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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-23067
CONCORD COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2710876
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
33 BOSTON POST ROAD, WEST
MARLBORO, MASSACHUSETTS 01752
(508) 460-4646
(ADDRESS AND TELEPHONE OF PRINCIPAL EXECUTIVE OFFICES)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 per share
(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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price of the Company's common stock on
March 1, 1998, as reported on the Nasdaq National Market was approximately
$339,862,720.
The number of shares outstanding of Common Stock as of March 1, 1998 was
12,391,028.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT FORM 10-K REFERENCE
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Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to
be held on April 30, 1998. Part III
Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1997. Part II, Items 6-8
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Concord develops, markets and supports a family of turnkey, automated,
scalable, software-based performance analysis and reporting solutions for the
management of computer networks. By providing a global view of network
performance, the Company's products enable the effective and efficient
management of large and medium-size multi-vendor networks, both by end users and
network service providers, including telecommunications carriers, Internet
Service Providers (ISPs), systems integrators and outsourcers. The Company's
Network Health product family retrieves and compiles vital network statistics,
performs extensive analyses of those statistics and provides intuitive,
informative, user-friendly graphical reports. The Company's software-only
solutions provide IT executives, managers and technicians with the information
necessary to assess and correct costly network inefficiencies, make
cost-effective network purchasing decisions, predict network failures and set
and monitor service levels.
The Company's initial target market has been organizations with large and
medium-size networks of 150 or more network elements. The Company markets to
these potential customers through its own sales force, sales agents, value added
resellers, network service providers, including telecommunication carriers, and
OEMs. As of December 31, 1997, the Company had over 500 customers operating in
and serving a variety of industries. Representative customers include America
Online, Inc., Ameritech Corporation, AT&T Corporation, The Bear Stearns
Companies, Inc., British Telecommunications plc, Burlington Northern Santa Fe
Corporation, Department of Commerce, Dow Jones & Company, Inc., Ernst & Young
LLP, MCI Communications Corporation, Morgan Stanley Group Inc., Motorola Inc.,
New York Stock Exchange, Inc., Pfizer Inc., Prudential Service Company, The
Procter & Gamble Company, Sprint Corporation, Viacom International Inc., Visa
International and U S WEST, Inc.
INDUSTRY BACKGROUND
The pervasiveness and sophistication of business process applications, such
as email, electronic commerce and enterprise resource planning systems, have
significantly increased the amount of data traffic across networks. As these
applications have become an integral part of managing information within an
enterprise, businesses have developed and expanded their computer networks to
connect remote operations, branch offices, telecommuters, customers and
suppliers, among others. These increases in data traffic, coupled with the
emergence of widely distributed computing across heterogeneous platforms, have
increased the demands placed on both LANs and WANs. The sophisticated and
complex technologies that have been developed to meet these demands, such as LAN
switching, frame relay and ATM, must not only enhance bandwidth and
connectivity, but must also interface with existing legacy environments in order
to build an effective integrated business infrastructure.
Increased network complexities, combined with inadequate centralized
network analysis and planning functions, have led to network congestion and the
inefficient use of both LAN and WAN resources and unnecessary purchases of
additional networking hardware, leased lines and digital carrier WAN bandwidth.
Because the consequences of network congestion and failure can range from a
temporary reduction in productivity to significant financial loss, the
reliability and performance of networks have assumed critical importance. To
ensure the reliability and performance of these networks, organizations are
increasingly relying on network management software.
The technical complexity of providing for high levels of automation,
aggregation and scalability over thousands of network elements has made
comprehensive network management applications difficult to develop. Solutions
originally developed for network management were centralized, mainframe-based
systems that offered a platform from which the network manager could monitor the
network. These systems were expensive, provided limited functionality and were
generally closed and proprietary. With the emergence of distributed computing
environments, independent tool vendors began developing solutions that solved
specific technical network problems. The emergence of MIBs along with a
standardized protocol (SNMP) provided
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not only a mechanism to measure all networking elements but also the required
enabling technology for technical network management. SNMP facilitated the
development of technical tools, such as network element management solutions and
RMON and RMON2 probe-based solutions. Network element management solutions allow
technical personnel to diagnose problems, but are usually limited to a
particular vendor's equipment. Probe-based solutions provide technical
information on a specific network segment only and may provide monitoring and
reporting capabilities that are usually dependent on data accumulated from the
particular probes.
Although these tools have enhanced the technical management of networks and
are particularly useful in isolating and correcting problems in networks after
such problems have already occurred, the dependency of organizations on their
networks has necessitated new, broad-based network management solutions. These
solutions enable organizations to optimize the performance and minimize the
costs of their existing network infrastructure, identify developing network
problems and support decisions relating to future network infrastructure growth.
IT executives and managers of both large and small networks are coming to
recognize that in order to optimize network resources and effectively plan for
future demand, performance analysis and reporting solutions must reside at the
core of the network as a means of aggregating relevant network data into a
comprehensive picture of network health.
THE CONCORD SOLUTION
Concord develops, markets and supports a family of turnkey, automated,
scaleable, software-based performance analysis and reporting solutions for the
management of computer networks. The Company's Network Health product family
retrieves and compiles vital network statistics, performs extensive analyses of
those statistics and provides intuitive, informative, user-friendly graphical
reports. The Company's products are capable of simultaneously polling, analyzing
and reporting on between 10,000 and 20,000 elements per workstation.
The Company's Network Health product family provides organizations with the
following benefits: (i) capacity planning -- providing information to support
business decisions relating to network utilization and future capacity
requirements; (ii) reduction in data communications expenses -- identifying
excess capacity on each WAN, leased line or frame relay circuit; (iii) effective
allocation of resources -- allowing management to effectively deploy networking
resources and personnel; and (iv) service level monitoring -- assisting managers
in making network resource allocation decisions within an organization and
assisting both network service providers and end users in monitoring the
availability of negotiated service level agreements.
In providing these benefits, the Company's Network Health product family
incorporates the following features:
Fully Automated, Turnkey Implementation. The Company's products provide
turnkey solutions for fully automated network performance analysis and
reporting. Installation can be accomplished in a few hours without the use of
additional network hardware. Once installed, the Company's software immediately
generates standardized reports on a variety of topics, such as: (i) situations
to watch for potential trouble spots; (ii) exceptions analysis for identifying
deviations from specified performance levels; and (iii) bandwidth utilization
for managing and allocating limited network resources. These standardized
reports can be accessed via the Web, directly at the network monitoring console,
or through printed reports.
Scaleable, Software-Only Solution. The Network Health product family is
designed to collect data from heterogeneous networking environments without the
use of additional probes and network monitoring tools. The Company's products
are easily scaled to meet the demands for network performance analysis and
reporting as an organization's network infrastructure expands. Network Health
provides managers with the ability to purchase add-on software licenses as
needed.
Multi-Level Reporting. The Company's Network Health product family
generates a comprehensive package of graphical reports that provide information
and analyses on a wide variety of pre-programmed parameters. Information is
provided for use at multiple levels of management, from a general overview of
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network performance for chief information officers to a port-by-port analysis of
specific network hardware for managers or technicians.
Technology and Vendor Independence. The Company's Network Health product
family provides performance analysis and reporting of elements within an
organization's heterogeneous LAN and WAN infrastructure, independent of network
technology and hardware vendor. The Company's products are easily extendible to
new technologies and network architectures.
PRODUCTS AND TECHNOLOGY
The Company's Network Health product family automatically provides
enterprise-wide performance analysis and reporting for the large number of
elements typically found within networks. The technical complexity of providing
for high levels of automation, aggregation and scalability over thousands of
network elements has made comprehensive network management applications
difficult to develop. The Network Health platform automatically locates devices
on the network, identifies MIB variables, polls devices, and stores data in a
relational database. After the data has been analyzed, Network Health
automatically generates multiple reports which can be retrieved from the network
console or via the Web. Network Health software operates continuously to provide
full-time data gathering and on demand reporting. Network Health reports show
the effects of usage and serve as a basis for agreeing to and understanding
service levels, proactively addressing potential network failures, managing
bandwidth and capacity, identifying security violations and understanding the
usage patterns of the network and the network's various elements.
The critical technology components in the Network Health architecture are
the polling engine, the MIB translation file, the database and group filter, and
the reporting engine. Each of these components is device independent, and thus
can function on any type of network device or segment irrespective of the
network equipment vendor or technology. These components automate the functions
of locating the appropriate devices for polling, gathering only the appropriate
variables and data from those devices, and converting the data into canonical
format which facilitates analysis. The distributed nature of the product allows
for the product components and the user to be located at any location within the
organization. Through the use of sophisticated algorithms and heuristics, the
gathered data can be analyzed to make predictions of upcoming problems
throughout the network. The report viewing components within the reporting
engine allow the rendering and display of multiple views and reports in a
graphical fashion for Web output, print output or integration level output to
other products.
By focusing on the issues of capacity, errors, service levels and
utilization, Network Health's manner of reporting provides a common model which
covers a broad spectrum of network elements and technologies. Pricing for
Network Health applications includes a fixed license fee per application and a
variable fee based on the number of network elements managed by that
application. During 1996 and 1997, initial orders with new customers for the
Company's Network Health products ranged from approximately $10,000 to $350,000.
The following are the Company's products:
Network Health 4.0 increased the number of network elements that can be
managed from a single server, provided enterprise and service provider customers
with an ability to customize Network Health and provided new and existing
customers with an NT version of Network Health.
Network Health -- LAN/WAN introduced scaleable performance analysis and
reporting for LANs as well as WANs by providing reports that allow users to
solve business problems. This application provides information on capacity,
errors, trends, over-utilization, under-utilization, and service levels through
intuitive charts and graphs. These charts and graphs minimize technology
differences to allow a single report format to cover a broad set of
technologies, including Ethernet, Token Ring, and fiber distributed data
interface (FDDI) to 56Kbps, T1, T3 and switched multimegabit data service
(SMDS).
Network Health -- Frame Relay is used to manage the unique aspects of frame
relay Permanent Virtual Circuits (PVCs). This application indicates poor carrier
service by: (i) identifying carrier network congestion;
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(ii) end user over-usage of the Committed Information Rate (CIR); and (iii)
timing for upgrades to higher capacities or downgrades to less expensive lower
capacities. Network Health -- Frame Relay is often used by network service
providers for quality of service discussion.
