solve typical network service delivery problems by building a bridge between
realtime network event feeds and relevant information stored throughout the
service provider's network that can be used to determine how specific events
will affect business processes, services, and customers. Key Netcool/Impact
capabilities can be summed as:
>> Impact Analysis - What service provider customers and business processes
are impacted by these incoming faults/events?
>> Event Enrichment - What other information is relevant to this event -
including information on how to resolve the problem.
>> Policy Management - What policies should I follow when resolving these
faults/events?
How Netcool/Impact Works. Netcool/Impact accesses existing institutional
knowledge in external databases and utilizes their inherent relationships. It
can identify the effect of a single event or generalize how types of events
affect services and users. In addition, Netcool/Impact can also automatically
warn users about a pending problem before they notice a disruption in service.
Netcool/Impact also helps organizations more efficiently resolve problems by
automatically assigning incoming faults and events to particular support
technicians and establishes the event status so technicians can prioritize their
work. It also facilitates policy management by letting operators define
resolution procedures for each particular event.
Netcool/Impact supports event escalation by keeping track of the time it takes
for a technicians, or administrators to acknowledge an event and resolve the
problem. If the event remains outstanding for a designated time period,
Netcool/Impact escalates the event up the chain of responsibility. It provides
impact analysis and facilitates policy-based management of realtime events and
operator-initiated queries by leveraging data from different data sources and
using it to define and enforce policies.
Netcool/Precision(TM)
The patented Netcool/Precision application is Micromuse's solution for the
root-cause analysis and network discovery market spaces. It is designed to take
the burden out of identifying and locating network faults. Faults that once took
hours or even days to track down can now be found in a matter of seconds thanks
to Netcool/Precision's patent-pending "Network Slice" technology.
Netcool/Precision rapidly identifies and traces faults throughout the network
infrastructure at the Layer 2 and Layer 3 slot/port levels. It allows network
operators to identify common network problems regardless of misconfigured or
unmanaged devices, or devices that have been moved or changed.
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Netcool/Precision successfully solves the underlying problem of determining
where a fault originates by identifying the current physical path of transported
data. Despite the vast number of possible communication paths, the "Network
Slice" technology pinpoints the precise route, enabling technicians to resolve
the problem in a fraction of the time they previously spent tracking down faults
and their causes.
Netcool/Precision features two primary components: a hyper-accurate and reliable
network topology server and a probable fault engine that analyze network-wide
fault information received from more than 200 environments by the Netcool
ObjectServer.
It creates a realtime picture of paths through which data traverses the network.
It discovers the most probable cause of the fault at the actual data entry and
departure port slot on a given router or switch and then presents a live ranking
of possible faults in the Netcool EventList.
Netcool/Visionary(TM)
Netcool/Visionary is a network problem diagnosis software solution that
integrates with the Netcool ObjectServer. Micromuse acquired this strategic
technology when it acquired NetOps Corporation in July 2000. Because NetOps uses
the Netcool trapd Probe to collect SNMP MIB information, Netcool/Visionary was
immediately compatible out of the box with the rest of the Netcool family. By
analyzing management information from industry-standard SNMP devices and
applications, Netcool/Visionary provides realtime, device-centric diagnoses that
explain why a problem occurred in the network infrastructure, at the device
level.
Its underlying technology also has the ability to predict problems from
occurring in the future, while providing significant savings on operational
support. Off the shelf, Netcool/Visionary diagnoses infrastructure problems
reported by Netcool-collected faults.
Position within the Netcool Suite. Using NetOps' progressive "MicroCorrelation"
technology, Netcool/Visionary analyzes the MIB information to pinpoint the
underlying cause of hundreds of unique problems. Once integrated, it will
include the following complementary applications:
>> Netcool/OMNIbus, the flagship application, which provides network
operators with a realtime window into the network, consolidates faults
from more than 250 managed environments throughout the infrastructure, and
allows operators to quickly ascertain which faults could adversely affect
the availability of services. (WHAT the problem is.)
>> Netcool/Impact, which identifies which users and services will be impacted
by faults while providing access to information on how to resolve them.
(WHO the problem affects.)
>> Netcool/Precision, which identifies - down to the Layer 2 and Layer 3
IP/MAC address level - where a fault occurred and which device was the
root cause of the fault (WHERE the problem is.)
>> Netcool/Visionary, which diagnoses problems in the network infrastructure,
predicts and prevents future problems, and determines how they can be
resolved at the device. (WHY the problem occurred and how it can be
resolved.)
Target Markets
Many IT service providers need a comprehensive realtime event monitoring
solution. The Netcool suite is essentially filling a void.
There are five clearly defined vertical markets in which Netcool software has
been licensed - telecommunications, wireless, cable, Internet, and the corporate
enterprise. They each face the same fundamental challenge - maintaining the
availability of networked-based services to their customers or internal users.
Uniquely Adaptable. The Netcool suite can help IT service provider raise their
service levels without the agony of long, painful and costly implementations. We
realize that maintaining service availability ranks as one of the most critical
functions in global network operations centers (NOCs) and Operations Service &
Support centers (OSS).
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The Netcool event processing architecture is uniquely adaptable to IT service
environments. Off the shelf, the Netcool ObjectServer collects, processes, and
presents event data from more than 250 elements and applications across the
network to maintain the availability of services. Netcool offers the versatility
to handle numerous elements across a wide spectrum of platforms and the
scalability to keep pace with your network as it grows. This makes it suitable
for IT service providers, whether they deliver services internally within an
enterprise or externally to multiple customers on a regional or global scale.
Sales and Marketing
We market our software and services primarily through our direct sales
organization with offices in Atlanta; Dallas; Edina; Minneapolis; New York; San
Francisco; Washington, D.C.; Eindhoven; Frankfurt; London; Paris; Singapore;
Sydney; Tokyo and Vienna, Austria. Additionally, we have a growing channel
consisting of OEMs, value-added resellers and systems integrators.
Typically, the sales process will include an initial sales presentation, a
product demonstration, at times a proof of concept evaluation, a closing meeting
and a purchase process. The sales process typically takes one to three months.
Companies often purchase Netcool products to manage their internal data network
initially and upon its demonstrated effectiveness subsequently make additional
and larger purchases. A majority of our sales are from repeat customers who
generally purchase additional software as their networks expand, or as
additional sites within a customer learn of the services provided by, and the
benefits of, Netcool.
We have a number of marketing programs designed to inform potential customers
about the capabilities and benefits of our products. Our marketing efforts
include technical leadership, participation in industry trade shows, technical
conferences and technology seminars, preparation of competitive analyses, sales
training, publication of technical and educational articles in industry journals
and advertising.
Although we increased the size of our sales organization during the year ended
September 30, 2000, we experienced difficulty in recruiting a sufficient number
of qualified sales people during that period. If we are to achieve significant
revenue growth in the future, we must both successfully train our existing sales
force and recruit additional sales personnel. Competition for such individuals
is intense, and there can be no assurance that we will be able to either retain
and adequately train our current sales force or attract qualified sales
personnel in the future. If we are unable to hire such people on a timely basis,
our business, operating results or financial condition could be adversely
affected. See "Risk Factors -- We need to continue to expand and improve the
productivity of our sales force and our technical services and customer support
organization."
To achieve significant growth in revenues in the future we must continue to
improve the performance of our network of distribution partners. Our network of
distribution partners currently includes VARs, systems integrators and OEM
partners, including Cisco, CTC (Itochu), Datacraft, Ericsson Data Services and
Unisphere (Siemens). Such partners license our products at a discount to list
price for re-licensing and may provide training, support and technical and
customer services to the end users of the our products. At times, members of our
technical services organization will assist a channel partner with training and
technical support. We offer a comprehensive channel-partnering program
consisting of training, certification, technical support, priority
communications regarding upcoming activities and products, and joint sales and
marketing activities. There can be no assurance that we will be able to continue
to attract and retain VARs, systems integrators and OEMs or that such
organizations will be able to market and sell our products effectively. In
addition, there can be no assurance that our existing or future channel partners
will continue to represent our products. See "Risk Factors -- We need to
continue to expand our distribution channels and retain our existing third-party
distributors."
Because we first sold our software in the United Kingdom and were previously
domiciled in London, sales of our software outside of the United States (i.e.,
"international sales") have historically comprised a significant portion of our
total revenue. International sales accounted for 36%, 29% and 39% of total
revenues in fiscal 2000, 1999 and 1998, respectively. We believe that a majority
of these international sales were made to customers in the United Kingdom,
France and Germany. While we believe there are significant opportunities in
Europe, we expect international revenues from Europe as a percentage of total
revenues to decline in future periods as we more fully exploit opportunities in
the United States and in the Pacific Rim. See "Risk Factors -- Our international
sales and operations expose us to currency fluctuation risks and other inherent
risks."
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Technical Services
Our technical services organization provides customers with a full range of
support services including pre-sales demonstrations, evaluations,
implementations, consulting services, training and ongoing technical support
including onsite maintenance. In addition, the technical services organization
serves a variety of internal functions, including drafting support and training
documentation, product management, product testing, research and development
related to specific customer industries. We believe that superior technical
services and support are critical to customer satisfaction and the development
of customer relationships.
Our recent growth and the expansion of the customer base of the Netcool suite
have increased the demands on our technical services organization. Competition
for qualified technical personnel is intense. There can be no assurance that the
current resources in our technical services organization will be sufficient to
manage any future growth in our business. The failure to expand our technical
services organization at least commensurate with the expansion in the installed
base of Netcool products would have a material adverse effect on our business,
operating results and financial condition. See "Risk Factors - We need to
continue to expand and improve the productivity of our sales force and our
technical services and customer support organization" and "We depend on our key
personnel, and the loss of any of our key personnel could harm our business."
Customer Support
The customer support organization is responsible for providing ongoing technical
support for our customers after implementation of the product and for training
the next generation of our software engineers and technical services personnel.
Based on feedback by customers, we believe that the quality and responsiveness
of our customer support organization provides it with a significant competitive
advantage.
For an annual fee, a customer will receive toll-free telephone and email
support, as well as new releases of our products. We offer two support packages
to our customers: 8 hours a day, 5 days a week support or 24 hours a day, 7 days
a week support. While support personnel generally answer the technical support
calls and resolve most problems over the phone, we will deploy any one of our
technical support personnel in the event that an on-site visit is necessary.
Research and Development
We believe that our future success depends in large part on our ability to
continue to enhance existing products and develop new products that maintain
technological and operational competitiveness and leadership and deliver a rapid
ROI to our customers. We have historically developed and expect to continue to
develop our products in conjunction with our existing and potential customers.
Extensive product development input is obtained through customers, through our
monitoring of end-user needs and changes in the marketplace and through
partnerships with leading research institutes such as Cambridge University
Centre for Communication Systems Research.
Our research and development organization is composed of two related engineering
groups. The core technology group is responsible for the enhancement of
Netcool/OMNIbus, including our real-time technologies and the exploration of new
directions and applications of our Netcool ObjectServer, Netcool Probes &
Monitors, Netcool Gateway, Netcool Data Source Adapters, Netcool Modules and
Netcool Desktop technologies. The application development group is responsible
for designing and developing off-the-shelf products that leverage the
technologies developed by the core technology group. While both groups work
closely with customers, the application development group depends on customer
contact and partnerships for the rapid development of new realtime fault
management and service assurance products. Both research and development groups
work closely with our technical services organization and our marketing
organization to incorporate customer feedback and market requirements into their
product development agendas.
We have made and intend to continue to make substantial investments in research
and development. Our total expenses for research and development, exclusive of
purchased research and development costs, for fiscal 2000, 1999 and 1998 were
$19.1 million, $9.5 million and $5.5 million, respectively. Since we anticipate
that we will continue to commit substantial resources to research and
development in the future, product development expenses are expected to increase
in absolute dollars in future periods. To date, our development efforts have not
resulted in any capitalized software development costs.
The market for our products is characterized by rapidly changing technologies,
evolving industry standards, changing regulatory environments, frequent new
product introductions and rapid changes in customer requirements. The
introduction or announcement of
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products by the Company or our competitors embodying new technologies and the
emergence of new industry standards and practices can render existing products
obsolete and unmarketable. As a result, the life cycles of our products are
difficult to estimate. Our future success will depend on our ability to enhance
our existing products and to develop and introduce, on a timely and
cost-effective basis, new products and product features that keep pace with
technological developments and emerging industry standards and that address the
increasingly sophisticated needs of our customers. There can be no assurance
that we will be successful in developing and marketing new products or product
features that respond to technological change or evolving industry standards,
that we will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products and
features, or that our new products or product features will adequately meet the
requirements of the marketplace and achieve market acceptance. In addition, to
the extent that any product upgrade or enhancement requires extensive
installation and configuration, current customers may postpone or forgo the
purchase of new versions of our products. If we are unable, for technological or
other reasons, to develop and introduce enhancements of existing products or new
products in a timely manner, our business, operating results and financial
condition will be materially adversely affected. See "Risk Factors - Rapid
technological change, including evolving industry standards and regulations and
new product introductions by our competitors, could render our products
obsolete" and "Our products operate on third-party software platforms, and we
could lose market share if our products do not operate on the hardware and
software operating platforms employed by our customers." In addition, software
products as complex as ours may contain defects or failures when introduced or
when new versions or enhancements are released. For example, the initial
commercial release of Netcool/Reporter had features and performance
characteristics that had limited market appeal. See "Risk Factors -- If we ship
products that contain defects, the market acceptance or our products and our
reputation will be harmed, and our customers could seek to recover their damages
from us."
Competition
Our products are designed for use in the evolving realtime fault management and
service assurance markets. Competition in these markets is intense and is
characterized by rapidly changing technologies, new and evolving industry
standards, frequent new product introductions and rapid changes in customer
requirements. Our current and prospective competitors offer a variety of
solutions to address the realtime fault management and service assurance markets
and generally fall within the following five categories: (i) customer's internal
design and development organizations that produce SLM and network management
applications for their particular needs, in some cases using multiple instances
of products from hardware and software vendors such as Sun Microsystems, Inc.
("Sun") and Hewlett-Packard Company ("HP"); (ii) vendors of network and systems
management frameworks including Computer Associates International, Inc. ("CA")
and International Business Machines Corporation ("IBM"); (iii) vendors of
network and systems management applications including HP, BMC Software, Inc, Sun
and IBM; (iv) providers of specific market applications; and (v) systems
integrators serving the telecommunications industry which primarily provide
programming services to develop customer specific applications including TCSI
Corporation (formerly Teknekron Communications Systems, Inc.), Telcordia and
Agilent (with its pending acquisition of Objective Systems Integrators, Inc.
("OSI")). In the future, as we enter new markets, we expect that such markets
will have additional, market-specific competitors. In addition, because there
are relatively low barriers to entry in the software market, we have become
aware of new and potential entrants in portions of our market space and we
expect additional competition from these and other established and emerging
companies. Increased competition may result in price reductions and may result
in reduced gross margins and loss of market share, any of which could materially
adversely affect our business, operating results or financial condition.