Network Health -- Router/Switch expands Network Health reports to cover the
increased complexity of managing the behavior of the network's routers and
switches. This application gathers information on and analyzes CPUs, memory
usage, buffer utilization, buffer misses and other such detail to provide the
first level of insight into the operation and capacities of the routers and
switches themselves. For example, with the Situations to Watch panel in the
Network Health -- Router/Switch report, needed memory upgrades can be forecasted
to allow for an orderly upgrade of the router's memory. When a router has been
identified as needing attention, the At-A-Glance Reports provide an historical
snapshot of a router's recent performance, enabling network managers to
determine a course of action.
Network Health -- Traffic Accountant is a software application that
provides information on nodes, access patterns and applications used. This
application scales to enterprise networks, providing an array of reports
covering cost allocation, security audit trails, security exception reports,
reconfiguration reports, application usage, Internet usage and department
utilization. The percentage of the entire network used by particular departments
or divisions in an organization can be reported in a single chart.
Network Health -- Server analyzes and reports on servers in a scaleable
manner allowing a network manager to understand the trends, capacities and
service levels of the server's CPUs, memory, disks, partitions, virtual memory,
swapping, paging and performance and operational characteristics. The diversity
of server vendors coupled with the increased complexity of servers necessitates
a unique application. The product's analysis and prediction capability, for
example, can be used to identify the disks in need of upgrade before they become
capacity constrained.
Network Health -- Service Level Reporting provides a one to two page report
on an entire corporate enterprise's network that summarizes network and server
availability, response time and capacity. These reports give IT executives
including the CIO a picture of the critical parameters being used by endusers of
the IT infrastructure. Service Level Reporting is useful in providing a report
against pre-determined goals for levels of capacity, availability and response
time that can be used by Service Providers with their enduser customers. This
product was introduced during December of 1997.
CUSTOMER SERVICE
The post-sales support organization is responsible for providing ongoing
technical support and training for the Company's customers. For an annual fee, a
customer will receive telephone and email support, as well as new releases of
the Company's products. The Company offers a toll-free customer support line to
customers. Support personnel answer the technical support calls and generally
provide same-day responses to questions that cannot be resolved during the
initial call. All calls are logged, opened, tracked, and closed with daily
updates to the customer, Concord's sales teams and Concord's executive
management team. Concord will deploy any one of its 14 field pre-sales technical
support representatives in the event that an on-site visit is necessary. At
December 31, 1997, the Company employed 10 technical post-sales support
personnel as well as two product trainers.
SALES AND MARKETING
The Company markets its products in the United States to organizations with
large and medium-size networks, as well as network service providers which
include telecommunications carriers, ISPs, systems integrators and outsourcers
primarily through a direct sales force, sales agents and through value added
resellers (VARs). Internationally, the Company markets exclusively through
distributors. Additionally, the Company has entered into joint marketing and
joint development arrangements with a number of companies.
At December 31, 1997, the Company had 11 domestic sales teams each
comprised of one direct sales person and one or two technical support people
targeting the following 11 different geographic regions: Atlanta and the
Southeast; Dallas; Detroit; Denver; New England and East Canada; New York; the
Carolinas;
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Northern California and West Canada; Philadelphia; Southern California; and
Washington, D.C. In addition, the Company employs six sales personnel to support
the 11 domestic sales teams. Internationally, the Company has a sales office in
London, England with one sales person and one technical support person. At
December 31, 1997 the Company utilized 11 international distributors in nine
geographic regions, including: the United Kingdom, Germany, France, Sweden,
Korea, the Benelux region, Australia, South America and South Africa. It is the
responsibility of each sales team to manage all sales within its geographic
territory by signing up, training, and managing a small number of sales agents,
VARs, network service providers and outsourcers, as well as selling directly to
customers. The Company generates sales through seminars, trade shows, Internet
postings, press articles, referrals, mass mailings and cold calling as well as
through relationships with sales agents, VARs, network service providers and
outsourcers.
The Company distributes its products through a network of more than 15
VARs, and at December 31, 1997, the Company had relationships with over 20
network service providers. The network service providers offer the Company's
products as part of their service offerings. At December 31, 1997, the Company
also had eight joint marketing and development partners, including Ascend
Communications, Inc., Bay Networks, Inc., Cabletron Systems, Inc., FORE Systems,
Inc., NetScout Systems, Inc. and Newbridge Networks Corporation that work with
the Company's direct sales force. The Company recently introduced a professional
services referral program aimed at its key network consulting partners. Under
this program, the Company will provide professional services through these
partners directly to its customers.
At December 31, 1997, the Company employed seven marketing personnel who
position, promote and market the Company's products. These individuals are
engaged in a variety of activities, including direct marketing, public
relations, tradeshows, advertising, Internet postings, and seminars. At December
31, 1997, the Company employed 37 sales personnel, consisting of five management
personnel, 12 sales persons, 16 technical support persons and four inside sales
persons.
PRODUCT DEVELOPMENT
Management believes that the Company's future success depends in large part
on its ability to continue to enhance existing products and develop new products
that maintain technological competitiveness and deliver value to existing and
new customers. The Company has made and intends to continue to make substantial
investments in product development. Extensive product development input is
obtained through customers and the Company's monitoring of end user needs and
changes in the marketplace.
The Company introduced the initial version of Network Health focused at the
LAN and WAN environments in the first quarter of 1995. During 1996, the Company
introduced three additional versions of Network Health -- Frame Relay,
Router/Switch and Traffic Accountant. During 1997, the Company introduced two
additional versions of Network Health -- Server and Service Level Reporting. The
Company is currently developing an enhanced version of Network Health aimed at
performance analysis and reporting for other networking and computing
environments.
The Company's total expenses for research and development for the years
1995, 1996 and 1997 were $2.4 million, $3.9 million and $4.6 million,
respectively. The Company anticipates that it will continue to commit
substantial resources to research and development in the future and that product
development expenses may increase in absolute dollars in future periods. To
date, the Company's development efforts have not resulted in any capitalized
software development costs. As of December 31, 1997, the Company's product
development organization consisted of 40 people.
COMPETITION
The market for the Company's products is highly competitive and subject to
rapid technological change. Although the Company has experienced limited
competition to date from products with comparable capabilities, the Company
expects competition to increase in the future. The Company currently competes
principally on the basis of: (i) the breadth of its products' features; (ii) the
automated, scaleable, and cost effective nature of its products; and (iii) the
Company's knowledge, expertise and service ability gained from years of close
interaction
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with customers. While the Company believes that it currently competes favorably
overall with respect to these factors, there can be no assurance that the
Company will be able to continue to do so.
The Company competes or may compete directly or indirectly with the
following categories of companies: (i) other developers of network performance
analysis and reporting solutions, such as Kaspia Systems, Inc., and report
toolset vendors, such as Desktalk Systems, Inc.; (ii) large, well established
networking OEMs such as International Business Machines Corporation,
Hewlett-Packard Company, and Cabletron Systems, Inc. that have developed network
management platforms; (iii) developers of network element management solutions
such as Cisco Systems, Inc., 3Com Corporation and Bay Networks, Inc.; (iv)
companies offering network performance reporting services such as International
Network Services (INS); and (v) to a lesser degree, probe vendors such as
NetScout Systems, Inc. and Visual Networks, Inc. Additional competitors,
including large networking or telecommunications equipment manufactures,
telecommunications service providers, and computer hardware and software
companies, may enter this market, thereby further intensifying competition.
Additionally, there can be no assurance that one or more of the Company's
customers may not attempt to develop competing products internally or that one
or more of the companies Concord has developed relationships with, such as the
network management platform developers and probe vendors, will not try to
develop a product that competes more directly with Network Health.
Many of the Company's current and prospective competitors have
significantly greater financial, selling and marketing, technical and other
resources than the Company. As a result, these competitors may be able to devote
greater resources to the development, promotion, sale and support of their
products than the Company. Moreover, these companies may introduce additional
products that are competitive with or better than those of the Company or may
enter into strategic relationships to offer better products than those currently
offered by the Company. There can be no assurance that the Company's products
would effectively compete with such new products.
To remain competitive, the Company must continue to invest in research and
development, selling and marketing, and customer service and support. In
addition, as the Company enters new markets and utilizes different distribution
channels, the technical requirements and levels and bases of competition may be
different than those experienced in the Company's current market. There can be
no assurance that the Company will be able to successfully compete against
either current or potential competitors in the future.
PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other contractual provisions to
establish, maintain and protect its proprietary rights in its products. The
Company has four issued U.S. patents, three pending U.S. patent applications and
various foreign counterparts. There can be no assurance that patents which have
been or may be issued will not be challenged, invalidated or circumvented, or
any rights thereunder will provide protection of the Company's intellectual
property rights. The Company believes that, because of the rapid pace of
technological change in the software and data communications industries, the
legal intellectual property protection for its products is a less significant
factor in the Company's success than the knowledge, abilities and experience of
the Company's employees, the frequency of its product enhancements, the
effectiveness of its marketing activities and the timeliness and quality of its
support services. See "Risk Factors -- Uncertain Protection of Intellectual
Property Rights." Certain technologies used in the Company's products are
licensed from third parties, including the database technology employed in the
Company's Network Health product family. Such third-party licenses are generally
non-exclusive, royalty based licenses. With respect to the database technology,
the Company is obligated to make minimum fixed price payments to the extent that
the royalty under such license does not exceed a certain minimum threshold. The
termination of any such licenses, or the failure of the third-party licensors to
adequately maintain or update their products, could result in delay in the
Company's ability to ship certain of its products while it seeks to implement
technology offered by alternative sources, and any required replacement licenses
could prove costly. While it may be necessary or desirable in the future to
obtain other licenses relating to one or more of the Company's products or
relating to current or future technologies, there can be no assurance that the
Company will be able to do so on commercially reasonable terms or at all.
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EMPLOYEES
As of December 31, 1997, the Company had a total of 111 employees, all but
two of whom were based in the United States. Of the total, 40 were in research
and development, 12 were in customer support, 37 were in sales, seven were in
marketing, and 15 were in finance, administration and operations. The Company's
future performance depends in significant part upon the continued service of its
key engineering, technical support and sales personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in attracting or retaining such personnel in the future. None of the
Company's employees are represented by a labor union or are subject to a
collective bargaining agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of December 31,
1997 are as follows:
NAME AGE POSITION
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John A. Blaeser......... 56 Chief Executive Officer, President and Director
Kevin J. Conklin........ 44 Vice President, Marketing
Ferdinand Engel......... 49 Vice President, Engineering
Gary E. Haroian......... 46 Vice President, Finance and Administration,
Chief Financial Officer, Clerk and Treasurer
Daniel D. Phillips, Jr.. 43 Vice President, Worldwide Sales
Set forth below is certain information relating to each executive officer's
business experience:
John A. Blaeser has been Chief Executive Officer and President of the
Company since January 1, 1996 and a Director of the Company since 1985. Prior to
joining the Company, from 1991 until 1996, Mr. Blaeser was Managing General
Partner of EG&G Venture Management, a venture capital firm.
Kevin J. Conklin has been Vice President, Marketing, of the Company since
March 1994. Prior to joining Concord, Mr. Conklin was Vice President of Product
Marketing and Development at Artel Communications from June 1993 until joining
Concord in March 1994, and from July 1991 to June 1993 Mr. Conklin served as
Director of Marketing at Artel Communications.
Ferdinand Engel has been the Vice President, Engineering of the Company
since 1989. Prior to joining Concord, Mr. Engel was Vice President, Engineering
for Technology Concepts at Bell Atlantic.
Gary E. Haroian has been the Vice President, Finance and Administration and
Chief Financial Officer of the Company since February 1997, and also serves as
Clerk and Treasurer of the Company. Prior to joining the Company, Mr. Haroian
was President and Chief Executive Officer of Stratus Computer. At Stratus, Mr.
Haroian held the positions of Controller from 1983 until 1985, Vice President
and Chief Financial Officer from 1985 until 1991, Vice President, Corporate
Operations, from 1991 until 1993, Executive Vice President from 1993 until 1994,
and President and Chief Operating Officer from 1994 until 1996.
Daniel D. Phillips, Jr. has been Vice President, Worldwide Sales, of the
Company since May 1994. Prior to joining Concord, Mr. Phillips was Vice
President, Worldwide Sales, of Epoch Systems. While at Epoch Systems from
September 1989 until May 1994, Mr. Phillips also held the positions of Vice
President, International and OEM Operations, and Director of International
Operations.
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RISK FACTORS
Information provided by the Company from time to time including statements
in this Form 10-K which are not historical facts, are so-called "forward-looking
statements" that involve risks and uncertainties, made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. In
particular, statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical facts
(including, but not limited to, statements concerning the plans and objectives
of management; increases in sales and marketing, research and development and
general and administrative expenses; and the Company's expected liquidity and
capital resources) may constitute forward-looking statements. The Company's
actual future results may differ significantly from those stated in any
forward-looking statements. Factors that may cause such differences include, but
are not limited to, the factors discussed below.
LIMITED OPERATING HISTORY; UNCERTAINTY OF FUTURE OPERATING RESULTS
The Company changed its focus to network management software in 1991 and
commercially introduced its first Network Health product in 1995. Accordingly,
the Company has only a limited operating history in the network performance
analysis and reporting market upon which an evaluation of its business and
prospects can be based. The Company has incurred significant net losses in each
of the five fiscal years prior to earning a small profit in 1997. As of December
31, 1997, the Company had accumulated net losses of $31.0 million. The limited
operating history of the Company and its dependence on a single product family
in an emerging market makes the prediction of future results of operations
difficult or impossible, and the Company and its prospects must be considered in
light of the risks, costs and difficulties frequently encountered by emerging
companies, particularly companies in the competitive software industry. Although
the Company has achieved recent revenue growth, and profitability for the
three-months ended September 30, 1997 and the three months ended December 31,
1997, there can be no assurance that the Company can generate substantial
additional revenue growth on a quarterly or annual basis, or that any revenue
growth that is achieved can be sustained. Revenue growth that the Company has
achieved or may achieve may not be indicative of future operating results. In
addition, the Company has increased, and plans to increase further, its
operating expenses in order to fund higher levels of research and development,
increase its sales and marketing efforts, develop new distribution channels,
broaden its customer support capabilities and expand its administrative
resources in anticipation of future growth. To the extent that increases in such
expenses precede or are not subsequently followed by increased revenues, the
Company's business, results of operations and financial condition would be
materially adversely affected. There can be no assurance that the Company will
sustain profitability on a quarterly or annual basis. The Company must achieve
substantial revenue growth in order to sustain profitability. In addition, in
view of recent revenue growth, the rapidly evolving nature of its business and
markets and its limited operating history in its current market, the Company
believes that period-to-period comparisons of financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance. Management believes that it is more likely than not that the
Company will not generate sufficient income to utilize available net operating
loss carryforwards of approximately $23.0 million and federal research and
development credit carryforwards of approximately $1.5 million as of December
31, 1997. In addition, there are limitations on the Company's use of net
operating loss carryforwards. Accordingly, the Company has recorded a full
valuation allowance for these assets.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company is likely to experience significant fluctuations in quarterly
operating results caused by many factors, including, but not limited to: (i)
changes in the demand for the Company's products; (ii) the timing, composition
and size of orders from the Company's customers, including the tendency for
significant bookings to occur in the last month of each fiscal quarter; (iii)
spending patterns and budgetary resources of its customers on network management
software solutions; (iv) the success of the Company's new customer generation
activities; (v) introductions or enhancements of products, or delays in the
introductions or enhancements of products, by the Company or its competitors;
(vi) changes in the Company's pricing policies or those of its competitors;
(vii) changes in the distribution channels through which products are sold;
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(viii) the Company's ability to anticipate and effectively adapt to developing
markets and rapidly changing technologies; (ix) changes in networking or
communications technologies; (x) the Company's ability to attract, retain and
motivate qualified personnel; (xi) changes in the mix of products sold; (xii)
the publication of opinions about the Company and its products, or its
competitors and their products, by industry analysts or others; and (xiii)
changes in general economic conditions. Unlike other software companies with a
longer history of operations, the Company does not derive a significant portion
of its revenues from maintenance contracts, and therefore does not have a
significant ongoing revenue stream that may tend to mitigate quarterly
fluctuations in operating results. Furthermore, the Company is attempting to
expand its channels of distribution, and increases in the Company's revenues
will be dependent on its ability to implement successfully its distribution
strategy. Due to the buying patterns of certain of the Company's customers and
also to the Company's own sales incentive programs focused on annual sales
goals, revenues in the Company's fourth quarter could be higher than revenues in
the first quarter of the succeeding year. There also may be other factors that
significantly affect the Company's quarterly results which are difficult to
predict given the Company's limited operating history, such as seasonality and
the timing of receipt and delivery of orders within a fiscal quarter.
Consistent with software industry practice, the Company expects to operate
with a limited amount of backlog. As a result, quarterly sales and operating
results depend generally on the volume and timing of orders within the quarter,
the tendency of sales to occur late in fiscal quarters and the ability of the
Company to fill orders received within the quarter, all of which are difficult
to forecast and manage. The Company's expense levels are based in part on its
expectations of future orders and sales, which, given the Company's limited
operating history, are extremely difficult to predict. A substantial portion of
the Company's operating expenses are related to personnel, facilities, and sales
and marketing programs. This level of spending for such expenses cannot be
adjusted quickly and is, therefore, relatively fixed in the short term.
Accordingly, any significant shortfall in demand for the Company's products in
relation to the Company's expectations would have an immediate and material
adverse effect on the Company's business, results of operations and financial
condition.
Due to all of the foregoing factors, the Company believes that its
quarterly operating results are likely to vary significantly in the future.
Therefore, in some future quarter the Company's results of operations may fall
below the expectations of securities analysts and investors. In such event, the
trading price of the Company's Common Stock would likely be materially adversely
affected.
EMERGING NETWORK MANAGEMENT SOFTWARE MARKET
The market for the Company's products is in an early stage of development.
Although the rapid expansion and increasing complexity of computer networks in
recent years has increased the demand for network 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. The development of this market and the Company's
growth will be significantly dependent on the willingness of network service
providers, including telecommunications carriers, ISPs, systems integrators and
outsourcers, to integrate network performance analysis and reporting software
into their product and service offerings. Failure of the network performance
analysis and reporting market to grow or failure of the Company to properly
assess and address such market would have a material adverse effect on the
Company's business, results of operations and financial condition.
DEPENDENCE ON TELECOMMUNICATIONS CARRIERS
A significant portion of the Company's revenues are, and are expected to
continue to be, attributable to sales of products to telecommunications
carriers. The Company's future performance is significantly dependent upon
telecommunications carriers' increased incorporation of the Company's solutions
as part of their package of product and service offerings to end users. The
failure of the Company's products to perform favorably in and become an accepted
component of the telecommunications carriers' product and service
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offerings, or a slower than expected increase or a decrease in the volume of
sales of the Company's products and services to telecommunications carriers,
could have a material adverse effect on the Company's business, results of
operations and financial condition.
CONCENTRATED PRODUCT FAMILY
The Company currently derives substantially all of its revenues from its
Network Health product family, and the Company expects that revenues from these
products will continue to account for substantially all of the Company's
revenues for the foreseeable future. Broad market acceptance of these products
is, therefore, critical to the Company's future success, and any factor
adversely affecting sales or pricing levels of these products could have a
material adverse effect on the Company's business, results of operations and
financial condition. There can be no assurance that market acceptance of Network
Health will increase or even remain at current levels. Factors that may affect
the market acceptance of the Company's products include the availability and
price of competing products and technologies and the success of the sales
efforts of the Company and its marketing partners. Moreover, the Company
anticipates that its competitors will introduce additional competitive products,
particularly if demand for network management software products increases, which
may reduce future market acceptance of the Company's products. In addition, new
competitors could enter the Company's market and offer alternative products
which may impact the market acceptance of the Company's products. The Company's
future performance will also depend in part on the successful development,
introduction and market acceptance of new and enhanced products. There can be no
assurance that any such new or enhanced products will be successfully developed,
introduced and marketed, and failure to do so would have a material adverse
effect on the Company's business, results of operations and financial condition.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON STANDARD PROTOCOLS
The software industry is characterized by rapid technological change,
frequent introductions of new products, changes in customer demands and evolving
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards can render existing products obsolete
and unmarketable. Network Health's ability to analyze and generate reports, as
well as the quality of the reports, is dependent on Network Health's utilization
of the industry-standard SNMP protocol and the data resident in conventional
MIBs. Any change in these industry standards, the development of vendor-
specific proprietary MIB technology, or the emergence of new network
technologies could affect the compatibility of Network Health with these devices
which, in turn, could affect Network Health's ability to analyze and generate
comprehensive reports or the quality of the reports. Furthermore, although the
Company's products currently run on industry-standard UNIX operating systems and
Windows NT, any significant change in industry-standard operating systems could
affect the demand for, or the pricing of, the Company's products. Any of the
foregoing developments could have a material adverse effect on the Company's
business, results of operations and financial condition.