Some of our existing and potential customers and distributors continuously
evaluate whether to design and develop their own network operations support and
management applications or purchase them from outside vendors. Sometimes these
customers internally design and develop their own software solutions for their
particular needs and therefore may be reluctant to purchase products offered by
independent vendors such as ours. As a result, we must continuously educate
existing and prospective customers as to the advantages of our products versus
internally developed network operations support and management applications.
Many of our current and potential competitors have longer operating histories
and have significantly greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
we do. As a result, they may be able to devote greater resources to the
development, promotion, sale and support of their products or to respond more
quickly to new or emerging technologies and changes in customer requirements
than we can. Existing competitors could also increase their market share by
bundling products having management functionality offered by our products with
their current applications. Moreover, our current and potential competitors may
increase their share of the Fault and Service Level Management market by
strategic alliances and/or the acquisition of competing companies. In addition,
network operating system vendors could introduce new or upgrade and extend
existing operating systems or environments that include management functionality
offered by our products, which could render our products obsolete and
unmarketable. There can be no assurance that we will be able to compete
successfully against current or
10
<PAGE>
future competitors or that competitive pressures faced by us will not materially
adversely affect our business, operating results or financial condition.
Intellectual Property and Other Proprietary Rights
Our success and ability to compete is significantly dependent upon our
proprietary software technology. We rely on a combination of trade secret,
copyright and trademark laws, nondisclosure and other contractual agreements and
technical measures to protect our proprietary rights and, in the future,
patents. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. There can be no assurance that the
steps taken by us to protect our proprietary technology will prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or features similar to
our products. In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries. While we believe that
our products and trademarks do not infringe upon the proprietary rights of third
parties, there can be no assurance that we will not receive future
communications from third parties asserting that our products infringe, or may
infringe, the proprietary rights of third parties. We expect that software
product developers will be increasingly subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit could be time-consuming, result in costly
litigation and diversion of technical and management personnel, cause product
shipment delays or require us to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all. In the event
of a successful claim of product infringement against us and our failure or
inability to develop non-infringing technology or license the infringed or
similar technology, our business, operating results or financial condition could
be materially adversely affected.
We rely on certain software that we license from third parties, including
software that is integrated with internally developed software and used in our
products to perform key functions. There can be no assurance that these
third-party software licenses will continue to be available to us on
commercially reasonable terms or at all. Although we believe alternative
software is available from other third-party suppliers, the loss of or inability
to maintain any of these software licenses or the inability of the third parties
to enhance in a timely and cost-effective manner their products in response to
changing customer needs, industry standards or technological developments could
result in delays or reductions in our product shipments until equivalent
software could be developed internally or identified, licensed and integrated,
which would have a material adverse effect on our business, operating results
and financial condition. See "Risk Factors -- Our efforts to protect our
intellectual property may not be adequate, or a third-party could claim that we
are infringing its proprietary rights" and "We rely on software that we have
licensed from third-party developers to perform key functions in our products."
Employees
As of September 30, 2000, we had 514 employees. None of our employees are
represented by a collective bargaining agreement, nor have we experienced work
stoppages. We believe that our relations with our employees are good.
We believe that our future success will depend in large part on our ability to
attract and retain highly-skilled managerial, sales, technical services,
customer support and product development personnel. We have at times experienced
and continue to experience difficulty in recruiting qualified personnel.
Competition for qualified personnel in the software industry is intense, and
there can be no assurance that we will be successful in attracting and retaining
such personnel. Failure to attract and retain key personnel could materially
adversely affect on our business, operating results or financial condition. See
"Risk Factors -- Failure to manage our growth may adversely affect our business;
Failure to improve our infrastructure may adversely affect our business; We need
to continue to expand and improve the productivity of our sales force and our
technical services and customer support organization; and We depend on our key
personnel, and the loss of any of our key personnel could harm our business."
Item 2. Properties
Our headquarters are located in approximately 21,935 square feet of office space
in San Francisco, under a lease that expires in January 2008. Our principal
product development operations as well as our European headquarters are located
in approximately 30,077 square feet of office space in London pursuant to a
lease that expires in April 2009. We also maintain offices in Atlanta; Dallas;
Edina; New York; Washington, D.C.; Eindhoven; Frankfurt; Paris; Singapore;
Sydney; Tokyo and Vienna, Austria. We believe that
11
<PAGE>
our current facilities are adequate for our needs through the next twelve
months, and that, should it be needed, suitable additional space will be
available to accommodate expansion of our operations on commercially reasonable
terms, although there can be no assurance in this regard. See Note 8 of Notes to
Consolidated Financial Statements.
Item 3. Legal Proceedings
The Company is routinely involved in legal and administrative proceedings in the
ordinary course of its business. Management does not regard any of those
proceedings to be material.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2000.
12
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Price Range of Common Stock
Our common stock is traded publicly on the Nasdaq National Market under the
symbol "MUSE." The following table sets forth for the periods indicated the high
and low closing prices of the common stock since the Company went public at
$3.00 per share on February 13, 1998:
Fiscal 2000 Fiscal 1999 Fiscal 1998
------------------- ------------------ ------------------
High Low High Low High Low
------------------- ------------------ ------------------
September 30 $105.000 $ 56.313 $ 16.500 $ 11.125 $ 10.281 $ 3.438
June 30 82.750 31.000 12.813 8.156 10.203 5.375
March 31 103.000 36.422 11.500 5.141 6.656 4.719
December 31 45.625 15.688 5.969 2.000
The share prices above are adjusted for the two-for-one stock split effective
February 2000, and the two-for-one stock split effective December 2000, as
described in Note 10, Subsequent Event, in Notes to Consolidated Financial
Statements included in this report.
On November 30, 2000, the closing price of the common stock on the Nasdaq
National Market was $43.938 per share. As of November 30, 2000, there were
approximately 134 holders of record (not including beneficial holders of stock
held in street name) of the common stock.
Dividend Policy
We did not declare or pay any cash dividends on our capital stock during fiscal
2000, 1999 and 1998 and do not expect to do so in the foreseeable future. We
anticipate that all future earnings, if any, generated from operations will be
retained by us to develop and expand our business. Any future determination with
respect to the payment of dividends will be at the discretion of the Board of
Directors and will depend upon, among other things, our operating results,
financial condition and capital requirements, the terms of then-existing
indebtedness, general business conditions and such other factors as the Board of
Directors deems relevant.
Unregistered Sales of Common Stock
The Company completed acquisitions of two privately-held companies in separate
transactions on December 28, 1999 and July 18, 2000, by issuing approximately
1.8 million and 286,000 shares of the Company's common stock, respectively, to
the stockholders of the acquired companies, without registering these shares
under the Securities Act of 1933, as amended, in reliance upon the exemption
from registration under Section 4(2) of that Act. Additional information
concerning each of these transactions is set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview," and Note 2 of Notes to Consolidated Financial Statements included in
this Form 10-K.
13
<PAGE>
Item 6. Selected Financial Data
Consolidated Statements of Operations Data:
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------------------------------------
Revenues: 2000 1999 1998 1997 1996
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
License $ 90,763 $ 43,692 $ 22,432 $ 6,968 $ 3,374
Maintenance and services 32,770 14,378 5,829 2,324 1,141
-------------------------------------------------------------
Total revenues 123,533 58,070 28,261 9,292 4,515
Cost of revenues:
License 4,998 2,379 1,320 523 311
Maintenance and services 15,554 7,465 3,491 1,042 384
-------------------------------------------------------------
Total cost of revenues 20,552 9,844 4,811 1,565 695
-------------------------------------------------------------
Gross profit 102,981 48,226 23,450 7,727 3,820
-------------------------------------------------------------
Operating expenses:
Sales and marketing 54,039 27,420 15,710 8,970 1,768
Research and development 19,117 9,453 5,535 2,042 1,582
General and administrative 11,104 5,998 4,521 4,244 996
Purchased in-process research and development 11,406 -- -- -- --
Amortization of goodwill and purchased intangible assets 5,737 -- -- -- --
Executive recruiting costs -- 720 -- -- --
-------------------------------------------------------------
Total operating expenses 101,403 43,591 25,766 15,256 4,346
-------------------------------------------------------------
Income (loss) from operations 1,578 4,635 (2,316) (7,529) (526)
-------------------------------------------------------------
Other income (expense):
Interest income 4,762 3,480 1,840 64 8
Interest expense -- (341) (312) (1,268) (212)
Other 401 952 100 (200) 25
-------------------------------------------------------------
Income (loss) before income taxes 6,741 8,726 (688) (8,933) (705)
Income taxes 8,835 840 150 -- 100
-------------------------------------------------------------
Income (loss) from continuing operations (2,094) 7,886 (838) (8,933) (805)
Discontinued operations:
Income (loss) from discontinued operations -- -- -- (104) 569
Gain on disposition -- -- -- 1,161 --
-------------------------------------------------------------
Net income (loss) (2,094) 7,886 (838) (7,876) (236)
Accretion on redeemable convertible preferred stock -- -- (1,334) (755) --
-------------------------------------------------------------
Net income (loss) applicable to holders of common stock $ (2,094) $ 7,886 $ (2,172) $ (8,631) $ (236)
=============================================================
Per share data:
Basic net income (loss) from continuing operations
applicable to holders of common stock $ (0.03) $ 0.12 $ (0.05) $ (0.38) $ (0.03)
Diluted net income (loss) from continuing operations
applicable to holders of common stock $ (0.03) $ 0.11 $ (0.05) $ (0.38) $ (0.03)
Basic net income (loss) applicable to holders of common
stock $ (0.03) $ 0.12 $ (0.05) $ (0.34) $ (0.01)
Diluted net income (loss) applicable to holders of common
stock $ (0.03) $ 0.11 $ (0.05) $ (0.34) $ (0.01)
Weighted average shares used in computing:
Basic net income (loss) per share applicable to holders of
common stock 68,586 63,636 47,176 25,492 23,816
Diluted net income (loss) per share applicable to holders
of common stock 68,586 70,016 47,176 25,492 23,816
</TABLE>
14
<PAGE>
Consolidated Balance Sheet Data:
(In thousands)
<TABLE>
<CAPTION>
As of September 30,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 83,679 $ 35,058 $ 22,798 $ 13,741 $ 594
Working capital (deficiency) 96,847 62,991 58,193 13,181 (847)
Total assets 197,011 90,605 80,644 22,740 9,107
Redeemable convertible preferred stock -- -- -- 22,865 --
Total stockholders' equity (deficit) 152,523 70,006 67,718 (7,234) (222)
</TABLE>
Quarterly Financial Data:
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal 2000: 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 41,131 $ 32,932 $ 27,139 $ 22,331
Gross profit 34,590 27,337 22,565 18,489
Income (loss) from operations 3,908 3,185 2,420 (7,935)
Net income (loss) applicable to holders of common stock 2,527 2,442 1,529 (8,592)
Diluted net income (loss) per share $ 0.03 $ 0.03 $ 0.02 $ (0.13)
<CAPTION>
Fiscal 1999: 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 19,196 $ 15,422 $ 12,624 $ 10,828
Gross profit 15,903 12,847 10,465 9,011
Income from operations 2,513 1,348 224 550
Net income applicable to holders of common stock 2,142 2,377 2,048 1,319
Diluted net income per share $ 0.03 $ 0.03 $ 0.03 $ 0.02
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K. This document contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from the results discussed in such forward-looking
statements. Factors that might cause such differences include, but are not
limited to, fluctuations in customer demand, our ability to manage our growth,
risks associated with competition and risks identified in our most recent
Securities and Exchange Commission filings, including, but not limited to, those
discussed in this Form 10-K under the heading "Risk Factors."
Overview
Micromuse Inc. develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable realtime fault
management and service assurance. The Company was founded in 1989 in London,
England, and initially operated a systems integration business, reselling
computer hardware and software products and providing consulting services,
principally for managing networks. Leveraging our expertise in network
management, we developed our Netcool/OMNIbus software, which we began shipping
in January 1995. In March 1997, the Company was reorganized in Delaware and
relocated its headquarters from London to San Francisco. In connection with the
reorganization, we raised $4.9 million through the sale of equity securities and
arranged a $3.0 million credit facility. In September 1997, we raised an
additional $15.9 million through the sale of equity securities and sold our
systems integration business for approximately $0.4 million, net of fees. In
order to further the growth of the Netcool business, we completed an initial
public offering ("IPO") of common stock on February 12, 1998, raising
approximately $34.2 million, net of fees and expenses. With the proceeds from
the financings and the sale of the systems integration business, we expanded
operations and substantially increased development, sales and administrative
headcount for the Netcool business. On July 28, 1998, we completed a follow-on
offering of common stock, raising approximately $22.9 million, net of fees and
expenses. To accommodate recent growth, to compete effectively and manage future
growth, if any, we will be required to continue to implement and improve
operational, financial and management information systems, procedures and
controls on a timely basis and to expand, train, motivate and manage our
workforce.
15
<PAGE>
On December 28, 1999, we acquired all of the outstanding common and preferred
stock of Calvin Alexander Networking, Inc. ("CAN"), a privately-held developer
of network auto-discovery technology. Under the terms of the acquisition
agreement, we issued approximately 1.8 million shares of common stock (adjusted
for the two-for-one stock split effective February 2000 and for the two-for-one
stock split effective December 2000), then valued at approximately $43.0
million. 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.
On July 18, 2000, we acquired all of the outstanding common and preferred stock
of NetOps Corporation ("NetOps"), a privately-held developer of diagnostic
technology. Under the terms of the acquisition agreement, we issued cash and
approximately 286,000 shares of common stock (adjusted for the two-for-one stock
split effective December 2000), then valued in the aggregate at approximately
$21.4 million. 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 NetOps employees.
All of our revenues have been derived from licenses for our Netcool family of
products and related maintenance, training and consulting services. We currently
expect that Netcool-related revenues will continue to account for all or
substantially all of our revenues for the foreseeable future. As a result, our
future operating results are dependent upon continued market acceptance of our
Netcool products and enhancements thereto.
As of September 30, 2000, we had licensed our Netcool products to more than 870
customers worldwide. We license our software through our direct sales force,
OEMs and value-added resellers. License revenues from OEMs and resellers
combined, which are recognized upon the shipment to the OEMs and value-added
resellers, accounted for approximately 34%, 34% and 26% of our total license
revenues for fiscal 2000, 1999 and 1998, respectively. Our ability to achieve
significant additional revenue growth in the future will depend substantially on
our success in recruiting and training sufficient sales and technical services
personnel, maintaining our current distribution relationships and establishing
additional relationships with OEMs, resellers and systems integrators.
As a result of our multinational operations and sales, our operating results are
subject to significant fluctuations based upon changes in the exchange rates of
certain currencies, particularly the British pound, in relation to the U.S.
dollar. For example, while our United States headquarters is located in San
Francisco, California, our principal product development operations are located
in London, England. As a result, a substantial portion of our costs and expenses
are denominated in currencies other than the U.S. dollar. For the fiscal years
ended September 30, 2000, 1999 and 1998, license, maintenance and service
revenues outside of the United States accounted for 36%, 29% and 39% of our
total revenues, respectively. See Note 7 of Notes to Consolidated Financial
Statements. Although we will continue to monitor our exposure to currency
fluctuations, there can be no assurance that exchange rate fluctuations will not
have a material adverse effect on our business and operating results.