PRODUCT ENHANCEMENTS AND NEW PRODUCTS
Because of rapid technological change in the software industry and
potential changes in the network management software market and industry
standards, the life cycle of versions of Network Health is difficult to
estimate. The Company's future success will depend upon its ability to address
the increasingly sophisticated needs of its customers by developing and
introducing enhancements to Network Health on a timely basis that keep pace with
technological developments, emerging industry standards and customer
requirements. There can be no assurance that the Company will be successful in
developing and marketing enhancements to Network Health or in developing new
products that respond to technological changes, evolving industry standards or
customer requirements, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and sale of such
enhancements or new products, or that such enhancements or new products will
adequately address the requirements of the marketplace and achieve any
significant degree of market acceptance.
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COMPETITION; NEW ENTRANTS
The market for the Company's products is new, intensely competitive,
rapidly evolving and subject to technological change. Competitive and
alternative offerings are available from the major product categories of remote
monitoring (RMON) probe vendors, element management software, and other
performance analysis and reporting offerings. Another area of competition comes
from a number of companies offering network performance reporting services;
including International Network Services (INS). In addition, the Company expects
the large network management platform vendors to begin to offer products
directly competitive with the Company's products. These companies may bundle
their products with other hardware and software in a manner that may discourage
users from purchasing products offered by the Company. This strategy may be
particularly effective for companies with leading market shares in the network
hardware and software market, including Hewlett-Packard Company, International
Business Machines Corporation and Cabletron Systems, Inc. Developers of network
element management solutions such as Cisco Systems, Inc., 3Com Corporation and
Bay Networks, Inc. may also compete with the Company in the future. The Company
expects competition to persist, increase and intensify in the future with
possible price competition developing in the Company's markets. Many of the
Company's current and potential competitors have longer operating histories and
significantly greater financial, technical and marketing resources and name
recognition than the Company. The Company does not believe its market will
support a large number of competitors and their products. In the past, a number
of software markets have become dominated by one or a small number of suppliers,
and a small number of suppliers or even a single supplier may dominate the
Company's market. If the Company does not provide products that achieve success
in its market in the short term, the Company could suffer an insurmountable loss
in market share and brand name acceptance, which would result in a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that the Company will be able to compete
effectively with current and future competitors.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company's success depends significantly upon its proprietary
technology. The Company relies on a combination of patent, copyright, trademark
and trade secret laws, non-disclosure agreements and other contractual
provisions to establish, maintain and protect its proprietary rights, all of
which afford only limited protection. The Company has four issued U.S. patents,
three pending U.S. patent applications, and various foreign counterparts. There
can be no assurance that patents will issue from these pending applications or
from any future applications or that, if issued, any claims allowed will be
sufficiently broad to protect the Company's technology. In addition, there can
be no assurance that any patents that have been or may be issued will not be
challenged, invalidated or circumvented, or that any rights granted thereunder
would provide protection of the Company's proprietary rights. Failure of any
patents to protect the Company's technology may make it easier for the Company's
competitors to offer equivalent or superior technology. The Company has
registered or applied for registration for certain trademarks, and will continue
to evaluate the registration of additional trademarks as appropriate. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or services or to obtain
and use information that the Company regards as proprietary. Third parties may
also independently develop similar technology without breach of the Company's
proprietary rights. In addition, the laws of some foreign countries do not
protect proprietary rights to as great an extent as do the laws of the United
States. In addition, the Company's products are licensed under shrink wrap
license agreements that are not signed by licensees and therefore may not be
binding under the laws of certain jurisdictions.
Certain technologies used by the Company's products are licensed from third
parties, generally on a non-exclusive basis. The termination of any such
licenses, or the failure of the third-party licensors to adequately maintain or
update their products, could result in delay in the Company's ability to ship
certain of its products while it seeks to implement technology offered by
alternative sources, and any required replacement licenses could prove costly.
While it may be necessary or desirable in the future to obtain other licenses
relating to one or more of the Company's products or relating to current or
future technologies, there can be no assurance that the Company will be able to
do so on commercially reasonable terms or at all.
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Although the Company does not believe that it is infringing the
intellectual property rights of others, claims of infringement are becoming
increasingly common as the software industry develops and legal protections,
including patents, are applied to software products.
Litigation may be necessary to protect the Company's proprietary
technology, and third parties may assert infringement claims against the Company
with respect to their proprietary rights. Any claims or litigation can be
time-consuming and expensive regardless of their merit. Infringement claims
against the Company can cause product release delays, require the Company to
redesign its products or require the Company to enter into royalty or license
agreements, which agreements may not be available on terms acceptable to the
Company or at all.
RISK OF PRODUCT DEFECTS; PRODUCT LIABILITY
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and testing and use by
current and potential customers, errors will not be found in new products after
commencement of commercial shipments or, if discovered, that the Company will be
able to successfully correct such errors in a timely manner or at all. The
occurrence of errors and failures in the Company's products could result in loss
of or delay in market acceptance of the Company's products, and alleviating such
errors and failures could require significant expenditure of capital and other
resources by the Company. The consequences of such errors and failures could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Since the Company's products are used by its customers to predict future
network problems and avoid failures of the network to support critical business
functions, design defects, software errors, misuse of the Company's products,
incorrect data from network elements or other potential problems within or out
of the Company's control that may arise from the use of the Company's products
could result in financial or other damages to the Company's customers. The
Company does not maintain product liability insurance. Although the Company's
license agreements with its customers typically contain provisions designed to
limit the Company's exposure to potential claims as well as any liabilities
arising from such claims, such provisions may not effectively protect the
Company against such claims and the liability and costs associated therewith.
Accordingly, any such claim could have a material adverse effect upon the
Company's business, results of operations and financial condition. The Company
provides warranties for its products for a period of time (currently three
months) after the software is purchased. The Company's license agreements
generally do not permit product returns by the customer, and product returns and
warranty expense for fiscal 1995, 1996 and 1997 represented less than 1.0% of
total revenues during each of such periods. However, no assurance can be given
that product returns will not increase as a percentage of total revenues in
future periods.
RELIANCE ON STRATEGIC PARTNERS AND OTHER EVOLVING DISTRIBUTION CHANNELS
The Company's distribution strategy is to develop multiple distribution
channels, including sales through strategic marketing partners and value added
resellers, such as Newbridge Networks Corporation; telecommunications carriers,
such as MCI Communications Corporation; OEMs, such as Cabletron Systems, Inc.;
and independent software vendors, as well as international distributors
(collectively "channel partners"). The Company has developed a number of these
relationships and intends to continue to develop new channel partner
relationships. Accordingly, the success of the Company will be dependent in
large part on its ability to develop these additional distribution relationships
and on the performance and success of these third parties, particularly
telecommunications carriers and other network service providers. The Company's
channel partner relationships have been established recently, and the Company
cannot predict the extent to which its channel partners will be successful in
marketing the Company's products. The Company generally expects that its
agreements with its channel partners will be terminable by either party without
cause. None of the Company's channel partners are required to purchase minimum
quantities of the Company's products and none of these agreements contain
exclusive distribution arrangements. The Company's inability to attract
important and effective channel partners, or their inability to penetrate their
respective market segments, or the loss of any of the Company's channel
partners, as a result of competitive products offered by other companies or
products
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developed internally by these channel partners or otherwise, could materially
adversely affect the Company's business, results of operations and financial
condition.
MANAGEMENT OF POTENTIAL GROWTH
The Company recently has experienced significant growth in its sales and
operations and in the complexity of its products and product distribution
channels. The Company has recently increased and is continuing to increase the
size of its sales force and coverage territories. Furthermore, the Company has
recently established and is continuing to establish additional distribution
channels through third party relationships. The Company's growth, coupled with
the rapid evolution of the Company's markets, has placed, and is likely to
continue to place, significant strains on its administrative, operational and
financial resources and increase demands on its internal systems, procedures and
controls. If the Company is unable to manage future growth effectively, the
Company's business, results of operations and financial condition could be
materially adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its key technical and senior management personnel, none of whom is bound by an
employment agreement. The loss of the services of any of such personnel could
have a material adverse effect on the business, results of operations and
financial condition of the Company. The Company does not maintain key person
life insurance policies on any of its employees other than John A. Blaeser. The
Company's success is highly dependent on its continuing ability to identify,
hire, train, motivate and retain highly qualified management, technical, and
sales and marketing personnel, including recently hired officers and other
employees. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to attract, assimilate or retain highly
qualified technical and managerial personnel in the future. The inability to
attract and retain the necessary management, technical, and sales and marketing
personnel could have a material adverse effect on the Company's business,
results of operations and financial condition.
EXPANSION INTO INTERNATIONAL MARKETS
The Company intends to expand its operations outside of the United States
and enter additional international markets, primarily through the establishment
of additional reseller arrangements. The Company expects to commit additional
time and development resources to customizing its products and services for
selected international markets and to developing international sales and support
channels. There can be no assurance that such efforts will be successful.