16
<PAGE>
Results of Operations
The following table sets forth certain items in our consolidated statements of
operations as a percentage of total revenues, except as indicated:
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------
As a Percentage of Total Revenues: 2000 1999 1998
-------------------------
<S> <C> <C> <C>
Revenues:
License 73.5% 75.2% 79.4%
Maintenance and services 26.5% 24.8% 20.6%
-------------------------
Total revenues 100.0% 100.0% 100.0%
Cost of revenues:
License 4.0% 4.1% 4.7%
Maintenance and services 12.6% 12.9% 12.3%
-------------------------
Total cost of revenues 16.6% 17.0% 17.0%
-------------------------
Gross profit 83.4% 83.0% 83.0%
-------------------------
Operating expenses:
Sales and marketing 43.7% 47.2% 55.6%
Research and development 15.5% 16.3% 19.6%
General and administrative 9.0% 10.3% 16.0%
Purchased in-process research and development 9.2% -- --
Amortization of goodwill and purchased intangible assets 4.7% -- --
Executive recruiting costs -- 1.2% --
-------------------------
Total operating expenses 82.1% 75.0% 91.2%
-------------------------
Income (loss) from operations 1.3% 8.0% (8.2)%
-------------------------
Other income (expense):
Interest income 3.9% 6.0% 6.5%
Interest expense -- (0.6)% (1.1)%
Other 0.3% 1.6% 0.4%
-------------------------
Income (loss) before income taxes 5.5% 15.0% (2.4)%
Income taxes 7.2% 1.4% 0.6%
-------------------------
Net income (loss) (1.7)% 13.6% (3.0)%
Accretion on redeemable convertible preferred stock -- -- (4.7)%
-------------------------
Net income (loss) applicable to holders of common stock (1.7)% 13.6% (7.7)%
=========================
As a Percentage of Related Revenues:
Cost of license revenues 5.5% 5.4% 5.9%
Cost of maintenance and services revenues 47.5% 51.9% 59.9%
</TABLE>
Revenues
Our total revenues are derived from license revenues for our Netcool family of
products, as well as associated maintenance, consulting and training services
revenues. License revenues are recognized upon the acceptance of a purchase
order and shipment of the software provided that the fee is fixed and
determinable, no significant obligation remains and collection of the resulting
receivable is probable. Allowances for credit losses and for estimated future
returns are provided for upon shipment. Credit losses and returns to date have
not been material. Maintenance revenues from ongoing customer support and
product upgrades are deferred and recognized ratably over the term of the
maintenance agreement, typically 12 months. Payments for maintenance fees (on
initial order or on renewal) are generally made in advance and are
nonrefundable. Revenues for consulting and training services are recognized as
the services are performed. See Note 1 of Notes to Consolidated Financial
Statements.
Our total revenues increased to $123.5 million in fiscal 2000 from $58.1 million
in fiscal 1999 and $28.3 million in fiscal 1998. License revenues increased to
$90.8 million in fiscal 2000 from $43.7 million in fiscal 1999 and $22.4 million
in fiscal 1998, primarily
17
<PAGE>
as a result of an increase in the number of product licenses sold and in average
transaction size, reflecting the increased acceptance of Netcool/OMNIbus, the
expansion of our sales organization and the growing sales of Netcool/Internet
Service Monitors, Netcool/Impact, Netcool/Reporter, Netcool/Precision and
Netcool/Visionary. Maintenance and services revenues increased to $32.8 million
in fiscal 2000 from $14.4 million in fiscal 1999 and $5.8 million in fiscal
1998, as a result of providing maintenance and services to a larger installed
base in each successive year. The percentage of our total revenues attributable
to software was 74%, 75% and 79% in fiscal 2000, 1999 and 1998, respectively.
Maintenance and services revenues accounted for 26%, 25% and 21% in fiscal 2000,
1999 and 1998, respectively.
Revenues from U.S. operations were 64%, 71% and 61% of total revenues in fiscal
2000, 1999 and 1998, respectively. International revenues include all revenues
other than those from the United States. See Note 7 of Notes to Consolidated
Financial Statements.
To date, our revenues have resulted primarily from sales to the
telecommunications industry, ISPs and investment banks. License revenues from
telecommunications industry customers and ISPs combined accounted for 82%, 79%
and 68% of our total license revenues in fiscal 2000, 1999 and 1998,
respectively. License revenues from investment banks accounted for 3%, 7% and
12% of total license revenues in fiscal 2000, 1999 and 1998, respectively. No
one customer accounted for more than 10% of total revenue in fiscal 2000 and
1999. One customer accounted for approximately 10% of total revenue in fiscal
1998.
Cost of Revenues
Cost of license revenues consists primarily of technology license fees paid to
third-party software vendors and the costs of software media, packaging and
production. Cost of license revenues increased slightly as a percentage of
license revenues to 5.5% in fiscal 2000 from 5.4% in fiscal 1999 due primarily
to an increase, as a percentage of license revenue, in product sales that bear
royalties due to third parties. Cost of license revenues decreased as a
percentage of license revenues to 5.4% in fiscal 1999 from 5.9% in fiscal 1998,
as a result of economies of scale.
Cost of maintenance and service revenues consists primarily of personnel-related
costs incurred in providing maintenance, consulting and training to customers.
Cost of maintenance and service revenues decreased as a percentage of
maintenance and service revenues to 48% in fiscal 2000 from 52% in fiscal 1999
and 60% in fiscal 1998, principally due to economies of scale. These decreases
were partially offset by increased personnel, facilities and travel costs
associated with growth in the customer support and technical services
organization. We expect that maintenance and services costs will continue to
increase in dollar amounts in future periods as we continue to hire additional
customer support and technical services personnel and expand our maintenance,
consulting and training activities.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries, commissions and
bonuses earned by personnel engaged in sales, technical presales and marketing
activities, as well as the costs of trade shows, public relations, marketing
materials and other marketing activities. Sales and marketing expenses increased
to $54.0 million in fiscal 2000 from $27.4 million in fiscal 1999 and $15.7
million in fiscal 1998. The increases in both fiscal 2000 and fiscal 1999
reflected the hiring of additional personnel in connection with the building of
our sales force. Sales and marketing expenses represented 44%, 47% and 56% of
total revenues in fiscal 2000, 1999 and 1998, respectively. These percentage
reductions were primarily due to the increased scale of operations. We expect
that sales and marketing expenses will continue to increase in absolute dollar
amounts in future periods as we continue to hire additional sales, technical
services and marketing personnel, to increase marketing activities and to build
our indirect sales channel.
Research and Development Expenses
Research and development expenses, exclusive of purchased research and
development costs, consist primarily of salaries and other personnel-related
expenses and costs of computer systems and software development tools. Research
and development expenses increased to $19.1 million in fiscal 2000 from $9.5
million in fiscal 1999 and $5.5 million in fiscal 1998. The increase in research
and development expenses in each year was primarily attributable to increased
personnel, additional facilities and an increase in the computer systems and
software development tools required by the additional personnel. In addition to
increasing our research and development facility in London, we expanded our
research and development presence in New York with the acquisitions of CAN and
NetOps. Research and development expenses represented 16%, 16% and 20% of total
revenues in fiscal 2000, 1999 and 1998, respectively. These percentage
reductions were primarily due to the increased scale of operations. We expect
that our research and development costs will increase in absolute dollar amounts
as we continue to enhance and extend our core technologies and product
18
<PAGE>
lines. To date, all research and development costs have been expensed as
incurred. See Note 1 of Notes to Consolidated Financial Statements.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs for
administration, finance, information systems and human resources, as well as
professional fees. General and administrative expenses increased to $11.1
million in fiscal 2000 from $6.0 million in fiscal 1999 and $4.5 million in
fiscal 1998. These changes each year were primarily due to increased staffing,
facilities costs and associated expenses necessary to manage and support our
increased scale of operations. General and administrative expenses as a
percentage of total revenues were 9%, 10% and 16% in fiscal 2000, 1999 and 1998,
respectively. These percentage reductions were primarily due to the increased
scale of operations. We expect that our general and administrative expenses will
increase in absolute dollar amounts as we expand our administrative staff, add
infrastructure and incur additional costs related to the growth of our business.
Amortization of Goodwill and Purchased Intangible Assets
In connection with the CAN acquisition, we recorded goodwill and other
intangible assets of approximately $31.7 million, which is being amortized on a
straight-line basis over a period of three to five years. We also recorded an
immediate expense of $11.1 million relating to in-process research and
development.
In connection with the NetOps acquisition, we recorded goodwill and other
intangible assets of approximately $21.2 million, which is being amortized on a
straight-line basis over a period of three to five years. We also recorded an
immediate expense of $0.3 million relating to in-process research and
development.
Amortization of goodwill and intangible assets relating to our December 1999
acquisition of CAN and our acquisition of NetOps in July 2000 aggregated $5.7
million for the year ended September 30, 2000.
We expect amortization of approximately $11.1 million, $10.7 million, $10.5
million, $10.2 million and $4.7 million in the fiscal years ending September 30,
2001, 2002, 2003, 2004 and 2005, respectively, relating to the amortization of
goodwill and other intangible assets. In addition, we may have additional
acquisitions in future periods, which could give rise to additional goodwill or
other intangible assets being acquired. If we acquire additional goodwill or
other intangible assets, our acquisition-related amortization may increase in
future periods.
Executive Recruiting Costs
The executive recruiting costs in fiscal 1999 include a $0.5 million charge
related to the fair value of the warrant issued to the executive search firm to
purchase 106,668 shares of our common stock at a price of $7.41 per share and
approximately $0.2 million related to cash fees paid to the executive search
firm and certain relocation costs.
Other Income (Expense)
Other income in fiscal 2000, 1999 and 1998 includes the interest earned from the
proceeds raised from the public offerings and cash generated from operations,
and foreign exchange gains and losses. Fiscal 1999 also included insurance
proceeds related to the death of the former Chairman and Chief Executive
Officer. The interest earned in fiscal 1998 was partially offset by the imputed
interest expense related to the fiscal 1997 issuance of a warrant to purchase
5.7 million shares of Series A preferred stock at a per share exercise price of
$0.50 issued in connection with the provision of a line of credit to the
Company. See Note 4 of Notes to Consolidated Financial Statements.
Income Taxes
In fiscal 2000, the Company generated net operating losses primarily due to the
tax benefits related to the exercise of stock options. The 1999 income tax
provision reflects the utilization of prior years' net operating loss
carry-forwards. The fiscal 1998 income tax provision consisted primarily of
state and local taxes. See Note 5 of Notes to Consolidated Financial Statements.
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Liquidity and Capital Resources
As of September 30, 2000, we had $83.7 million in cash and cash equivalents and
$31.6 million in marketable securities, up from $35.1 million in cash and cash
equivalents and $34.7 million in marketable securities as of September 30, 1999.
The net increase in cash and cash equivalents in fiscal 2000 was due primarily
to the proceeds from the issuance of common stock, the increase in accrued
expenses, deferred revenue, the net maturity of investments and the net loss
adjusted for non-cash items. These sources of cash and cash equivalents were
partially offset by capital expenditures, the increase in accounts receivable
and prepaid expenses and other current assets, the acquisition of CAN and
NetOps, and the decrease in accounts payable and income taxes payable. The
increase in accrued expense, deferred revenue, and accounts receivable reflects
the growth in the business, while the increase in prepaid expense and other
current assets includes a prepayment of technology license fees to a third-party
software vendor, rental deposits and prepaid value added taxes.
As of September 30, 1999, we had $35.1 million in cash and cash equivalents and
$34.7 million in marketable securities, up from $22.8 million in cash and cash
equivalents and $40.5 million in marketable securities as of September 30, 1998.
The net increase in cash and cash equivalents in fiscal 1999 was due primarily
to net income of $7.9 million, the net proceeds from the maturity and purchase
of investments, the issuance of common stock, and the increase in accounts
payable, income taxes payable, accrued expenses and deferred revenues. These
sources of cash and cash equivalents were partially offset by the purchase of
treasury stock, capital expenditures, and the increase in accounts receivable
and prepaid expenses and other current assets. The increase in accounts
receivable, accounts payable and accrued expenses reflects the growth in the
business while the increase in prepaid expense and other current assets includes
a prepayment of technology license fees to a third-party software vendor, rental
deposits and prepaid value added taxes.
As of September 30, 2000, the Company's principal commitments consisted of
obligations under operating leases. See Note 8 of Notes to Consolidated
Financial Statements.
We believe that our current cash balances and the cash flows generated by
operations, if any, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for the next 12 months. Thereafter, if
cash generated from operations is insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or convertible debt
securities or obtain credit facilities. The decision to sell additional equity
or debt securities could be made at any time and would likely result in
additional dilution to our stockholders. A portion of our 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, we evaluate potential acquisitions of such businesses, products or
technologies.
RISK FACTORS
In addition to the other information in this Form 10-K, the following risk
factors should be considered carefully in evaluating the Company and our
business. The following factors, in addition to the other information contained
in this Form 10-K, should be considered carefully in evaluating the Company and
our prospects. This Form 10-K (including without limitation the following Risk
Factors) contains forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934) regarding the Company and our business, financial condition, results of
operations and prospects. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions or variations
of such words are intended to identify forward-looking statements, but are not
the exclusive means of identifying forward-looking statements in this Form 10-K.
Additionally, statements concerning future matters such as the development of
new products, enhancements or technologies, possible changes in legislation and
other statements regarding matters that are not historical are forward-looking
statements.
Although forward-looking statements in this Form 10-K reflect the good faith
judgment of our management, such statements can only be based on facts and
factors we currently know about. Consequently, forward-looking statements are
inherently subject to risks and uncertainties, and actual results and outcomes
may differ materially from the results and outcomes discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include, but are not limited to, those
discussed below and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as those discussed elsewhere in
this Form 10-K. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of the this Form
10-K. We undertake no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of the Form 10-K.
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Because we have a limited operating history in a dynamic market, it is difficult
to predict our future operating results.
Because we have a relatively limited operating history in a rapidly evolving and
dynamic market, it is difficult to predict our future operating results. We
first shipped our Netcool/OMNIbus product in January of 1995 and therefore have
a limited operating history of developing and providing service level management
software. Our limited operating history and rapidly changing product
development, installation, maintenance and market dynamics make the prediction
of future results of operations difficult. Our prospects must be considered in
light of the risks, costs and difficulties frequently encountered by emerging
companies, particularly companies in the competitive software industry. We
intend to increase our operating expenses to hire experienced senior managers,
develop new distribution channels, increase our sales and marketing efforts,
implement and improve operational, financial and management information systems,
broaden technical services and customer support capabilities, fund higher levels
of research and development and expand administrative resources in anticipation
of future growth. Our operating results will be harmed if these increased
expenditures do not result in increased revenues.
Our operating results may vary from quarter to quarter, causing our stock price
to fluctuate.
Our quarterly revenues and operating results in geographic segments that we
track fluctuate and are difficult to predict. It is possible that in some
quarter or quarters our operating results will be below the expectations of
public market analysts or investors. In such event, or in the event adverse
conditions prevail, or are perceived to prevail, with respect to our business or
financial markets generally, the market price of our common stock may decline
significantly.
We realize a significant portion of our license revenues in the last month of a
quarter, frequently in the last weeks or even days of a quarter. As a result,
license revenues in any quarter are difficult to forecast because it is
substantially dependent on orders booked and shipped in that quarter. Moreover,
our sales cycle, from initial evaluation to delivery of software, varies
substantially from customer to customer. Further, we base our expense levels in
part on forecasts of future orders and sales, which are extremely difficult to
predict. A substantial portion of our operating expenses is related to
personnel, facilities, and sales and marketing programs. The level of spending
for such expenses cannot be adjusted quickly and is, therefore, relatively fixed
in the short term. Accordingly, our operating results will be harmed if revenues
fall below our expectations in a particular quarter. In addition, the number and
timing of large individual sales has been difficult for us to predict, and large
individual sales have, in some cases, occurred in quarters subsequent to those
we anticipated, or have not occurred at all. The loss or deferral of one or more
significant sales in a quarter could harm our operating results.
Because of these fluctuations we believe that quarter-to-quarter comparisons of
our operating results are not necessarily meaningful or indicative of our future
performance. A number of other factors are likely to cause these variations,
including:
o changes in the demand for our software products and services and the level
of product and price competition that we encounter;
o the timing of new hires and our ability to attract, retain and motivate
qualified personnel, including changes in our sales incentives;
o the mix of products and services sold, including the mix of sales to new
and existing customers and through third-party distributors and our direct
sales force;
o changes in the mix of, and lack of demand from, distribution channels
through which our products are sold;
o the length of our sales cycles and the success of our new customer
generation activities;
o spending patterns and budgetary resources of our customers on network
management software solutions;
o product life-cycles and the timing of introductions or enhancements of
products, or delays in the introductions or enhancements of our products
and those of our competitors;
o market acceptance of new products;
o changes in the renewal rate of support agreements;
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o seasonal variation in revenues because a disproportionate amount of our
annual revenues have historically been generated by sales of our products
during our fourth fiscal quarter and this trend may or may not continue;
o expansion of international operations, including gains and losses on the
conversion to United States dollars of accounts receivable and accounts
payable arising from international operations and the mix of international
and domestic revenue;
o the extent of market consolidation; and
o software defects and other product quality problems.
Failure to manage our growth may adversely affect our business.
We have grown rapidly, adding customers, personnel and expanding the scope and
geographic area of our operations. Our growth has resulted in new and increased
responsibilities for our management personnel and has placed and will continue
to place a significant strain upon our management and our operating and
financial systems and resources. We have grown from 321 employees on September
30, 1999 to 514 employees on September 30, 2000 and currently plan to recruit
more staff.
Failure to improve our infrastructure may adversely affect our business.
We need to continue to implement and improve a variety of operational, financial
and management information systems, procedures and controls. In particular, we
need to improve our accounting and financial reporting systems, which currently
require substantial management effort, and to successfully manage an increasing
number of relationships with customers, suppliers and employees. These demands
require the addition of new management personnel, and we are currently in the
process of recruiting individuals to fill important management positions.
Further, we need to continue to develop a U.S.-based financial and accounting
system. Our business will be harmed if we are unable to recruit and retain these
key personnel, if our current and future executive officers do not operate
effectively, both independently and as a group, or if we fail to implement
improved operational, financial and management systems.
We need to continue to expand and improve the productivity of our sales force
and our technical services and customer support organization.
We need to continue to hire additional sales personnel. Based on our experience,
such personnel are in high demand, are difficult to recruit and retain and
require nine months, or longer, to become fully productive. Although we
increased the size of our sales organization during fiscal 2000, we experienced
difficulty in recruiting a sufficient number of qualified sales personnel during
that period. Our business will be harmed if we are unable to recruit additional
sales personnel or increase the productivity of our current sales personnel.
Further, because of the recent expansion of the installed base of
Netcool/OMNIbus, Netcool/Reporter, Netcool/Internet Service Monitors,
Netcool/Firewall, Netcool/Fusion, Netcool/NTSMs, and Netcool/Impact, and the
release of our Netcool/OMNIbus for Voice Networks, Netcool/Precision and
Netcool/Visionary, the demands on our technical services and customer support
resources have grown rapidly. We need to significantly expand our technical
services and customer support organizations and similar third-party capabilities
if we are to achieve significant additional revenue growth. Competition for
additional qualified technical personnel to perform the required functions is
intense and such personnel may not be available. If our technical services and
customer support resources are insufficient to support our growth our business
will be harmed.
We need to continue to expand our distribution channels and retain our existing
third-party distributors.
We need to continue to develop relationships with leading network equipment and
telecommunications providers and to expand our third-party channels of
distribution through OEMs, resellers and systems integrators. We are currently
investing, and plan to continue to invest, significant resources to develop
these relationships and channels of distribution, which could reduce our ability
to generate profits. Third-party distributors accounted for approximately 34%,
34% and 26% of our total revenues in fiscal 2000, 1999 and 1998, respectively.
Our business will be harmed if we are not able to attract additional
distributors that market our products effectively. Further, many of our
agreements with third-party distributors are nonexclusive, and many of the
companies with which we have agreements also have similar agreements with our
competitors or potential competitors. Our third-party distributors have
significantly greater sales and marketing resources than we do, and their sales
and marketing efforts may conflict with our direct sales efforts. In addition,
although sales through third-party distributors result in reduced sales and
marketing expense with respect to such sales, we sell our products to
third-party distributors at reduced prices, resulting in lower gross margins on
such third-party sales. We believe that our success in penetrating markets for
our fault and service level management applications depends substantially on our
ability to
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maintain our current distribution relationships, in particular, those with Cisco
Systems, Ericsson, Unisphere (Siemens) and others. Our business will be harmed
if network equipment and telecommunications providers and distributors
discontinue their relationships with us, compete directly with us or form
additional competing arrangements with our competitors.
We are dependent on the market for software designed for use with advanced
communications services, and the size of this market is unproven.
The market for our products is in an early stage of development and is very
dynamic. Although the rapid expansion and increasing complexity of computer
networks in recent years and the resulting emergence of service level agreements
has increased the demand for fault and service level management software
products, the awareness of and the need for such products is a recent
development. Because the market for these products is only beginning to develop,
it is difficult to assess the size of this market, the appropriate features and
prices for products to address this market, the optimal distribution strategy
and the competitive environment that will develop.
We are substantially dependent upon telecommunications carriers and other
service providers continuing to purchase our products.
Telecommunications carriers, including Internet service providers, that deliver
advanced communications services to their customers have accounted for
approximately 82%, 79% and 68% of our total revenues in fiscal 2000, 1999 and
1998, respectively. In addition, these providers are the central focus of our
sales strategy. If these customers cease to deploy advanced communications
services for any reason, the market for our products will be harmed. Also,
delays in the introduction of advanced services, such as network management
outsourcing, or the failure of such services to gain widespread market
acceptance or the decision of telecommunications carriers and other service
providers not to use our products in the deployment of these services would harm
our business.
Consolidations in, or a slowdown in the growth of, the telecommunications
industry could harm our business.
We have derived a substantial amount of our revenues from sales of products and
related services to the telecommunications industry. The telecommunications
industry has experienced significant growth and consolidation in the past few
years. Our business is highly dependent on the growth of the telecommunications
industry and on continued capital spending by our customers in that industry. In
the event of a significant slowdown in the growth or capital spending of the
telecommunications industry, our business could be adversely affected.
Furthermore, as a result of industry consolidation, there may be fewer potential
customers requiring our software in the future. Larger, consolidated
telecommunications companies may also use their purchasing power to create
pressure on the prices and the margins we could realize. We cannot be certain
that consolidations in, or a slowdown in the growth of, the telecommunication
industry will not harm our business.
Our business depends on the continued growth of the Internet.
A significant portion of our revenues comes from telecommunications carriers,
Internet service providers and other customers that rely upon or are driven by
the Internet. As a result, our future results of operations substantially depend
on the continued acceptance and use of the Internet as a medium for commerce and
communication. Rapid growth in the use of and interest in the Internet and
online services is a recent phenomenon. Our business could be harmed if this
rapid growth does not continue or if the rate of technological innovation,
deployment or use of the Internet slows or declines.
Furthermore, the growth and development of the market for Internet-based
services may prompt the introduction of new laws and regulations. Laws, which
impose additional burdens on those companies that conduct business online, could
decrease the expansion of the use of the Internet. A decline in the growth of
the Internet could decrease demand for our products and services and increase
our cost of doing business, or otherwise harm our business.
We face intense competition, including from larger competitors with greater
resources than our own, which could result in our losing market share or
experiencing a decline in gross margins.
We face intense competition in our markets. As we enter new markets, we
encounter additional, market-specific competitors. In addition, because the
software market has relatively low barriers to entry, we are aware of new and
potential entrants in portions of our market space. Increased competition is
likely to result in price reductions and may result in reduced gross margins and
loss of market share.
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Further, many of our competitors have longer operating histories and have
significantly greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
we do. As a result, they may be able to devote greater resources to the
development, promotion, sale and support of their products or to respond more
quickly to new or emerging technologies and changes in customer requirements
than we can. Existing competitors could also increase their market share by
bundling products having functionality offered by our products with their
current applications. Moreover, our current and potential competitors may
increase their share of the fault and service level management market by
strategic alliances and/or the acquisition of competing companies. In addition,
network operating system vendors could introduce new or upgrade and extend
existing operating systems or environments that include functionality offered by
our products, which could render our products obsolete and unmarketable.
Our current and prospective competitors offer a variety of solutions to address
the fault and service level and enterprise network management markets and
generally fall within the following five categories:
o customer's internal design and development organizations that produce
service level management and network management applications for their
particular needs, in some cases using multiple instances of products from
hardware and software vendors such as Compaq, Sun Microsystems, Inc.,
Hewlett-Packard Company and Cabletron Systems, Inc.;
o vendors of network and systems management frameworks including Computer
Associates International, Inc. and International Business Machines
Corporation;
o vendors of network and systems management applications including
Hewlett-Packard Company, BMC Software, Inc, Sun Microsystems, Inc. and
International Business Machines Corporation;
o providers of specific market applications; and
o systems integrators serving the telecommunications industry which
primarily provide programming services to develop customer specific
applications including TCSI Corporation (formerly Teknekron Communications
Systems, Inc.) and Objective Systems Integrators, Inc.
Many of our existing and potential customers and distributors continuously
evaluate whether to design and develop their own network operations support and
management applications or purchase them from outside vendors. Sometimes these
customers internally design and develop their own software solutions for their
particular needs and therefore may be reluctant to purchase products offered by
independent vendors such as ours. As a result, we must continuously educate
existing and prospective customers as to the advantages of our products versus
internally developed network operations support and management applications.
If we ship products that contain defects, the market acceptance of our products
and our reputation will be harmed, and our customers could seek to recover their
damages from us.
If we ship products that contain defects, the market acceptance of our products
and our reputation will be harmed, and our customers could seek to recover their
damages from us. Complex software products frequently contain errors or defects,
especially when first introduced or when new versions or enhancements are
released. Despite our extensive product testing, we have in the past released
versions of Netcool/OMNIbus with defects and have discovered software errors in
certain of our products after their introduction. For example, version 3.0 of
Netcool/OMNIbus, released in 1996, had a number of material defects. Version 1.0
of Netcool/Reporter, released in 1998, had features and performance
characteristics that limited market acceptance. A significant portion of our
technical personnel resources were required to address these defects. Because of
these defects, we could continue to experience delays in or failure of market
acceptance of products, or damage to our reputation or relationships with our
customers. Any defects and errors in new versions or enhancements of our
products after commencement of commercial shipments would harm our business.
In addition, because our products are used to monitor and address network
problems and avoid failures of the network to support critical business
functions, any design defects, software errors, misuse of our products,
incorrect data from network elements or other potential problems within or out
of our control that may arise from the use of our products could result in
financial or other damages to our customers. Our customers could seek to have us
pay for these losses. Although we maintain product liability insurance, it may
not be adequate. Further, although our license agreements with our customers
typically contain provisions designed to limit our exposure to potential claims
as well as any liabilities arising from such claims, such provisions may not
effectively protect us against such claims and the liability and costs
associated therewith.
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The sales cycle for our software products is long, and the delay or failure to
complete one or more large license transactions in a quarter could cause our
operating results to fall below our expectations.
The sales cycle for our software products can be as long as nine months, and
our delay or failure to complete one or more large license transactions in a
quarter could harm our operating results. Our software is generally used for
division-wide or enterprise-wide, business-critical purposes and involves
significant capital commitments by customers. Potential customers generally
commit significant resources to an evaluation of available enterprise software
and requires us to expend substantial time, effort and money educating them
about the value of our solutions. Licensing of our software products often
requires an extensive sales effort throughout a customer's organization because
decisions to license such software generally involve the evaluation of the
software by a significant number of customer personnel in various functional and
geographic areas, each often having specific and conflicting requirements. A
variety of factors, including actions by competitors and other factors over
which we have little or no control, may cause potential customers to favor a
particular supplier or to delay or forego a purchase.
We depend on our key personnel, and the loss of any of our key personnel could
harm our business.
Our success is substantially dependent upon a limited number of key management,
sales, product development, technical services and customer support personnel.
The loss of the services of one or more of such key employees could harm our
business. We do not generally have employment contracts with key personnel. In
addition, we are dependent upon our continuing ability to attract, train and
retain additional highly qualified management, sales, product development,
technical services and customer support personnel. We have at times and continue
to experience difficulty in recruiting qualified personnel. Because we face
intense competition in our recruiting activities, we may be unable to attract
and/or retain qualified personnel.
We have acquired other businesses and we may make additional acquisitions in the
future, which will complicate our management tasks and could result in
substantial expenditures.
We have acquired other businesses and we may make additional acquisitions in the
future, which will complicate our management tasks and could result in
substantial expenditures. For example, on December 28, 1999 we completed the
acquisition of Calvin Alexander Networking, Inc., a developer of network
auto-discovery software. On July 18, 2000, the Company completed the acquisition
of NetOps Corporation, a developer of network diagnostic software. Because of
these acquisitions, we will need to integrate distinct products, customers and
corporate cultures into our own. These past and potential future acquisitions
create numerous risks for us, including:
o failure to successfully assimilate acquired operations and products;
o diversion of our management's attention from other matters;
o loss of key employees of acquired companies;
o substantial transaction costs;
o substantial liabilities or exposures in the acquired entity that were not
known or accurately evaluated or forecast by us; and
o substantial additional costs charged to operations as a result of the
failure to consummate a potential acquisition.