In addition to the uncertainty as to the Company's ability to establish an
international presence, there are certain difficulties and risks inherent in
doing business internationally, including, but not limited to: (i) costs of
customizing products and services for international markets; (ii) dependence on
independent resellers; (iii) multiple and conflicting regulations; (iv) exchange
controls; (v) longer payment cycles; (vi) unexpected changes in regulatory
requirements; (vii) import and export restrictions and tariffs; (viii)
difficulties in staffing and managing international operations; (ix) greater
difficulty or delay in accounts receivable collection; (x) potentially adverse
tax consequences; (xi) the burden of complying with a variety of laws outside
the United States; (xii) the impact of possible recessionary environments in
economies outside the United States; and (xiii) political and economic
instability. In addition, the Company's ability to expand its business in
certain countries will require modification of its products, particularly
national language support. The Company's current export sales are denominated in
United States dollars and the Company currently expects to continue this
practice as it expands its international operations. To the extent that
international sales continue to be denominated in U.S. dollars, an increase in
the value of the United States dollar relative to other currencies could make
the Company's products and services more expensive and, therefore, potentially
less competitive in international markets. To the extent that future
international sales are denominated in foreign currency, the Company's operating
results will be subject to risks associated with foreign currency fluctuation
and the Company would consider entering into forward exchange contracts or
otherwise engaging in hedging activities. To date, as all export sales are
denominated in U.S. dollars, the Company has not entered
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into any such contracts or engaged in any such activities. As the Company
increases its international sales, its total revenue may also be affected to a
greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe and other parts of the world.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computers systems and software products as the millennium (Year 2000)
approaches. In 1997, the Company initiated the necessary development to ensure
Year 2000 compliance in all the Network Health family of applications. In 1998,
the Company will commence a Year 2000 date conversion project to address all
internal existing computer systems and applications. Management has not yet
assessed the Year 2000 compliance expense, but based on a preliminary review to
date, does not expect the amounts required to be expensed over the next two
years to have a material effect on its financial position or results of
operations. There can be no assurance, however, that further assessment of the
Company's products and internal systems and applications will not indicate that
additional Company efforts to assure Year 2000 compliance are necessary, and
that such efforts may be costly. Further, there can be no assurance that the
systems operated by other companies upon which the Company relies will be Year
2000 compliant on a timely basis. The Company's business, financial condition or
results of operations could be materially adversely affected by the failure of
the Company's products and its internal systems and applications to properly
operate or manage data beyond 1999.
POSSIBLE VOLATILITY OF STOCK PRICE
The Company completed an initial public offering of its common stock during
October of 1997. The market price of the shares of Common Stock may be highly
volatile and could be subject to wide fluctuations in response to variations in
results of operations, announcements of technological innovations or new
products by the Company or its competitors, changes in financial estimates by
securities analysts or other events or factors. In addition, the financial
markets have experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many high
technology companies and that often have been unrelated to the operating
performance of such companies or have resulted from the failure of the operating
results of such companies to meet market expectations in a particular quarter.
Broad market fluctuations or any failure of the Company's operating results in a
particular quarter to meet market expectations may adversely affect the market
price of the shares of 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 instituted against such a company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business, results of operations and financial condition.
FUTURE CAPITAL FUNDING
The Company plans to continue to expend substantial funds on the continued
development, sales and marketing of the Network Health product family. There can
be no assurance that the Company's existing capital resources, the proceeds from
the Company's initial public offering during October of 1997 and any funds that
may be generated from future operations together will be sufficient to finance
the Company's future operations or that other sources of funding will be
available on terms acceptable to the Company, if at all. In addition, future
sales of substantial amounts of the Company's securities in the public market
could adversely affect prevailing market prices and could impair the Company's
future ability to raise capital through the sale of its securities. The failure
to obtain such funding, if required, could have a material adverse effect on the
Company's business, results of operations and financial condition.
ITEM 2. PROPERTIES
The Company's corporate office and principal facility is located in
Marlboro, Massachusetts. Under an amendment signed in March of 1997, the Company
increased space under the lease in this facility from 20,000 to 30,000 square
feet. The amended lease expires in June of 2002. The Company is also currently
negotiating an amendment to increase the space in this facility to 34,000 square
feet. This facility accommodates finance,
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administration and operations, research and development, customer support and
marketing. The Company also leases, on a short-term basis, sales office space in
Tustin, California, Dallas, Texas and London, England. The Company believes that
its current facilities will meet its needs through at least the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on the business, results of operations and financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company completed its initial public offering on October 24, 1997 at a
price of $14.00 per share. The Company's Common Stock trades on the Nasdaq
National Market under the symbol CCRD. The following table sets forth, for the
period indicated, the high and low closing sales prices for the Common Stock,
all as reported by the Nasdaq National Market.
PERIOD HIGH LOW
- ------ ------ ------
October 16, 1997 -- December 31, 1997....................... $23.25 $15.75
As of March 01, 1998, there were approximately 273 stockholders of record
of the Company's Common Stock.
DIVIDEND POLICY
The Company currently anticipates that it will retain all future earnings
for use in its business and does not anticipate that it will pay any cash
dividends in the foreseeable future. The payment of any future dividends will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements and the
general financial condition of the Company, general business conditions and
contractual restrictions on payment of dividends, if any. In addition, the
Company's lines of credit prohibit the payment of dividends without prior lender
approval.
USE OF PROCEEDS
On October 16, 1997, the Company commenced an initial public offering
("IPO") of 2,900,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company pursuant to the Company's final prospectus dated
October 15, 1997 (the "Prospectus"). The Prospectus was contained in the
Company's Registration Statement on Form S-1, which was declared effective by
the Securities and Exchange Commission (SEC File No. 333-33227) on October 15,
1997. Of the 2,900,000 shares of Common Stock offered, 2,300,000 shares were
offered and sold by the Company and 600,000 shares were offered and sold by
certain stockholders of the Company. As part of the IPO, the Company granted the
several underwriters an overallotment option to purchase up to an additional
435,000 shares of Common Stock (the "Underwriters' Option"). The IPO closed on
October 21, 1997 upon the sale of 2,900,000 shares of Common Stock to the
underwriters. On October 24, 1997, the Representatives, on behalf of the several
underwriters, exercised the Underwriters' Option, purchasing 435,000 additional
shares of Common Stock from the Company. The aggregate offering price of the IPO
to the public was $40,600,000 (exclusive of the Underwriters' Option), with
proceeds to the Company and selling shareholders, after deduction of the
underwriting discount, of $29,946,000 (before deducting offering expenses
payable by the Company) and $7,812,000 respectively. The
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aggregate offering price of the Underwriters' Option exercised was $6,090,000,
with proceeds to the Company, after deduction of the underwriting discount, of
$5,663,700 (before deducting offering expenses payable by the Company). Through
December 31, 1997 the aggregate amount of expenses incurred by the Company in
connection with the issuance and distribution of the shares of Common Stock
offered and sold in the IPO were approximately $3.6 million, including $2.7
million in underwriting discounts and commissions and $950,000 in other offering
expenses.
None of the expenses paid by the Company in connection with the IPO or the
exercise of the Underwriters' Option were paid, directly or indirectly, to
directors, officers, persons owning ten percent or more of the Company's equity
securities, or affiliates of the Company.
The net proceeds to the Company from the IPO, after deducting underwriting
discounts and commissions and other offering expenses were approximately $34.7
million.
To date, the Company has not utilized any of the net proceeds from the IPO.
The Company has invested all such net proceeds primarily in US treasury
obligations and other interest bearing investment grade securities.
None of the net proceeds from the IPO were used to pay, directly or
indirectly, directors, officers, persons owning ten percent or more of the
Company's equity securities, or affiliates of the Company.
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ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED
---------------------------------------------------
JAN. 1, DEC. 31, DEC. 30, DEC. 28, DEC. 31,
1994 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
License revenues.............................. $ 3,232 $ 3,416 $ 3,443 $ 7,845 $17,345
Service revenues.............................. 261 649 912 1,162 2,225
------- ------- ------- -------- -------
Total revenues........................ 3,493 4,065 4,355 9,007 19,570
Cost of revenues................................ 1,966 1,941 1,164 1,957 2,874
------- ------- ------- -------- -------
Gross profit............................... 1,527 2,124 3,191 7,050 16,696
------- ------- ------- -------- -------
Operating Expenses:
Research and development...................... 1,514 2,374 2,361 3,933 4,631
Sales and marketing........................... 2,300 3,391 3,694 7,040 10,173
General and administrative.................... 754 751 1,000 1,177 2,058
------- ------- ------- -------- -------
Total operating expenses.............. 4,568 6,516 7,055 12,150 16,862
------- ------- ------- -------- -------
Operating loss............................. (3,041) (4,392) (3,864) (5,100) (166)
Other income (expense), net..................... 37 (2) 80 45 297
------- ------- ------- -------- -------
Income (loss) from continuing operations...... (3,004) (4,394) (3,784) (5,055) 131
Income (loss) from discontinued operations...... (68) 117 -- -- --
------- ------- ------- -------- -------
Net income (loss)............................. $(3,072) $(4,277) $(3,784) $ (5,055) $ 131
======= ======= ======= ======== =======
Net income (loss) per common and potential
common share:
Basic......................................... $ (4.63) $ (6.34) $ (5.07) $ (6.64) $ 0.04
Diluted....................................... (4.63) (6.34) (5.07) (6.64) 0.01
Pro forma diluted............................. (3.06) (1.42) (0.84) (0.57) 0.01
Weighted average common and potential common
shares outstanding:
Basic......................................... 664 675 746 761 3,070
Diluted....................................... 664 675 746 761 11,319
Pro forma diluted............................. 1,003 3,007 4,507 8,869 11,319
FISCAL YEAR ENDED
---------------------------------------------------
JAN. 1, DEC. 31, DEC. 30, DEC. 28, DEC. 31,
1994 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 4,202 $ 1,619 $ 4,397 $ 1,664 $36,539
Working capital (deficit)....................... 4,329 1,907 3,316 (1,387) 32,431
Total assets.................................... 6,288 3,989 6,729 5,584 41,914
Long-term debt, net of current portion.......... -- -- -- 668 --
Redeemable convertible preferred stock.......... 5,161 7,527 13,616 14,478 --
Total stockholders' equity (deficit)............ (54) (4,716) (9,126) (15,035) 34,483
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing under the caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1997
Annual Report to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements together with the related notes and the
report of Arthur Andersen LLP, independent accountants, are set forth beginning
on page F-1 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information under the captions "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" as set forth in the Company's
proxy statement for its annual stockholders' meeting to be held April 30, 1998
is incorporated herein by reference.