Further, some of the products we acquire would require significant additional
development before they can be marketed and may not generate revenue at levels
we anticipate. Moreover, our future acquisitions, if any, may result in
issuances of our equity securities which dilute our stockholders, the incurrence
of debt, large one-time write-offs and creation of goodwill or other intangible
assets that could result in amortization expense. It is possible that our
efforts to consummate or integrate acquisitions will not be successful, which
would harm our business.
We have relied and expect to continue to rely on a limited number of products
for a significant portion of our revenues.
All of our revenues have been derived from licenses for our Netcool family of
products and related maintenance, training and consulting services. We currently
expect that Netcool/OMNIbus-related revenues will continue to account for a
substantial percentage
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of our revenues beyond fiscal 2000 and for the foreseeable future thereafter.
Although we have Netcool/OMNIbus for Voice Networks, Netcool/Precision,
Netcool/Visionary and other products, our future operating results, particularly
in the near term, are significantly dependent upon the continued market
acceptance of Netcool/OMNIbus, improvements to Netcool/OMNIbus and new and
enhanced Netcool/OMNIbus applications. Our business will be harmed if
Netcool/OMNIbus does not continue to achieve market acceptance or if we fail to
develop and market improvements to Netcool/OMNIbus or new or enhanced products.
The life cycles of Netcool/OMNIbus, including the Netcool/OMNIbus applications,
are difficult to estimate due in large part to the recent emergence of many of
our markets, the effect of future product enhancements and competition. A
decline in the demand for Netcool/OMNIbus as a result of competition,
technological change or other factors would harm our business.
We have relied and expect to continue to rely on a limited number of customers
for a significant portion of our revenues.
We derive a significant portion of our revenues in any particular period from a
limited number of customers. Although no customer accounted for more than 10% of
revenues in the fiscal 2000 and 1999, we expect to derive a significant portion
of our revenues from a limited number of customers in the future. If a
significant customer, or group of customers, cancels or delays orders for our
products, or does not continue to purchase our products at or above historical
levels, our business will be harmed. For example, pre-existing customers may be
part of, or become part of, large organizations that standardize using a
competitive product. The terms of our agreements with our customers typically
contain a one-time license fee and a prepayment of one year of maintenance fees.
The maintenance agreement is renewable annually at the option of the customer
and there are no minimum payment obligations or obligations to license
additional software. Therefore, we generally do not have long-term customer
contracts upon which we can rely for future revenues.
Our international sales and operations expose us to currency fluctuation risks
and other inherent risks.
We license our products in foreign countries. In addition, we maintain a
significant portion of our operations, including the bulk of our software
development operations, in the United Kingdom. Fluctuations in the value of
these currencies relative to the United States dollar have adversely impacted
our results in the past and may do so in the future. These fluctuations can
cause our prices to not be competitive or raise our expenses and reduce our
profitability. License, maintenance and service revenues outside of the United
States accounted for 36%, 29% and 39% of our total revenues in fiscal 2000, 1999
and 1998, respectively. We expect that international license, maintenance and
consulting revenues will continue to account for a significant portion of our
total revenues in the future. We pay the expenses of our international
operations in local currencies and do not currently engage in hedging
transactions with respect to such obligations.
Our international operations and revenues involve a number of other inherent
risks, including:
o longer receivables collection periods and greater difficulty in accounts
receivable collection;
o difficulty in staffing and generally higher costs associated with managing
foreign operations;
o an even lengthier sales cycle than with domestic customers;
o the impact of possible recessionary environments in economies outside the
United States;
o sales in Europe and certain other parts of the world generally are
adversely affected in the quarter ending September 30, as many customers
reduce their business activities during the summer months. If our
international sales become a greater component of total revenue, these
seasonal factors may have a more pronounced effect on our operating
results;
o changes in regulatory requirements, including a slowdown in the rate of
privatization of telecommunications service providers, reduced protection
for intellectual property rights in some countries and tariffs and other
trade barriers;
o changes in payroll, stock option, employee stock purchase and business
related taxation;
o political or economic instability;
o lack of acceptance of non-localized products;
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o legal and cultural differences in the conduct of business; and
o immigration regulations that limit our ability to deploy our employees.
We intend to enter into additional international markets and to continue to
expand our operations outside of the United States by expanding our direct sales
force and pursuing additional strategic relationships. Such expansion will
require significant management attention and expenditure of significant
financial resources and could adversely affect our ability to generate profits.
If we are unable to establish additional foreign operations in a timely manner,
our growth in international sales will be limited, and our business could be
harmed.
Rapid technological change, including evolving industry standards and
regulations and new product introductions by our competitors, could render our
products obsolete.
Rapid technological change, including evolving industry standards and
regulations and new product introductions by our competitors, could render our
products obsolete. As a result, the life cycles of our products are difficult to
estimate and we must constantly develop, market and sell new and enhanced
products. If we fail to do so, our business will be harmed. For example, the
widespread adoption of new architecture standards for managing
telecommunications networks (for example TMN architecture) would force us to
adapt our products to such standard, which we may be unable to do on a timely
basis or at all. In addition, to the extent that any product upgrade or
enhancement requires extensive installation and configuration, current customers
may postpone or forgo the purchase of new versions of our products. Further, the
introduction or announcement of new product offerings by us or one or more of
our competitors may cause our customers to defer licensing of our existing
products.
Our products operate on third-party software platforms, and we could lose market
share if our products do not operate on the hardware and software operating
platforms employed by our customers.
Our products operate on third-party software platforms and we could lose market
share if our products do not operate on the hardware and software operating
platforms employed by our customers. Our products are designed to operate on a
variety of hardware and software platforms employed by our customers in their
networks. We must continually modify and enhance our products to keep pace with
changes in hardware and software platforms and database technology. As a result,
uncertainties related to the timing and nature of new product announcements,
introductions or modifications by systems vendors, particularly Sun
Microsystems, Inc., International Business Machines Corporation, Hewlett-Packard
Company, Cabletron Systems, Inc. and Cisco Systems, Inc. and by vendors of
relational database software, particularly Oracle Corporation and Sybase, Inc.,
could harm our business. For example, we are modifying certain of our products
to operate with the Linux operating system.
Our efforts to protect our intellectual property may not be adequate, or a
third-party could claim that we are infringing its proprietary rights.
We cannot guarantee that the steps we have taken to protect our proprietary
rights will be adequate to deter misappropriation of our intellectual property.
In addition, we may not be able to detect unauthorized use or our intellectual
property and take appropriate steps to enforce our rights. If third parties
infringe or misappropriate our trade secrets, copyrights, trademarks or other
proprietary information or intellectual property, our business could be harmed.
In addition, protection of intellectual property in many foreign countries is
weaker and less reliable than in the United States, so as our international
operations expand, the risk that we will fail to adequately protect our
intellectual property increases. Further, while we believe that our products and
trademarks do not infringe upon the proprietary rights of third parties, other
parties may assert that our products infringe, or may infringe, their
proprietary rights. Any such claims, with or without merit could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause product shipment delays or require us to develop
non-infringing technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all. We expect that software product developers will be
increasingly subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps.
We rely on software that we have licensed from third-party developers to perform
key functions in our products.
We rely on software that we license from third parties, including software that
is integrated with internally developed software and used in our products to
perform key functions. We could lose the right to use this software or it could
be made available to us only on commercially unreasonable terms. Although we
believe that alternative software is available from other third-party suppliers,
the loss
27
<PAGE>
of or inability to maintain any of these software licenses or the inability of
the third parties to enhance in a timely and cost-effective manner their
products in response to changing customer needs, industry standards or
technological developments could result in delays or reductions in product
shipments by us until equivalent software could be developed internally or
identified, licensed and integrated, which would harm our business.
Our stock price is volatile.
The market price of our common stock has been and is likely to continue to
be highly volatile. The market price may vary in response to many factors, some
of which are outside our control, including:
o actual or anticipated fluctuations in our operating results;
o announcements of technological innovations, new products or new contracts
by us or our competitors;
o developments with respect to copyrights or proprietary rights;
o adoption of new accounting standards affecting the software industry; and
o general market conditions and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market price
for the common stock of technology companies. These types of broad market
fluctuations may adversely affect the market price of our common stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been initiated against
such company. Such litigation could result in substantial costs and a diversion
of our management's attention and resources that could harm our business.
General economic and market conditions may impair our business.
Segments of the software industry have experienced significant economic
downturns characterized by decreased product demand, price erosion, work
slowdowns and layoffs. Our operations may in the future experience substantial
fluctuations as a consequence of general economic conditions affecting the
timing of orders from major customers and other factors affecting capital
spending. Although we have a diverse client base, we target certain market
segments. Therefore, any economic downturns in general or in the targeted
segments in particular would harm our business.
Future sales of our common stock may affect the market price of our common
stock.
As of September 30, 2000, we had approximately 70.5 million shares of common
stock outstanding, excluding approximately 13.2 million shares subject to
options outstanding as of such date under our stock option plans that are
exercisable at prices ranging from approximately $0.01 to $104.31 per share. We
cannot predict the effect, if any, that future sales of common stock or the
availability of shares of common stock for future sale, will have on the market
price of common stock prevailing from time to time. Sales of substantial amounts
of common stock (including shares issued upon the exercise of stock options), or
the perception the such sales could occur, may materially and adversely affect
prevailing market prices for common stock. In addition, tax charges resulting
from the exercise of stock options could adversely affect the reported results
of operations.
We have various mechanisms in place to discourage takeover attempts.
Certain provisions of our certificate of incorporation and bylaws and certain
provisions of Delaware law could delay or make difficult a change in control of
Micromuse that a stockholder may consider favorable. The provisions include:
o "blank check": preferred stock that could be used by our board of
directors to increase the number of outstanding shares and thwart a
takeover attempt; and
o a classified board of directors with staggered, two-year, terms, which may
lengthen the time required to gain control of the board of directors
28
<PAGE>
In addition, Section 203 of the General Corporation Law of the State of
Delaware, which is applicable to us, and our stock incentive plans, may
discourage, delay or prevent a change of control of Micromuse.
Year 2000 issues could impair our business.
We have designed and tested our products to be Year 2000 compliant. We continue
to believe that our products performed well during the roll-over from 1999 to
2000 and February 29, 2000. However, any undetected or unreported errors or
defects associated with Year 2000 date functions could result in material costs
to us. In addition, certain components of our products process timestamp
information from third-party applications or local operating systems. If such
third-party applications or local operating systems are not Year 2000 compliant,
our products that process such timestamp information may not be Year 2000
compliant.
In our standard license agreements, we provide certain warranties to licensees
that our software routines and programs are Year 2000 compliant. If any of our
licensees experience Year 2000 problems, such licensees could assert claims for
damages against us. Any such claims or litigation could result in substantial
costs and diversion of our resources even if ultimately decided in our favor.
Based on work done to date and our best estimates, we have not incurred material
costs and do not expect to incur future material costs in addressing the Year
2000 issue in our systems and products.
Euro conversion may adversely affect our business.
On January 1, 1999, various European countries established fixed conversion
rates between their existing currencies and a new single currency known as the
Euro to be introduced through a transition period ending in 2002. Issues we are
reviewing as a result of the Euro include updating information technology
systems, assessing currency risk, reviewing licensing agreements and contracts
for currency issues, and processing tax and accounting records. Although we do
not currently expect the Euro to have a material adverse effect on our financial
conditions or results of operations, we cannot assure that issues relating to
the Euro will not harm our business.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Hedging Instruments
We transact business in various foreign currencies. Accordingly, we are 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 September 30, 2000, no hedging
contracts were outstanding.
We currently do not use financial instruments to hedge local currency
denominated operating expenses in the U.K. Instead, we believe that a natural
hedge exists, in that local currency revenues will substantially offset the
local currency denominated operating expenses. We assess the need to utilize
financial instruments to hedge currency exposures on an ongoing basis.
We do not use derivative financial instruments for speculative trading purposes,
nor do we hedge our foreign currency exposure in a manner that entirely offsets
the effects of changes in foreign exchange rates. We regularly review our
hedging program and may as part of this review determine at any time to change
our hedging program.
Fixed Income Investments
Our 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. We place our investments with high credit quality issuers and,
by policy, limits the amount of the credit exposure to any one issuer.