The information concerning officers is included in Part I, Item 1 under the
caption "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" as set forth in
the Company's proxy statement for its annual stockholders' meeting to be held
April 30, 1998 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Securities Ownership of Certain
Beneficial Owners and Management" as set forth in the Company's proxy statement
for its annual stockholders' meeting to be held April 30, 1998 is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
18
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
PAGE NUMBER
-----------
1. Financial Statements:
Report of Independent Public Accountants................ F-1
Balance Sheets:
December 28, 1996 and December 31, 1997.............. F-2
Statements of Operations:
Years ended December 30, 1995, December 28, 1996 and
December 31, 1997................................... F-3
Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit):
Years ended December 30, 1995, December 28, 1996 and
December 31, 1997................................... F-4
Statements of Cash Flows:
Years ended December 30, 1995, December 28, 1996 and
December 31, 1997................................... F-5
Notes to the Financial Statements....................... F-6
2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
Included in Item 12 of Notes to the Financial
Statements
3. Exhibits:
See Index to Exhibits. The Exhibits listed in the
accompanying Index to Exhibits are filed or
incorporated by reference as part of this report.
(b) Reports on Form 8-K:
None
19
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Concord Communications, Inc.:
We have audited the accompanying balance sheets of Concord Communications,
Inc. (a Massachusetts corporation) as of December 28, 1996 and December 31,
1997, and the related statements of operations, redeemable convertible preferred
stock and stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Concord Communications, Inc.
as of December 28, 1996 and December 31, 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 19, 1998
F-1
22
CONCORD COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 28, DECEMBER 31,
1996 1997
------------ ------------
ASSETS
Current Assets:
Cash, cash equivalents and marketable securities.......... $ 1,663,896 $ 36,539,303
Accounts receivable, net of allowance of approximately
$210,000 and $280,000, respectively.................... 2,273,255 3,040,850
Prepaid expenses and other current assets................. 148,934 282,311
------------ ------------
Total current assets.............................. 4,086,085 39,862,464
------------ ------------
Equipment and Improvements, at cost:
Equipment................................................. 5,376,966 6,473,305
Leasehold improvements.................................... 78,759 85,957
------------ ------------
5,455,725 6,559,262
Less -- Accumulated depreciation and amortization......... 3,957,519 4,507,737
------------ ------------
1,498,206 2,051,525
------------ ------------
$ 5,584,291 $ 41,913,989
============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ 1,560,312 $ 1,764,580
Accrued expenses.......................................... 2,324,927 3,368,585
Deferred revenue.......................................... 1,331,291 2,298,092
Current portion of long-term debt......................... 257,000 --
------------ ------------
Total current liabilities......................... 5,473,530 7,431,257
------------ ------------
Long-Term Debt.............................................. 667,502 --
------------ ------------
Commitments and Contingencies (Note 8)
Redeemable Convertible Preferred Stock (none at December
31,1997):
Series A, $.01 par value --
Authorized -- 1,965,373 shares
Issued and outstanding -- 1,940,863 shares recorded at
redemption value...................................... 9,427,506 --
Series A-1, $.01 par value --
Authorized -- 212,044 shares
Issued and outstanding -- 36,070 shares recorded at
redemption value...................................... 179,106 --
Series B, $.01 par value --
Authorized -- 4,479,613 shares
Issued and outstanding -- 4,460,789 shares recorded at
redemption value...................................... 4,871,117 --
------------ ------------
Total redeemable convertible preferred stock...... 14,477,729 --
------------ ------------
Stockholders' Equity (Deficit)
Preferred Stock, $.01 par value --
Authorized -- 1,000,000 shares (none 1996); no shares
issued and outstanding................................ -- --
Common stock, $.01 par value --
Authorized -- 50,000,000 shares
Issued and outstanding -- 844,482 and 12,019,188
shares, respectively.................................. 8,445 120,193
Additional paid-in capital................................ 18,097,045 67,942,708
Deferred compensation..................................... -- (149,157)
Unrealized gains on marketable securities................. -- 19,750
Accumulated deficit....................................... (33,139,960) (33,450,762)
------------ ------------
Total stockholders' equity (deficit).............. (15,034,470) 34,482,732
------------ ------------
$ 5,584,291 $ 41,913,989
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
23
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
Revenues:
License revenues.................................. $ 3,443,040 $ 7,844,523 $17,344,307
Service revenues.................................. 911,964 1,162,242 2,225,287
----------- ----------- -----------
Total revenues............................ 4,355,004 9,006,765 19,569,594
Cost of Revenues.................................... 1,163,863 1,956,889 2,873,840
----------- ----------- -----------
Gross profit.............................. 3,191,141 7,049,876 16,695,754
----------- ----------- -----------
Operating Expenses:
Research and development.......................... 2,360,287 3,933,483 4,630,560
Sales and marketing............................... 3,694,198 7,039,662 10,173,182
General and administrative........................ 1,000,228 1,176,938 2,058,402
----------- ----------- -----------
Total operating expenses.................. 7,054,713 12,150,083 16,862,144
----------- ----------- -----------
Operating loss............................ (3,863,572) (5,100,207) (166,390)
----------- ----------- -----------
Other Income (Expense):
Interest income................................... 48,015 79,832 419,733
Interest expense.................................. -- (48,564) (126,836)
Other............................................. 31,877 14,076 4,248
----------- ----------- -----------
Total other income (expense).............. 79,892 45,344 297,145
----------- ----------- -----------
Net income (loss)......................... $(3,783,680) $(5,054,863) $ 130,755
=========== =========== ===========
Net income (loss) per common and potential
common share:
Basic............................................. $ (5.07) $ (6.64) $ 0.04
=========== =========== ===========
Diluted........................................... $ (5.07) $ (6.64) $ 0.01
=========== =========== ===========
Pro forma diluted................................. $ (0.84) $ (0.57) $ 0.01
=========== =========== ===========
Weighted average common and potential common
shares outstanding:
Basic............................................. 746,152 760,971 3,069,667
=========== =========== ===========
Diluted........................................... 746,152 760,971 11,319,479
=========== =========== ===========
Pro forma diluted................................. 4,506,723 8,869,229 11,319,479
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
24
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
----------------------------------------------------------------------------
SERIES A SERIES A-1 SERIES B
------------------------ ---------------------- ------------------------
NUMBER REDEMPTION NUMBER REDEMPTION NUMBER REDEMPTION
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
---------- ----------- --------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 1994........................... 1,706,232 $7,365,540 36,070 $ 161,057 -- $ --
Issuance of preferred stock and common stock, net of
issuance costs of $98,813......................... 234,631 957,292 -- -- 4,460,789 4,550,000
Accretion of dividends on preferred stock........... -- 570,807 -- 8,342 -- 2,617
Exercise of stock options........................... -- -- -- -- -- --
Net loss............................................ -- -- -- -- -- --
---------- ----------- ------- --------- ---------- -----------
BALANCE, DECEMBER 30, 1995........................... 1,940,863 8,893,639 36,070 169,399 4,460,789 4,552,617
Accretion of dividends on preferred stock........... -- 533,867 -- 9,707 -- 318,500
Exercise of stock options........................... -- -- -- -- -- --
Net loss............................................ -- -- -- -- -- --
---------- ----------- ------- --------- ---------- -----------
BALANCE, DECEMBER 28, 1996........................... 1,940,863 9,427,506 36,070 179,106 4,460,789 4,871,117
Issuance of common stock,
net of Issuance costs of $955,359................. -- -- -- -- -- --
Accretion of dividends on preferred stock........... -- 277,156 -- 5,151 -- 159,250
Conversion of redeemable convertible preferred stock
to common stock................................... (1,940,863) (9,704,662) (36,070) (184,257) (4,460,789) (5,303,367)
Exercise of stock options............................ -- -- -- -- -- --
Deferred compensation related to grants of stock
options............................................. -- -- -- -- -- --
Amortization of deferred compensation related to
grants of stock options............................. -- -- -- -- -- --
Unrealized gains on available-for-sale securities.... -- -- -- -- -- --
Net income........................................... -- -- -- -- -- --
---------- ----------- ------- --------- ---------- -----------
BALANCE, DECEMBER 31, 1997........................... -- $ -- -- $ -- -- $ --
========== =========== ======= ========= ========== ===========
REDEEMABLE CONVERTIBLE PREFERRED STOCK STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------- ------------------------------
SERIES B COMMON STOCK
------------ ----------------------
NUMBER $.01
TOTAL OF SHARES PAR VALUE
------------ ---------- ---------
BALANCE, DECEMBER 31, 1994........................... $ 7,526,597 682,487 $ 6,824
Issuance of preferred stock and common stock, net of
issuance costs of $98,813......................... 5,507,292 71,180 712
Accretion of dividends on preferred stock........... 581,766 -- --
Exercise of stock options........................... -- 6,678 67
Net loss............................................ -- -- --
------------ ---------- --------
BALANCE, DECEMBER 30, 1995........................... 13,615,655 760,345 7,603
Accretion of dividends on preferred stock........... 862,074 -- --
Exercise of stock options........................... -- 84,137 842
Net loss............................................ -- -- --
------------ ---------- --------
BALANCE, DECEMBER 28, 1996........................... 14,477,729 844,482 8,445
Issuance of common stock,
net of Issuance costs of $955,359................. -- 2,735,000 27,350
Accretion of dividends on preferred stock........... 441,557 -- --
Conversion of redeemable convertible preferred stock
to common stock................................... (14,919,286) 8,108,258 81,083
Exercise of stock options............................ -- 331,448 3,315
Deferred compensation related to grants of stock
options............................................. -- -- --
Amortization of deferred compensation related to
grants of stock options............................. -- -- --
Unrealized gains on available-for-sale securities.... -- -- --
Net income........................................... -- -- --
------------ ---------- --------
BALANCE, DECEMBER 31, 1997........................... $ -- 12,019,188 $120,193
============ ========== ========
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------
UNREALIZED
ADDITIONAL GAIN ON
PAID-IN DEFERRED MARKETABLE ACCUMULATED
CAPITAL COMPENSATION SECURITIES DEFICIT TOTAL
----------- ------------ ---------- ------------ ------------
BALANCE, DECEMBER 31, 1994........................... $18,134,985 $ -- $ -- $(22,857,577) $ (4,715,768)
Issuance of preferred stock and common stock, net of
issuance costs of $98,813......................... (50,451) -- -- -- (49,739)
Accretion of dividends on preferred stock........... -- -- -- (581,766) (581,766)
Exercise of stock options........................... 4,798 -- -- -- 4,865
Net loss............................................ -- -- -- (3,783,680) (3,783,680)
----------- --------- ------- ------------ ------------
BALANCE, DECEMBER 30, 1995........................... 18,089,332 -- -- (27,223,023) (9,126,088)
Accretion of dividends on preferred stock........... -- -- -- (862,074) (862,074)
Exercise of stock options........................... 7,713 -- -- -- 8,555
Net loss............................................ -- -- -- (5,054,863) (5,054,863)
----------- --------- ------- ------------ ------------
BALANCE, DECEMBER 28, 1996........................... 18,097,045 -- -- (33,139,960) (15,034,470)
Issuance of common stock,
net of Issuance costs of $955,359................. 34,626,991 -- -- -- 34,654,341
Accretion of dividends on preferred stock........... -- -- -- (441,557) (441,557)
Conversion of redeemable convertible preferred stock
to common stock................................... 14,838,203 -- -- -- 14,919,286
Exercise of stock options............................ 188,594 -- -- -- 191,909
Deferred compensation related to grants of stock
options............................................. 191,875 (191,875) -- -- --
Amortization of deferred compensation related to
grants of stock options............................. -- 42,718 -- -- 42,718
Unrealized gains on available-for-sale securities.... -- -- 19,750 -- 19,750
Net income........................................... -- -- -- 130,755 130,755
----------- --------- ------- ------------ ------------
BALANCE, DECEMBER 31, 1997........................... $67,942,708 $(149,157) $19,750 $(33,450,762) $ 34,482,732
=========== ========= ======= ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
25
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
Cash Flows from Operating Activities:
Net income (loss)................................ $(3,783,680) $(5,054,863) $ 130,755
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating
activities --
Depreciation and amortization................. 335,837 409,484 592,936
Changes in current assets and liabilities --
Accounts receivable......................... 147,562 (1,254,453) (767,595)
Prepaid expenses and other current assets... 159,387 (8,472) (133,377)
Accounts payable............................ 598,989 373,464 204,268
Accrued expenses............................ 369,333 1,646,087 1,043,658
Deferred revenue............................ 92,648 957,625 966,801
----------- ----------- ------------
Net cash (used in) provided by operating
activities............................. (2,079,924) (2,931,128) 2,037,446
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchases of equipment and improvements.......... (604,838) (734,571) (1,103,537)
Investments in marketable securities............. -- -- (28,661,367)
----------- ----------- ------------
Net cash used in investing activities............ (604,838) (734,571) (29,764,904)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from bank borrowings.................... -- 924,502 583,707
Repayments of bank borrowings.................... -- -- (1,508,209)
Proceeds from issuance of preferred and common
stock......................................... 5,457,553 -- 34,654,341
Proceeds from exercise of stock options.......... 4,865 8,555 191,909
----------- ----------- ------------
Net cash provided by financing
activities............................. 5,462,418 933,057 33,921,748
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... 2,777,656 (2,732,642) 6,194,290
Cash and Cash Equivalents, beginning of year....... 1,618,882 4,396,538 1,663,896
----------- ----------- ------------
Cash and Cash Equivalents, end of year............. $ 4,396,538 $ 1,663,896 $ 7,858,186
=========== =========== ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest........................... $ -- $ 48,564 $ 126,836
=========== =========== ============
Supplemental Disclosure of Noncash Transactions:
Accretion of dividends on preferred stock........ $ 581,766 $ 862,074 $ 441,557
=========== =========== ============
Deferred compensation related to grants of stock
options....................................... $ -- $ -- $ 191,875
=========== =========== ============
Conversion of redeemable convertible preferred
stock to common stock......................... $ -- $ -- $ 14,919,286
=========== =========== ============
Unrealized gain on available-for-sale
securities.................................. $ -- $ -- $ 19,750
=========== =========== ============
The accompanying notes are an integral part of these financial statements.
F-5
26
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Concord Communications, Inc. (the Company) is primarily engaged in the
development and sale of automated network reporting software to companies
principally in the United States and Europe.
The Company is subject to the risks associated with emerging,
technology-oriented companies. Primary among these risks are competition from
substitute products and the ability to successfully develop and market its
current and future products.
(a) Fiscal Year-End
Through fiscal 1996, the Company's fiscal year was the 52- or 53-week
period ended on the Saturday closest to December 31. References to 1995 and 1996
are for the 52-week periods ended December 30, 1995 and December 28, 1996,
respectively. Beginning in 1997, the Company has changed to a calendar year-end.
(b) Cash, Cash Equivalents and Marketable Securities
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company has classified its cash equivalents and marketable
securities as available-for-sale and recorded them at fair value, with the
unrealized gains and losses reported as a separate component of stockholders'
equity. The Company considers cash and highly liquid investments, purchased with
an original maturity of 90 days or less, to be cash and cash equivalents. Cash
and cash equivalents are $1,663,896 and $7,858,186 at December 28, 1996 and
December 31, 1997.
(c) Revenue Recognition
Revenue from software product sales is recognized upon shipment of the
product to customers. In cases where significant unfulfilled vendor obligations
remain upon shipment, the related revenue is deferred until such obligations are
fulfilled. Revenue from postcontract customer support and other related services
is recognized ratably as the obligations are fulfilled or when the related
services are performed. The deferred revenue balance at December 28, 1996 and
December 31, 1997 consists of prepayments on software maintenance contracts and
shipments to customers of software products for which certain significant vendor
obligations remain.
(d) Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation is provided
for on a straight-line basis over the useful lives of the assets, which are
estimated to be three to five years for all assets except leasehold
improvements, which are amortized over the life of the lease.
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(f) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-
F-6
27
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
sheet and credit risk concentrations. The Company has no significant
off-balance-sheet concentration of credit risk such as foreign exchange
contracts, option contracts or other foreign hedging arrangements. The Company
maintains its cash, cash equivalent and marketable securities with established
financial institutions. The Company does not believe it has accounts receivable
collection risk in excess of existing reserves. For the years ended December 30,
1995, December 28, 1996 and December 31, 1997, no individual customer accounted
for more than 10% of revenue.
(g) Software Development Costs
SFAS No. 86, Accounting for the Costs of Computer Software To Be Sold,
Leased or Otherwise Marketed, requires the capitalization of certain computer
software development costs incurred after technological feasibility is
established. The Company believes that once technological feasibility of a
software product has been established, the additional development costs incurred
to bring the product to a commercially acceptable level are not significant.
There were no capitalized software development costs at December 28, 1996 and
December 31, 1997.
(h) Net Income (Loss) per Share
In 1997, the Company adopted SFAS No. 128, Earnings Per Share, effective
December 15, 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. The Company has applied the provisions of SFAS
No. 128 retroactively to all periods presented. In accordance with Staff
Accounting Bulletin (SAB) No. 98, the Company has determined that there were no
nominal issuances of common stock or potential common stock in the period prior
to the Company's initial public offering (IPO). The dilutive effect of potential
common shares in 1997, consisting of outstanding stock options and redeemable
convertible preferred stock, is determined using the treasury method and the
if-converted method, respectively, in accordance with SFAS No. 128. Diluted
weighted average shares outstanding for 1995 and 1996 excludes the potential
common shares from stock options and redeemable convertible preferred stock
outstanding because to do so would have been antidilutive for the years
presented. Pro forma diluted net income (loss) per common and potential common
share assumes that all series of redeemable convertible preferred stock had been
converted to common stock as of the original issuance dates. Calculations of
basic, diluted and pro forma diluted net income (loss) per common share and
potential common share are as follows:
1995 1996 1997
----------- ----------- -----------
Net income (loss)................................... $(3,783,680) $(5,054,863) $ 130,755
----------- ----------- -----------
Weighted average common shares outstanding.......... 746,152 760,971 3,069,667
Potential common shares pursuant to stock options... -- -- 1,830,774
Potential common shares pursuant to conversion of
redeemable convertible preferred stock............ -- -- 6,419,038
----------- ----------- -----------
Diluted weighted average shares..................... 746,152 760,971 11,319,479
Pro forma conversion of redeemable convertible
preferred stock................................... 3,760,571 8,108,258 --
----------- ----------- -----------
Pro forma diluted weighted average shares
outstanding....................................... 4,506,723 8,869,229 11,319,479
----------- ----------- -----------
Basic net income (loss) per common share............ $ (5.07) $ (6.64) $ .04
=========== =========== ===========
Diluted net income (loss) per common and potential
common share...................................... $ (5.07) $ (6.64) $ .01
=========== =========== ===========
Pro forma diluted net income (loss) per common and
potential common share............................ $ (0.84) $ (0.57) $ .01
=========== =========== ===========
F-7
28
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) MARKETABLE SECURITIES
It is the Company's intent to maintain a liquid investment portfolio to
support current operations and to take advantage of investment opportunities;
therefore, all marketable securities are considered to be available-for-sale and
are classified as current assets. The amortized cost, unrealized gains (losses)
and fair value of marketable securities available-for-sale as of December 31,
1997 with maturity dates from January 1, 1998 through December 1, 2000, are as
follows:
UNREALIZED GAINS
AMORTIZED COST (LOSSES) FAIR VALUE
-------------- ---------------- -----------
US government obligations........................ $ 7,450,812 $ (924) $ 7,449,888
Corporate bonds and notes........................ 22,317,923 22,455 22,340,378
Asset-backed securities.......................... 5,402,979 (1,781) 5,401,198
----------- ------- -----------
35,171,714 19,750 35,191,464
Less: Amounts classified as cash-equivalents..... 6,510,435 (88) 6,510,347
----------- ------- -----------
Available-for-sale marketable securities......... $28,661,279 $19,838 $28,681,117
=========== ======= ===========
(3) LINE OF CREDIT AND LONG-TERM DEBT
During 1996, the Company entered into an agreement for an equipment line of
credit in the amount of $1,000,000 (the Equipment Line) with a bank. The
Equipment Line, as amended, carries interest at the bank's prime rate plus 2%
and was collateralized by substantially all of the Company's assets. As of
December 28, 1996, the outstanding borrowings under the Equipment Line were
$924,502. In 1997, the Company received additional advances of $74,185 through
March 25, 1997, at which time the total amount of $998,687 due was converted to
a term loan payable in 36 even monthly payments of principal plus interest
through March 25, 2000. In December 1997, the Company paid off all outstanding
principal and interest due on this term loan.