Our 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 less than three months to maturity 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 5.8%. We do not expect any material loss with respect
to our investment portfolio.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
ASSETS
<TABLE>
<CAPTION>
As of September 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 83,679 $ 35,058
Short-term investments 31,614 34,689
Accounts receivable, net of allowance for doubtful accounts of $1,472 and
$282 as of September 2000 and 1999, respectively 17,898 9,613
Prepaid expenses and other current assets 6,044 3,871
Deferred income taxes 2,100 359
--------- ---------
Total current assets 141,335 83,590
Property and equipment, net 8,495 5,984
Deferred income taxes -- 1,031
Goodwill and other intangible assets, net 47,181 --
--------- ---------
$ 197,011 $ 90,605
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,919 $ 4,210
Accrued expenses 18,900 4,798
Income taxes payable 712 1,919
Deferred revenue 21,957 9,672
--------- ---------
Total current liabilities 44,488 20,599
Commitments and contingencies
Stockholders' equity:
Preferred stock; $0.01 par value; 5,000 shares authorized;
no shares issued and outstanding -- --
Common stock; $0.01 par value; 200,000 shares authorized;
70,520 and 64,651 shares issued and outstanding as of September 30,
2000 and 1999, respectively 705 646
Additional paid-in capital 159,061 73,263
Deferred compensation (47) (103)
Accumulated other comprehensive loss (1,588) (286)
Accumulated deficit (5,608) (3,514)
--------- ---------
Total stockholders' equity 152,523 70,006
--------- ---------
$ 197,011 $ 90,605
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
30
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------
Revenues: 2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
License $ 90,763 $ 43,692 $ 22,432
Maintenance and services 32,770 14,378 5,829
--------- --------- ---------
Total revenues 123,533 58,070 28,261
Cost of revenues:
License 4,998 2,379 1,320
Maintenance and services 15,554 7,465 3,491
--------- --------- ---------
Total cost of revenues 20,552 9,844 4,811
--------- --------- ---------
Gross profit 102,981 48,226 23,450
--------- --------- ---------
Operating expenses:
Sales and marketing 54,039 27,420 15,710
Research and development 19,117 9,453 5,535
General and administrative 11,104 5,998 4,521
Purchased in-process research and development 11,406 -- --
Amortization of goodwill and other intangible assets 5,737 -- --
Executive recruiting costs -- 720 --
--------- --------- ---------
Total operating expenses 101,403 43,591 25,766
--------- --------- ---------
Income (loss) from operations 1,578 4,635 (2,316)
--------- --------- ---------
Other income (expense):
Interest income 4,762 3,480 1,840
Interest expense -- (341) (312)
Other 401 952 100
--------- --------- ---------
Income (loss) before income taxes 6,741 8,726 (688)
Income taxes 8,835 840 150
--------- --------- ---------
Net income (loss) (2,094) 7,886 (838)
Accretion on redeemable convertible preferred stock -- -- (1,334)
--------- --------- ---------
Net income (loss) applicable to holders of common stock $ (2,094) $ 7,886 $ (2,172)
========= ========= =========
Per share data:
Basic net income (loss) applicable to holders of common stock $ (0.03) $ 0.12 $ (0.05)
Diluted net income (loss) applicable to holders of common stock $ (0.03) $ 0.11 $ (0.05)
Weighted average shares used in computing:
Basic net income (loss) per share applicable to holders of common
stock 68,586 63,636 47,176
Diluted net income (loss) per share applicable to holders of
common stock 68,586 70,016 47,176
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common stock Additional Treasury stock Deferred other
--------------------- paid-in ---------------------- stock comprehensive
Shares Amount capital Shares Amount compensation loss
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of September 30, 1997 26,823 $ 268 $ 2,189 (480) $ (300) $ (215) $ 52
Stock options exercised 477 4 258 -- -- -- --
Issuance of common stock under
stock purchase plan 246 4 625 -- -- -- --
Issuance of common stock in
public offerings, net of
related costs 13,328 132 51,640 3,590 5,300 -- --
Treasury stock purchased -- -- -- (3,110) (5,000) -- --
Conversion of Series B and C
preferred stock 17,953 180 22,431 -- -- -- --
Exercise of Series A warrants 5,364 52 1,536 -- -- -- --
Amortization of deferred
employee Compensation -- -- -- -- -- 56 --
Foreign currency translation
adjustment -- -- -- -- -- -- (94)
Net loss -- -- -- -- -- -- --
Accretion on redeemable
convertible preferred stock -- -- -- -- -- -- --
---------------------------------------------------------------------------------------
Balance as of September 30, 1998 64,191 640 78,679 -- -- (159) (42)
---------------------------------------------------------------------------------------
Stock options exercised 443 4 (5,406) 1,512 7,215 -- --
Issuance of common stock under
stock purchase plan 17 2 (875) 488 2,325 -- --
Treasury stock purchased -- -- -- (2,000) (9,540) -- --
Compensation expense related to
issuance of a warrant -- -- 462 -- -- -- --
Tax benefit related to the
exercise of stock options -- -- 403 -- -- -- --
Amortization of deferred
employee Compensation -- -- -- -- -- 56 --
Foreign currency translation
adjustment -- -- -- -- -- -- (244)
Net income -- -- -- -- -- -- --
---------------------------------------------------------------------------------------
Balance as of September 30, 1999 64,651 646 73,263 -- -- (103) (286)
---------------------------------------------------------------------------------------
Stock options exercised 3,278 33 12,478 -- -- -- --
Issuance of common stock under
stock purchase plan 453 5 3,312 -- -- -- --
Warrant exercised 97 -- -- -- -- -- --
Tax benefit related to the
exercise of stock options -- -- 8,878 -- -- -- --
Amortization of deferred
employee compensation -- -- -- -- -- 56 --
Stock issued in acquisition of
CAN 1,755 18 42,668 -- -- -- --
Stock issued in acquisition of
NetOps 286 3 18,462 -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- (1,302)
Net loss -- -- -- -- -- -- --
---------------------------------------------------------------------------------------
Balance as of September 30, 2000 70,520 $ 705 $ 159,061 -- $ -- $ (47) $ (1,588)
=======================================================================================
<CAPTION>
Total
stockholders' Total
Accumulated equity comprehensive
deficit (deficit) income (loss)
-------------------------------------------
<S> <C> <C> <C>
Balance as of September 30, 1997 $ (9,228) $ (7,234) $ --
Stock options exercised -- 262
Issuance of common stock under
stock purchase plan -- 629
Issuance of common stock in
public offerings, net of
related costs -- 57,072
Treasury stock purchased -- (5,000)
Conversion of Series B and C
preferred stock -- 22,611
Exercise of Series A warrants -- 1,588
Amortization of deferred
employee Compensation -- 56
Foreign currency translation
adjustment -- (94) (94)
Net loss (838) (838) (838)
Accretion on redeemable
convertible preferred stock (1,334) (1,334)
-------------------------------------------
Balance as of September 30, 1998 (11,400) 67,718 (932)
-------------------------------------------
Stock options exercised -- 1,813
Issuance of common stock under
stock purchase plan -- 1,452
Treasury stock purchased -- (9,540)
Compensation expense related to
issuance of a warrant -- 462
Tax benefit related to the
exercise of stock options -- 403
Amortization of deferred
employee Compensation -- 56
Foreign currency translation
adjustment -- (244) (244)
Net income 7,886 7,886 7,886
-------------------------------------------
Balance as of September 30, 1999 (3,514) 70,006 7,642
-------------------------------------------
Stock options exercised -- 12,511
Issuance of common stock under
stock purchase plan -- 3,317
Warrant exercised -- --
Tax benefit related to the
exercise of stock options -- 8,878
Amortization of deferred
employee compensation -- 56
Stock issued in acquisition of
CAN -- 42,686
Stock issued in acquisition of
NetOps -- 18,465
Foreign currency translation
adjustment -- (1,302) (1,302)
Net loss (2,094) (2,094) (2,094)
-------------------------------------------
Balance as of September 30, 2000 $ (5,608) $ 152,523 $ (3,396)
===========================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
32
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------
2000 1999 1998
-----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,094) $ 7,886 $ (838)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 10,158 1,580 1,201
Amortization of deferred compensation 56 56 56
Compensation expense related to issuance of warrant -- 462 --
Tax benefit related to the exercise of stock options 8,878 403 --
Purchased in-process research and development 11,406 -- --
Deferred income taxes (1,164) (895) --
Changes in operating assets and liabilities:
Accounts receivable (8,744) (3,118) (2,034)
Prepaid expenses and other current assets (2,423) (2,582) (354)
Related party loan -- 85 1,068
Accounts payable (1,183) 2,137 (581)
Accrued expenses 12,656 1,471 194
Income taxes payable (1,111) 1,919 --
Deferred revenue 12,632 2,146 6,204
-----------------------------------
Cash provided by operating activities 39,067 11,550 4,916
Cash flows from investing activities:
Capital expenditures (7,026) (4,596) (1,719)
Acquisition of businesses, net of cash acquired (1,621) -- --
Purchase of investments (110,329) (58,552) (57,831)
Proceeds from the maturity of investments 113,404 70,872 10,822
-----------------------------------
Cash provided by (used in) investing activities (5,572) 7,724 (48,728)
Cash flows from financing activities:
Proceeds from issuance of common stock, net 15,828 3,265 57,963
Purchase of treasury stock -- (9,540) (5,000)
Proceeds from issuance of redeemable convertible preferred stock -- -- --
-----------------------------------
Cash provided by (used in) financing activities 15,828 (6,275) 52,963
Effects of exchange rate changes on cash and cash equivalents (702) (739) (94)
-----------------------------------
Net increase in cash and cash equivalents 48,621 12,260 9,057
Cash and cash equivalents at beginning of year 35,058 22,798 13,741
-----------------------------------
Cash and cash equivalents at end of year $ 83,679 $ 35,058 $ 22,798
===================================
Supplemental disclosures of cash flow information:
Cash paid during the year -- interest $ -- $ 51 $ 36
Cash paid during the year -- taxes $ 42 $ 34 $ 28
Non-cash financing activities:
Accretion of redeemable convertible preferred stock $ -- $ -- $ 1,334
Exercise of warrants to purchase redeemable convertible Series A preferred
stock for common stock $ -- $ -- $ 1,588
Conversion of redeemable convertible Series B and C preferred stock to
common stock $ -- $ -- $ 22,611
Common stock issued in acquisitions $ 61,151 $ -- $ --
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Micromuse Inc. and its subsidiaries (the "Company") develops and supports a
family of scalable, highly configurable, rapidly deployable software solutions
for the effective monitoring and management of multiple elements underlying an
enterprise's information technology infrastructure. The Company maintains its
U.S. headquarters in San Francisco, California and its European headquarters in
London, England.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Reclassifications
Certain reclassifications, none of which effected net income, have been made to
prior amounts to conform to the current year presentation.
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.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to credit risk consist
of cash and cash equivalents, investments and accounts receivable. At September
30, 2000, the Company had investments in excess of insured amounts of
approximately $112.1 million. Trade receivables potentially subject the Company
to concentrations of credit risk. The Company closely monitors extensions of
credit and has not experienced significant credit losses in the past. Credit
losses have been provided for in the consolidated financial statements and have
been within management's expectations. No one customer accounted for more than
10% of revenues for the year ended September 30, 2000
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, investments, accounts receivable
and accounts payable approximates their respective carrying amounts defined as
the amount at which the instrument could be exchanged in a current transaction
between willing parties.
Investments
The Company has invested in certain marketable securities that are categorized
as held-to-maturity. At September 30, 2000, the Company had invested $44.2
million in cash and money market funds, $19.4 million in debt securities issued
by U.S. government agencies and $51.7 million in corporate notes and bonds. The
aggregate 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. Securities with maturities between three
and twelve months are
34
<PAGE>
considered to be short-term investments, while securities with maturities in
excess of twelve months are considered to be long-term investments.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, typically two years for equipment and
three years for furniture. Leasehold improvements are amortized over the shorter
of the estimated useful lives of the respective assets or the lease term.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of any asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
the costs to sell.
Goodwill and Other Intangible Assets
The Company records goodwill when the cost of net identifiable assets it
acquires exceeds their fair value. Goodwill and the cost of identified
intangible assets are amortized on a straight-line basis over three to five
years. The Company regularly performs reviews to determine if the carrying value
of assets is impaired. The purpose for the review is to identify any facts or
circumstances, either internal or external, which indicate that the carrying
value of the asset cannot be recovered. No such impairment has been indicated to
date. If, in the future, management determines the existence of impairment
indicators, the Company would use undiscounted cash flows to initially determine
whether impairment should be recognized. If necessary, the Company would perform
a subsequent calculation to measure the amount of the impairment loss based on
the excess of the carrying value over the fair value of the impaired assets. If
quoted market prices for the assets are not available, the fair value would be
calculated using the present value of estimated expected future cash flows. The
cash flow calculation would be based on management's best estimates, using
appropriate assumptions and projections at the time.
Revenue Recognition
License revenues are recognized upon the acceptance of a purchase order and
shipment of the software provided that the fee is fixed and determinable, no
significant obligations remain and collection of the resulting receivable is
probable. Allowances for credit losses and for estimated future returns are
provided for upon shipment. Credit losses and returns to date have not been
material. Maintenance revenues from ongoing customer support and product
upgrades are deferred and recognized ratably over the term of the maintenance
agreement, typically twelve months. Payments for maintenance fees (on initial
order or on renewal) are generally made in advance and are nonrefundable.
Revenues for consulting and training services are recognized as the services are
performed. The Company adheres to the revenue recognition requirements of the
American Institute of Certified Public Accountants issued Statement of Position
No. 97-2, Software Revenue Recognition ("SOP 97-2"). SOP 97-2 generally requires
revenue earned on software arrangements involving multiple elements, such as
software products, upgrades, enhancements, post-contract customer support,
installation and training, to be allocated to each element based on the relative
fair value of the elements. The fair value of an element must be based on
evidence that is specific to the vendor. The revenue allocated to software
products, including specified upgrades or enhancements, generally is recognized
upon delivery of the products. The revenue allocated to post-contract customer
support generally is recognized ratably over the term of the support, and
revenue allocated to service elements generally is recognized as the services
are performed. If evidence of the fair value for all element arrangement does
not exist, all revenue from the arrangement is deferred until such evidence
exists or until all elements are delivered.
In December 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-9, Software Revenue Recognition, with Respect to
Certain Arrangements ("SOP 98-9"), which requires the recognition of revenue
using the "residual method" in a multiple element arrangement when fair value
does not exist for one or more of the delivered elements in the arrangement.
Under the "residual method", the total fair value of the undelivered elements is
deferred and subsequently recognized in accordance with SOP 97-2. The Company
adopted SOP 98-9 on October 1, 1999 and did not incur a material change to its
accounting for revenues as a result of the provisions of SOP 98-9.
35
<PAGE>
Research and Development Cost
Development costs related to software products are expensed as incurred until
the technological feasibility of the product has been established. Technological
feasibility in the Company's circumstances occurs when a working model is
completed. After technological feasibility is established, additional costs
would be capitalized. The Company believes its process for developing software
is essentially completed concurrent with the establishment of technological
feasibility, and, accordingly, no research and development costs have been
capitalized to date.
Income Taxes
Income taxes are recorded using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which the temporary differences are expected to be recovered or
settled. The measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits that are not expected to be realized.
Stock-Based Compensation
The Company accounts for its stock-based employee compensation arrangements
using the intrinsic value method. As such, compensation expense is recorded when
on the date of grant the fair value of the underlying common stock exceeds the
exercise price for stock options or the purchase price for issuance or sales of
common stock.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
currency. The Company translates the assets and liabilities of its foreign
subsidiaries to U.S. dollars at the rates of exchange in effect at the end of
the year. Revenues and expenses are translated at the average rates of exchange
for the year. Translation adjustments and the effects of exchange rate changes
on intercompany transactions of a long-term investment nature are included in
stockholders' equity (deficit) in the consolidated balance sheets. Gains and
losses resulting from foreign currency transactions denominated in a currency
other than the functional currency are included in income and have not been
significant to the Company's consolidated operating results in any year.
Per Share Data
Basic per share amounts are calculated using the weighted-average number of
common shares outstanding during the period. Diluted per share amounts are
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 exercise of outstanding options to purchase common stock using the
treasury stock method. Excluded from the computation of the diluted loss per
share for the years ended September 30, 2000 and 1998 were nil and 18.0 million
shares of redeemable convertible preferred stock and options to acquire 13.2
million and 5.9 million shares of common stock, respectively, with a
weighted-average exercise price of $22.33 and $1.20 per share, respectively,
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:
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------
2000 1999 1998
-------------------------------
<S> <C> <C> <C>
Numerator for basic and diluted net income (loss)
applicable to holders of common stock $ (2,094) $ 7,886 $ (2,172)
===============================
Denominator for basic net income (loss) per
share - weighted-average shares outstanding 68,586 63,636 47,176
Dilutive effect of:
Common stock options -- 6,272 --
Warrant -- 108 --
-------------------------------
Denominator for diluted net income (loss) per share 68,586 70,016 47,176
===============================
</TABLE>
36
<PAGE>
Comprehensive Income (Loss)
Effective October 1, 1998, the Company adopted the Financial Accounting
Standards Board's (the "FASB") Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income
(loss) and its components; however, the adoption of SFAS 130 had no impact on
our net income (loss) or stockholders' equity. This Statement requires foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity (deficit), to be included in other
comprehensive income (loss).
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended 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 adopted SFAS No. 133 on October 1, 2000.
Management does not believe the adoption of SFAS No. 133 will have a material
effect on the Company's consolidated financial position or results of
operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. In March 2000,
the SEC issued Staff Accounting Bulletin No. 101A (SAB 101A), Amendment: Revenue
Recognition in Financial Statements. SAB 101A delays the implementation date of
SAB 101 until the Company's first fiscal quarter of 2001. SAB 101B "Second
Amendment: Revenue Recognition in Financial Statements" delays the
implementation of SAB 101 until the Company's fourth fiscal quarter of 2001. The
Company will adopt SAB 101 in its fourth fiscal quarter of 2001 and is
evaluating the effect that such adoption may have on its financial statements.
In March 2000, the FASB issued interpretation No. 44 (FIN 44), Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB 25.
This Interpretation clarifies (a) the definition of an employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company adopted FIN 44 on July 1, 2000. The adoption did not
have a material effect on the Company's consolidated financial position or
results of operations.
Note 2. Acquisitions
On December 28, 1999, the Company acquired all of the outstanding common and
preferred stock of Calvin Alexander Networking, Inc. ("CAN"), a privately-held
developer of network auto-discovery technology. Under the terms of the
acquisition agreement, the Company issued approximately 1.8 million shares of
its common stock, then valued at approximately $43.0 million. The transaction
was accounted for under the purchase method of accounting with CAN's results of
operations included from the acquisition date, 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 summary of the allocation of the purchase price is as follows (in millions):
Total tangible assets, net $ 0.2
Intangible assets:
In-process research and development 11.1
Assembled workforce 0.3
Core technology 5.7
Goodwill 25.7
-----
Total intangible assets 42.8
-----
Total $43.0
=====
37
<PAGE>
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 on a straight-line basis over the
estimated life of five years.
On July 18, 2000, the Company acquired all of the outstanding common and
preferred stock of NetOps Corporation ("NetOps"), a privately-held developer of
diagnostic technology. Under the terms of the acquisition agreement, the Company
issued cash and approximately 286,000 shares of its common stock, then valued in
aggregate at approximately $21.4 million. The transaction was accounted for
under the purchase method of accounting with NetOps' results of operations
included from the acquisition date, 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 NetOps employees.
A summary of the allocation of the purchase price is as follows (in millions):
Total tangible liabilities, net $(0.1)
Intangible assets:
In-process research and development 0.3
Assembled workforce 0.9
Trademarks 0.9
Non-compete agreements 0.7
Core technology 10.1
Goodwill 8.6
-----
Total intangible assets 21.5
-----
Total $21.4
=====
At the time of the acquisition, the estimated aggregate fair value of NetOps
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 $0.3 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 on a straight-line basis over the estimated life of
five years.
The following summary, which was prepared on a pro forma basis, combines the
Company's consolidated results of operations with CAN and NetOps results of
operations for the year ended September 30, 2000 and 1999, as if the combination
had occurred at the beginning of the periods presented. The table includes the
impact of certain adjustments including the elimination of the charge for
acquired in-process research and development, and the additional amortization
relating to intangible assets acquired (in thousands, except per share amounts):
Year ended September 30,
------------------------
2000 1999
------------------------
Revenues $124,319 $ 60,570
Net income (loss) $381 ($5,327)
Net income (loss) per share:
Basic $ 0.01 $ (0.08)
Diluted $ 0.00 ($0.08)
Shares used in per share computation:
Basic 68,954 65,384
Diluted 79,110 65,384
38
<PAGE>
Note 3. Balance Sheet Components (in thousands)
As of September 30,
--------------------------
Property and equipment: 2000 1999
--------------------------
Computer equipment $ 10,226 $ 6,413
Furniture and fixtures 1,640 1,342
Leasehold improvements 1,864 1,507
Other 3,295 1,212
--------------------------
17,025 10,474
Accumulated depreciation and amortization (8,530) (4,490)
--------------------------
$ 8,495 $ 5,984
==========================
Goodwill and Other Intangible Assets:
Goodwill $ 34,334 $ --
Core technology 15,790 --
Assembled workforce 1,210 --
Trademarks 840 --
Non-compete agreements 710 --
--------------------------
52,884 --
Accumulated amortization (5,703) --
--------------------------
$ 47,181 $ --
==========================
Accrued expenses:
Payroll and commission related $ 9,992 $ 2,844
Other 8,908 1,954
--------------------------
$ 18,900 $ 4,798
==========================
Note 4. Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit)
Redeemable Convertible Preferred Stock
A $3.0 million line of credit was made available to the Company in March 1997.
Interest under the line of credit was at no more than prime plus 2% and funds
drawn were to be used to finance an acquisition or other vehicles of growth as
approved by the Board of Directors. If exercised, the line of credit became due
and payable upon the earliest of a qualified public offering, a qualified
acquisition, or expiration of the Series A warrant issued in conjunction with
the line of credit. During fiscal 1997, the Company drew down $1.0 million,
which was repaid as of September 30, 1997. The warrant expired on the earlier of
March 2002, or the closing date of a public offering, merger, or acquisition of
the Company. The warrant issued in conjunction with the line of credit allowed
the holder to purchase 5.7 million shares of the Series A preferred stock at an
exercise price of $0.50 per share. The warrant was initially recorded at fair
value of $1.4 million, which was included in the carrying value of the Series A
preferred stock and treated as a debt issuance cost. This cost was amortized to
interest expense over the period from the date of issuance to the anticipated
date of the initial public offering, which resulted in a non-cash interest
charge of $300,000 and $1.1 million in fiscal 1998 and 1997, respectively. Under
the terms of the initial public offering, all the outstanding shares of Series B
and Series C preferred stock were converted into 8.0 million shares and 10.0
million shares of common stock, respectively, upon the closing of the IPO. In
addition, a warrant to purchase Series A preferred stock was converted into 5.4
million shares of common stock.
Common Stock
In February 1998, the Company raised approximately $34.2 million of net proceeds
from the sale of approximately 12.9 million shares of the Company's common stock
in its IPO.
In July 1998, the Company raised approximately $22.9 million of net proceeds
from the sale of approximately 4.0 million shares of the Company's common stock
in a follow-on public offering.
39
<PAGE>
All share and per-share numbers herein reflect the two-for-one stock split of
the Company's common stock that occurred for stockholders of record on February
3, 2000 and also for the two-for-one split announced by the Board of Directors
in October 2000 (Note 10) thus effecting an overall four-for-one stock split.
On December 5, 2000, the stockholders approved an increase in the authorized
common stock to 200 million shares. The financial information included in this
report has been restated to give effect to the increased number of authorized
shares. See Note 10.
Treasury Stock
In November 1997, the Company repurchased, from a stockholder who was an officer
and a director, approximately 3.1 million shares of common stock at $1.61 per
share for a total price of $5.0 million. The stockholder used a portion of the
proceeds to repay an interest-free loan from the Company.
In October 1998, the Board of Directors authorized the repurchase of up to 6.0
million shares, or approximately 9% of our outstanding common stock. As of
December 31, 1998, the Company had repurchased 2.0 million 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 issuance under our stock
option and employee stock purchase plans. In January 1999, the Company announced
the termination of the repurchase program. As of September 30, 1999, all the
shares of treasury stock had been reissued.
Stock Option Plan
Under the Company's 1997 and 1998 Stock Option/Stock Issuance Plans (the
"Plans"), options to purchase shares of common stock may be granted to
employees, officers, directors and consultants (officers and directors are not
eligible for grants under the 1998 Plan). The Plans provide for the issuance of
incentive and non-statutory options that must be granted at an exercise price
not less than 100% and 85% of the fair market value of the common stock on the
date of grant, respectively (110% if the person to whom the option is granted is
a 10% stockholder). Incentive options may only be granted to employees under the
1997 Plan. Options generally vest over four years from the date of grant. The
options expire between five and ten years from the grant date, and any vested
options must normally be exercised within three months after termination of
employment. The Plans are administered by the Company's Board of Directors and
its Compensation Committee.
A summary of the status of the Company's options under the Plans is as follows:
<TABLE>
<CAPTION>
Outstanding options
----------------------------------------------------
Number of Weighted-average Weighted-average
shares exercise price fair value
----------------------------------------------------
<S> <C> <C> <C>
Balance as of September 30, 1997 5,248,344 $ 0.60 $ --
Granted at market value 1,863,696 2.72 1.69
Exercised (477,296) 0.52 --
Canceled (713,180) 1.22 --
----------------------------------------------------
Balance as of September 30, 1998 5,921,564 1.20 --
Granted at market value 8,967,852 6.88 3.97
Exercised (1,955,440) 0.94 --
Canceled (489,520) 3.03 --
----------------------------------------------------
Balance as of September 30, 1999 12,444,456 5.26 --
Granted at market value 5,361,604 47.24 27.68
Exercised (3,278,234) 3.82 --
Canceled (1,334,178) 8.71 --
----------------------------------------------------
Balance as of September 30, 2000 13,193,648 $22.33 $ --
====================================================
</TABLE>
As of September 30, 2000, 1999 and 1998, there were 3,523,410, 1,896,672 and
2,008,376 fully vested and exercisable shares, with weighted-average exercise
prices of $5.76, $1.63 and $0.62, respectively. As of September 30, 2000,
approximately 1,116,618 shares were available for grant. The following table
summarizes information concerning outstanding and exercisable options under the
Plans outstanding as of September 30, 2000:
40
<PAGE>
<TABLE>
<CAPTION>
Outstanding
--------------------------------------- Exercisable
Weighted- Weighted- --------------------------
Range of average Average Weighted-
exercise Number of remaining life Exercise Number average
prices shares (in years) Price of shares exercise price
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.01 - $ 4.91 3,237,694 5.96 $2.11 1,483,386 $ 1.73
5.14 - 9.98 3,942,020 7.87 7.61 1,731,372 7.51
10.00 - 37.44 2,649,874 8.10 21.93 300,786 14.63
37.50 - 61.50 2,568,260 8.36 53.30 7,866 42.50
62.50 - 104.31 795,800 9.69 78.84 -- --
---------- ---------
$ 0.01 - $104.31 13,193,648 7.66 $22.33 3,523,410 $ 5.76
========== =========
</TABLE>
The Company uses the intrinsic value-based method to account for all of its
fixed employee stock-based compensation plans. Accordingly, no compensation cost
has been recognized for its stock options in the accompanying consolidated
financial statements because the fair value of the underlying common stock
equals or exceeds the exercise price of the stock options at the date of grant,
except with respect to certain options issued in 1996 and during fiscal 1997.
The Company has recorded deferred stock compensation expense of $167,000 and
$229,000 for the difference at the grant date between the exercise price and the
fair value of the common stock underlying the options issued in September 1996
and fiscal 1997, respectively. The $167,000 was amortized in fiscal 1996 as the
options were fully vested upon issuance and $56,000 (of the $229,000) was
amortized in each of fiscal 2000, 1999, and 1998, respectively, as the options
vest over four years.
Had compensation cost for the Company's stock options been determined in a
manner consistent with SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company's fiscal 2000 net loss would have increased by $11.1 million, the
fiscal 1999 net income would have decreased by $4.7 million and the fiscal 1998
net loss would have increased by $733,000. The basic and diluted earnings (loss)
per share would have been $(0.19) for both in fiscal 2000, $0.05 for both in
fiscal 1999, and $(0.06) for both in fiscal 1998.
The per share weighted-average fair value of stock options granted during 2000,
1999 and 1998 was $27.68, $3.97 and $1.69, respectively, on the date of grant
using the Black-Scholes pricing model, with the following weighted assumptions:
2000 -- expected dividend yield of 0.0%, risk-free interest rate of 6.0%,
expected volatility of 80%, expected forfeiture rate of 30% and expected life of
four years; 1999 -- expected dividend yield of 0.0%, risk-free interest rate of
5.8%, expected volatility of 70%, expected forfeiture rate of 30% and expected
life of four years; 1998 -- expected dividend yield of 0.0%, risk-free interest
rate of 5.6%, expected volatility of 80%, expected forfeiture rate of 25% and
expected life of four years;
The per share weighted-average fair values of Employee Stock Purchase Plan
shares granted during fiscal 2000, 1999 and 1998 were $7.35, $1.61 and $1.22,
respectively, calculated using the Black-Scholes pricing model with the
following weighted assumptions: 2000 - expected dividend yield of 0.0%,
risk-free interest rate of 6.0%, expected volatility of 80%, and expected life
of 0.5 years; 1999 - expected dividend yield of 0.0%, risk-free interest rate of
5.3%, expected volatility of 70%, and expected life of 0.5 years; 1998 -
expected dividend yield of 0.0%, risk-free interest rate of 5.2%, expected
volatility of 80%, and expected life of 0.5 years.
1998 Employee Stock Purchase Plan
In January 1998, the Board of Directors adopted the Company's 1998 Employee
Stock Purchase Plan (the "ESPP") to provide employees of the Company with an
opportunity to purchase common stock through payroll deductions. The ESPP became
effective at the time of the IPO. As of September 30, 2000, approximately
1,840,000 shares of common stock have been reserved for issuance under the ESPP.
All full-time regular employees who are employed by the Company are eligible to
participate in the ESPP. Eligible employees may contribute up to 15% of their
total cash compensation to the ESPP. Amounts withheld are applied at the end of
every six-month accumulation period to purchase shares of common stock, but not
more than 5,000 shares per employee per accumulation period. The value of the
common stock (determined as of the beginning of the offering period) that may be
purchased by any participant in a calendar year is limited to $25,000.
Participants may withdraw their contributions at any time before stock is
purchased.
The purchase price is equal to 85% of the lower of (a) the market price of
common stock immediately before the beginning of the applicable offering period
or (b) the market price of common stock at the time of the purchase. In general,
each offering period is 24
41
<PAGE>
months long, but a new offering period begins every six months. Thus, up to four
overlapping offering periods may be in effect at the same time. An offering
period continues to apply to a participant for the full 24 months, unless the
market price of common stock is lower when a subsequent offering period begins.
In that event, the subsequent offering period automatically becomes the
applicable period for purposes of determining the purchase price. The first
accumulation and offering periods commenced on February 13, 1998, the effective
date of the IPO. The first accumulation period ended on July 31, 1998, and the
first offering period will end on January 31, 2000. A total of 453,296, 505,036
and 246,384 shares of the Company's common stock were issued under the ESPP in
fiscal 2000, 1999 and 1998, respectively, at prices ranging from $2.55 per share
to $69.36 per share.
Note 5. Income Taxes
The provision for income taxes was as follows (in thousands):
Year ended September 30,
-----------------------------------
Current: 2000 1999 1998
-----------------------------------
Federal $ 4,462 $ 28 $ 83
State 859 73 67
Foreign 4,678 1,634 --
-----------------------------------
Total Current 9,999 1,735 150
Deferred:
Federal (907) (712) --
State (220) (41) --
Foreign (37) (142) --
-----------------------------------
Total Deferred (1,164) (895) --
-----------------------------------
$ 8,835 $ 840 $ 150
===================================
The current tax benefits resulting from the exercise of employee stock options
in the year ended Sepetember 30, 2000 are approximately $8.9 million. These
benefits are not included in the above provision for income taxes.
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets are presented below (in thousands):
As of September 30,
--------------------
2000 1999
--------------------
Accruals and reserves not currently deductible $ 1,006 $ 295
Depreciation and amortization 125 117
State taxes (662) --
Acquired intangible property (6,788) --
Tax credit carry-forwards 202 126
Other -- 64
Net operating loss carry-forwards 21,021 3,794
--------------------
Total deferred tax assets 14,904 4,396
Valuation allowance (12,804) (3,006)
--------------------
Net deferred tax assets $ 2,100 $ 1,390
====================
Included in gross deferred tax assets at September 30, 2000 is approximately
$6.3 million which pertains to net operating loss carry-forwards from tax
deductions resulting from the exercise of employee stock options. When
recognized, the tax benefit of these losses will be accounted for as a credit to
shareholders' equity rather than as a reduction of the income tax provision.
Also included in gross deferred tax assets at September 30, 2000 is
approximately $5.8 million which pertains to preacquisition net operating loss
carry-forwards of acquired companies. When recognized, the tax benefit of these
losses will be accounted for as an offset against the amortization of
nondeductible acquisition goodwill rather than as a reduction of the income tax
provision.
42
<PAGE>
Income (loss) before income taxes was as follows (in thousands):
Year ended September 30,
-------------------------------------
2000 1999 1998
-------------------------------------
United States $ (8,763) $ 1,373 $ 667
International 15,504 7,353 (1,355)
-------------------------------------
Total $ 6,741 $ 8,726 $ (688)
=====================================
Total income tax expense differs from expected income tax expense (computed by
applying the U.S. federal corporate income tax rate of 34% to profit (loss)
before taxes), as follows (in thousands):
Year ended September 30,
-----------------------------
2000 1999 1998
-----------------------------
Income tax expense at federal statutory rate $ 2,292 $ 2,966 $ (234)
State income taxes, net of federal benefits 422 21 44
Meals and entertainment 165 63 56
Nondeductible purchased research and development 3,878 -- --
Nondeductible goodwill from acquisitions 1,426 -- --
(Utilized) unutilized losses -- (1,351) 284
Change in deferred tax asset -- (859) --
Foreign income at other than US rates 690 -- --
Other (38) -- --
-----------------------------
$ 8,835 $ 840 $ 150
=============================
As of September 30, 2000, the Company had net operating losses for federal,
state, and foreign purposes of approximately $46.2 million, $37.0 million, and
$10.5 million, respectively, available to offset taxable income in future years.
The federal net operating losses will expire, if not utilized, beginning in
2018. The state net operating losses will expire, if not utilized, beginning in
2003. The foreign net operating losses will expire at varying dates depending on
the laws of each country. Federal and state tax laws impose substantial
restrictions on the utilization of net operating loss carry-forwards in the
event of an "ownership change," as defined in Section 382 of the Internal
Revenue Code. The Company has not yet determined whether an ownership change
occurred due to significant stock transactions in each of the reporting years
disclosed. If an ownership change has occurred, utilization of the net operating
loss carry-forwards could be significantly reduced. Additionally, loss
carry-forwards of either Micromuse Inc. or Micromuse USA Inc. cannot be utilized
against future profits generated by the other company.
Note 6. Defined Contribution Plan
In February 1998, the Company adopted a defined contribution plan (the "Plan")
in the United States pursuant to Section 401(k) of the Internal Revenue Code
(the "Code"). All eligible full and part-time employees of the Company who meet
certain age requirements may participate in the Plan. Participants may
contribute up to 20% of their pre-tax compensation, but not in excess of the
maximum allowable under the Code. The Plan allows for discretionary
contributions by the Company. Such discretionary contributions vest based on the
participant's length of service. In addition, the Company may make
profit-sharing contributions at the discretion of the Board of Directors. The
Company made no contributions during fiscal 2000, 1999 and 1998.
Note 7. Geographic and Segment Information
During 1999 the Company adopted the provisions of SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based on the
way that management organizes the operating segments within the Company for
making operational decisions and assessments of financial performance.
The Company's chief operating decision-maker is considered to be the Company's
Chief Executive Officer ("CEO"). The CEO reviews financial information presented
on a consolidated basis accompanied by geographic information for purposes of
making operating decisions and assessing financial performance. Therefore, the
Company operates as a single operating segment: fault management and service
assurance software.
43
<PAGE>
The Company markets its products primarily from the United States. International
sales are primarily to customers in France, Germany and the United Kingdom.
Information regarding regional revenues, which are based on the location of the
end-user, and operations in different geographic regions is as follows (in
thousands):
Year ended September 30,
------------------------------------
2000 1999 1998
------------------------------------
Revenues:
United States $ 78,536 $ 41,208 $ 17,242
United Kingdom 23,477 10,725 10,741
Other International 21,520 6,137 278
------------------------------------
Total $ 123,533 $ 58,070 $ 28,261
====================================
Net income (loss):
United States $ (16,060) $ 2,297 $ 517
International 13,966 5,589 (1,355)
------------------------------------
Total $ (2,094) $ 7,886 $ (838)
====================================
As of September 30,
------------------------------------
2000 1999 1998
------------------------------------
Identifiable assets:
United States $ 179,715 $ 79,208 $ 71,377
International 17,296 11,397 9,267
------------------------------------
Total $ 197,011 $ 90,605 $ 80,644
====================================
Net assets:
United States $ 147,273 $ 68,633 $ 64,600
International 5,250 1,373 3,118
------------------------------------
Total $ 152,523 $ 70,006 $ 67,718
====================================
Intercompany transfers between geographic areas are accounted for using the
transfer prices in effect for subsidiaries.
Note 8. Commitments
The Company leases its facilities and certain equipment under non-cancelable
operating leases. The lease agreements expire at various dates during the next
10 years.
Rent expense was approximately $2.2 million, $1.4 million and $0.9 million for
the years ended September 30, 2000, 1999 and 1998, respectively. Future minimum
lease payments under non-cancelable operating leases are expected to be
approximately $2.5 million, $2.0 million, $1.8 million, $1.7 million, $1.6
million and $6.3 million for each of the years in the five-year period and
thereafter, respectively.
Note 9. Management
In February 1999, the Company announced that Gregory Q. Brown would join the
Company as Chairman of the Board and Chief Executive Officer and on February 17,
1999, he joined the Company as a full-time employee. The Company incurred
approximately $0.7 million of executive recruiting costs related to the hiring
of Mr. Brown. Included in this amount was a charge related to the fair value of
the warrant issued to the executive search firm to purchase 106,668 shares of
our common stock at a price of $7.41 per share, cash fees paid to the executive
search firm and certain relocation costs. The charge for the warrant was
determined in a manner consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation" by using the Black-Scholes pricing model with the following
assumptions: expected dividend yield of 0.0%, risk-free interest rate of 5.5%,
expected volatility of 50%, and expected life of seven years.
44
<PAGE>
Note 10. Subsequent Event
In October 2000, the Company announced that its Board of Directors approved a
two-for-one split of its common stock, to be effected in the form of a stock
dividend. Stockholders will receive one additional share for each share held as
of December 5, 2000, and distributed on or about December 19, 2000. On December
5, 2000, the stockholders approved an increase in the authorized common stock to
200 million shares. The financial information included in this report has been
restated to give effect to the stock split and the increased number of
authorized shares.
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Micromuse Inc.
We have audited the accompanying consolidated balance sheets of Micromuse Inc.
and subsidiaries as of September 30, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity (deficit) and comprehensive
income (loss), and cash flows for each of the years in the three-year period
ended September 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Micromuse Inc. and
subsidiaries as of September 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Mountain View, California
October 20, 2000, except as to Note 10,
which is as of December 5, 2000
46
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table provides certain information regarding the executive
officers of the Company as of September 30, 1999:
Name Age Position
------------------ --- ----------------------------------------------------
Gregory Q. Brown 40 Chairman of the Board and Chief Executive Officer
Stephen A. Allott 42 Director, President and Chief Financial Officer
James B. De Golia 51 Senior Vice President, General Counsel and Secretary
Michael Donohue 41 Senior Vice President, Sales and Business Operations
Peter Shearan 36 Senior Vice President, Technical Services
Gregory Q. Brown was named Chairman and CEO of Micromuse Inc. on February 17,
1999. His 19 years of high-tech experience includes leadership positions in the
telecommunications, data networking, cable TV and computer software industries.
From September 1996 until joining Micromuse Inc., Mr. Brown served as president
of Ameritech Custom Business Services, a $1.4 billion dollar unit of Ameritech
Corporation that provided fortune 500 companies with custom communications and
information technology. For the three years prior to his position at Custom
Business Services, Brown was president of Ameritech New Media Inc. As president,
Brown was responsible for all of Ameritech's consumer cable TV operations.
Additionally Brown was a member of the board of directors of Americast, the
video programming joint venture involving Ameritech, The Walt Disney Company,
GTE, Bell South, and Southern New England Telephone. Before joining Ameritech in
1987, Brown held a variety of sales and marketing positions with AT&T in
Detroit, Michigan for five years. He also worked for the IBM Company in various
sales and support capacities in the early 1980s. Mr. Brown received his degree
in Economics from Rutgers University in June 1982.
Stephen A. Allott was appointed to the Board of Directors and named President in
October 1998. Mr. Allott has served as 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.
James B. De Golia became Senior Vice President in September 1999 having joined
Micromuse in January 1999 as Vice President, General Counsel and Secretary.
Previously, Mr. De Golia was Vice President and General Counsel of N.E.T. Prior
to that, Mr. De Golia was Counsel at Xerox Corporation. He received his B.A.
from the University of California at Irvine and his J.D. from the University of
California, Hastings College of the Law.
Michael Donohue, joined Micromuse as Vice President, Western Region Sales in
December 1998. His 20 years in the technology field includes experience in the
hardware, software and consulting services industries. He was promoted to his
present position of Senior Vice President, World-Wide Sales and Operations in
March 1999. Before joining Micromuse, Mr. Donohue held senior vice president and
corporate officer positions at Computer Associates. At Computer Associates, Mr.
Donohue was responsible for leading teams selling to organizations with revenues
in excess of $100 million. In addition, he was part of the sales management team
that launched the CA Unicenter(R) enterprise management software line. Prior to
Computer Associates, Mr. Donohue held sales, technical and management positions
at Texas Instrument and Storage Technology Corporation over a 10 year period
from 1981 - 1991. Mr. Donohue received his degree in Operations Management from
the University of Arizona in 1981.
Peter Shearan has served as the Company's Senior Vice President, Technical
Services since April 1998. From February 1996 to March 1998, Mr. Shearan served
as the Company's Vice President, Technical Services. From November 1995 to
February 1996, Mr. Shearan served as Senior Consultant in the Company's Netcool
Business Development department. Prior to joining the Company, Mr. Shearan
47
<PAGE>
served as a systems manager for British Telecommunications from June 1984 to
November 1995. Mr. Shearan received his Qualifications in Computer Science from
Southbank University, London.
The information regarding directors and Section 16 reporting compliance required
by Item 10 is incorporated herein by reference from the sections entitled
"Proposal No. 1 -- Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Proxy Statement.
Item 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference from the
section entitled "Executive Compensation" and other relevant portions of the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated herein by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated herein by reference from the
section entitled "Compensation Committee Interlocks and Insider Participation"
of the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statements Schedule, and Reports on Form 8-K
(a)(1) Financial Statements
See the Consolidated Statements beginning on page 30 of this Form 10-K.
(2) Financial Statement Schedule
See the Financial Statement Schedule at page 30 of this Form 10-K.
(3) Exhibits
See Exhibit Index at page 51 of this Form 10-K.
(b) Reports on Form 8-K. During the fourth quarter ended September 30, 2000,
(i) the Company filed on July 7, 2000, a Form 8-K dated June 21, 2000,
reporting a press release describing the Company's agreement to acquire
NetOps Corporation, and (ii) the Company filed on August 2, 2000, a Form
8-K dated July 18, 2000, reporting the completion of the NetOps
acquisition.
(c) See Exhibit Index at page 51 of this Form 10-K.
(d) See the Consolidated Financial Statements beginning on page 30 and
Financial Statement Schedule at page 49 of this Form 10-K.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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.
MICROMUSE INC.
By: /s/ STEPHEN A. ALLOTT
-----------------------------------------------
Stephen A. Allott
Director, President and Chief Financial Officer
(Principal Financial Officer)
Date: December 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, on behalf of the Registrant in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ GREGORY Q. BROWN Chairman and Chief Executive Officer December 28, 2000
--------------------------- (Principal Executive Officer)
(Gregory Q. Brown)
/s/ STEPHEN A. ALLOTT Director, President and December 28, 2000
--------------------------- Chief Financial Officer
(Stephen A. Allott) (Principal Financial Officer)
/s/ MICHAEL E.W. JACKSON Director December 28, 2000
---------------------------
(Michael E.W. Jackson)
/s/ DAVID C. SCHWAB Director December 28, 2000
---------------------------
(David C. Schwab)
/s/ KATHLEEN M.H. WALLMAN Director December 28, 2000
---------------------------
(Kathleen M.H. Wallman)
</TABLE>
49
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Year Ended September 30, 2000, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended September 30, 2000:
Allowance for doubtful accounts $282 1,217 (27) $1,472
Year Ended September 30, 1999:
Allowance for doubtful accounts 153 411 (282) 282
Year Ended September 30, 1998:
Allowance for doubtful accounts -- 178 (25) 153
</TABLE>
50
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1(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(2) Restated Certificate of Incorporation of the Registrant.
3.2(2) Amended and Restated Bylaws of the Registrant.
4.1(2) Reference is made to Exhibits 3.1, 3.2 and 10.4.
4.2(1) Specimen Common Stock certificate.
10.1(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, as amended.*
10.3(1) 1997 Employee Stock Purchase Plan.*
10.4(1) 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(1) Office lease dated as of March 25, 1997, by and between the
Registrant and SOMA Partners, L.P.
10.6(1) Office lease dated as of March 3, 1997, by and between Micromuse
plc, Marldown Limited and Christopher J. Dawes.
10.7(1) Office lease dated as of March 3, 1993, by and between Micromuse
plc, Guildquote Limited and Christopher J. Dawes.
10.8(1) 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.
10.9 1998 Non-Officer Stock Option/Stock Issuance Plan and forms of
agreements thereunder.
10.10 Employment Agreement as of February 17, 1999, by and between Gregory
Q. Brown and Micromuse Inc.*
10.11(3) Agreement and Plan of Reorganization by and among Micromuse Inc.,
CAN Acquisition Corporation. and Calvin Alexander Networking, Inc.
10.12(4) Agreement and Plan of Reorganization by and among Micromuse Inc.,
Salamander Acquisition Corp. and NetOps Corporation.
21.1 Subsidiaries of the Registrant.
23.1 Report on Schedule and Consent of Independent Auditors
27.1 Financial Data Schedule
(1) 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.
(2) 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.
(3) Incorporated by reference from the exhibit of the same number in the
Registrant's Form 10-K for the fiscal year ended September 30, 1999, as
filed with the SEC on December 28, 1999.
(4) Incorporated by reference from exhibit 2.1 to the Registrant's Form 8-K as
filed with the SEC on August 2, 2000.
* Indicates management contracts.
51