On April 3, 1997, the Company entered into an agreement for a revolving
working capital line of credit (the Working Capital Line) with the bank that
also held the Company's term loan payable. Under the agreement, the Company can
borrow up to the lesser of $2,500,000 or 90% of eligible accounts receivable, as
defined, minus the principal amount outstanding under the term loan payable.
Interest on outstanding borrowings is payable monthly and accrues at a rate of
prime plus 2%. The Working Capital Line is collateralized by substantially all
assets of the Company and requires compliance with certain financial covenants,
including the maintenance of minimum levels of tangible net worth, profitability
and revenues, as defined. The Working Capital Line expires on April 2, 1998. As
of December 31, 1997, no borrowings have been made by the Company under the
Working Capital Line.
On June 9, 1997, the Company entered into an agreement with another bank to
allow the Company to draw one or more loans (the Equipment Term Loans), up to
$1,000,000, for the purchases of qualifying equipment and financing of
qualifying software/engineering costs, as defined. Interest on the Equipment
Term Loans was due and payable monthly in arrears at the prime rate plus 0.75%.
Borrowings under the Equipment Term Loans were permitted through December 31,
1997, at which time the outstanding principal would have been due and payable in
36 even, consecutive monthly installments beginning January 30, 1998 through
December 29, 2000. The Equipment Term Loans were secured by the equipment
acquired. In addition, the Company was required to comply with certain financial
covenants, which include, among other items, minimum levels of capital base,
liquidity and profitability. The Company had borrowed $509,522 under this
agreement during 1997. In December, 1997, the Company paid off all outstanding
principal and interest under the Equipment Term Loans.
F-8
29
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) STOCKHOLDERS' EQUITY (DEFICIT)
In December 1995, the Company's Board of Directors approved a one-for-three
reverse stock split of its common and redeemable convertible preferred stock. On
October 9, 1997, the Company amended its certificate of incorporation to
authorize a 1-for-2 reverse stock split of the Company's common stock and
increase the number of authorized shares of common stock to 50,000,000. The
stock splits have been retroactively reflected in the accompanying financial
statements and notes for all periods presented.
In October 1997, the Company completed an initial public offering (the IPO)
of 2,735,000 shares of its common stock, inclusive of 435,000 shares exercised
to cover over-allotments. The sale of common stock resulted in net proceeds to
the Company of approximately $34,650,000, after deducting all expenses related
to the IPO.
(5) PREFERRED STOCK
In connection with the IPO, the Company's redeemable convertible preferred
stock was converted into 8,108,258 shares of common stock. Thereafter, the
Company's certificate of incorporation was amended to authorize 1,000,000 shares
of preferred stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend rights and rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or
designation of such series. At December 31, 1997, the Company has no issued or
outstanding shares of preferred stock.
(6) STOCK OPTION PLANS
In 1995, the Company's Board of Directors (the Board) approved the 1995
Stock Plan, which provides for the granting of incentive stock options (ISOs)
and nonqualified stock options. Prior to the adoption of the 1995 Stock Plan,
the Board granted options under the 1982 Employee Incentive Stock Option Plan,
the 1986 Nonqualified Stock Option Plan and the 1986 Stock Plan. Following the
completion of the IPO, the Company adopted the 1997 Stock Plan, the 1997
Employee Stock Purchase Plan and the 1997 Nonemployee Director Stock Option
Plan, for which the Company reserved 750,000, 375,000 and 95,000 shares of
common stock, respectively, for future issuance.
Under the 1995 and 1997 Stock Plans (the Plans), the Company may issue
options to purchase up to 2,687,300 shares of common stock, of which 556,200
options are available for grant as of December 31, 1997. ISOs may be granted at
an exercise price not less than the fair market value per share of common stock
on the date of grant, as determined by the Board. The price per share relating
to each nonqualified option granted under the Plans shall not be less than the
lesser of (i) the book value per share of common stock as of the end of the
Company's fiscal year immediately preceding the date of grant or (ii) 50% of the
fair market value per share of common stock on the date of grant. Vesting of the
options is determined by the Board, and the options expire 8 years from the date
of grant. An employee may convert his or her unexercised ISOs into nonqualified
options at any time prior to the expiration of such ISOs.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which requires the measurement of
the fair value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to the financial statements. As permitted
by SFAS No. 123, the Company will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
has elected the disclosure-only alternative under SFAS No. 123 for options
granted using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The
F-9
30
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
weighted average fair value per share of options granted during 1995, 1996 and
1997 was $0.46, $0.17 and $5.64, respectively. The weighted average assumptions
are as follows:
1995 1996 1997
------- ------- ----------
Risk-free interest rate...................... 6.5% 6.3% 5.1 - 6.0%
Expected dividend yield...................... -- -- --
Expected lives............................... 7 years 7 years 7 years
Expected volatility.......................... 80% 80% 80%
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income (loss) and basic, diluted and pro forma
diluted net income (loss) per common and potential common share would have been
as follows:
1995 1996 1997
----------- ----------- ---------
Net income (loss), as reported....................... $(3,783,680) $(5,054,863) $ 130,755
=========== =========== =========
Net income (loss), pro forma......................... $(3,812,217) $(5,105,339) $(320,629)
=========== =========== =========
Net income (loss) per share, as reported
Basic.............................................. $ (5.07) $ (6.64) $ 0.04
=========== =========== =========
Diluted............................................ $ (5.07) $ (6.64) $ 0.01
=========== =========== =========
Pro forma diluted.................................. $ (0.84) $ (0.57) $ 0.01
=========== =========== =========
Net income (loss) per share, pro forma
Basic.............................................. $ (5.11) $ (6.71) $ (0.10)
=========== =========== =========
Diluted............................................ $ (5.11) $ (6.71) $ (0.03)
=========== =========== =========
Pro forma diluted.................................. $ (0.85) $ (0.58) $ (0.03)
=========== =========== =========
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
may not be representative of that to be expected in future years.
The following table summarizes information about options outstanding at
December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING EXERCISE PRICE NUMBER EXERCISE PRICE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PER SHARE OUTSTANDING PER SHARE
- -------------- ----------- ---------------- ---------------- ----------- ----------------
$ .10 - 1.90 1,642,550 6.27 $ .44 516,879 $.19
4.10 -- 10.00 294,750 7.36 4.67 -- --
18.88 -- 21.88 193,800 7.80 19.38 -- --
---------
2,131,100
=========
F-10
31
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following schedule summarizes the activity under the stock option plans
for the three-year period ended December 31, 1997:
NUMBER OF PRICE PER WEIGHTED AVERAGE
SHARES SHARE PRICE PER SHARE
--------- ------------ ----------------
Outstanding at December 31, 1994............... 220,329 $ 1.20 $1.20
Granted...................................... 540,399 .60 .60
Exercised.................................... (6,678) .60 - 1.20 .73
Terminated................................... (328,028) .60 - 1.20 1.00
--------- ------------ -----
Outstanding at December 30, 1995............... 426,022 .60 .60
Granted...................................... 1,881,259 .10 - 1.90 .22
Exercised.................................... (84,137) .10 - .60 .10
Terminated................................... (518,802) .10 - .60 .51
--------- ------------ -----
Outstanding at December 28, 1996............... 1,704,342 .10 - 1.90 .23
Granted...................................... 784,700 1.90 - 21.88 7.29
Exercised.................................... (331,448) .10 - 1.90 .58
Terminated................................... (26,494) .10 - 8.50 2.56
--------- ------------ -----
Outstanding at December 31, 1997............... 2,131,100 $.10 - 21.88 $2.76
========= ============ =====
Exercisable at December 31, 1997............... 517,816 $.10 - 1.90 $0.19
========= ============ =====
In 1997, the Company granted one officer and one director options to
purchase in total 143,750 shares of common stock at an exercise price of $1.90
per share. At the date of grant, the estimated fair value per share of the
Company's common stock exceeded the exercise price of the options, and
accordingly, the Company has recorded deferred compensation of $191,875 related
to this difference at the date of grant. For the year ended December 31, 1997,
the Company has recorded compensation expense of $42,718 related to these
options grants.
The exercise price of all other options outstanding represents the fair
market value per share of common stock as of the date of grant.
(7) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This standard requires, among other things,
recognition of future tax effects, measured by enacted tax rates, attributable
to deductible temporary differences between the financial statement and income
tax bases of assets and liabilities.
The approximate income tax effects of these temporary differences are as
follows:
DECEMBER 28, DECEMBER 31,
1996 1997
------------ ------------
Net operating loss and federal tax credit
carryforwards............................... $ 12,291,000 $ 10,689,000
Reserves not yet deductible for tax
purposes.................................... 282,000 344,000
Depreciation.................................. 145,000 101,000
Deferred revenue.............................. 43,000 174,000
Capitalized research and development
expenses.................................... 1,276,000 2,284,000
Valuation allowance........................... (14,037,000) (13,592,000)
------------ ------------
$ -- $ --
============ ============
F-11
32
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has available net operating loss carryforwards of approximately
$23,000,000 and federal research and development tax credit carryforwards of
approximately $1,500,000 as of December 31, 1997 to reduce future income tax
liabilities. These carryforwards are subject to review and possible adjustment
by the appropriate taxing authorities and expire from 1999 through 2011 as
follows:
RESEARCH AND
NET OPERATING LOSS DEVELOPMENT TAX
FISCAL YEAR CARRYFORWARDS CREDIT CARRYFORWARDS
----------- ------------------ --------------------
1999.................................. $ 3,358,000 $ --
2000.................................. 3,659,000 --
2001.................................. 2,870,000 1,252,000
2002-2006............................. 1,369,000 150,000
2007-2011............................. 11,744,000 98,000
----------- ----------
$23,000,000 $1,500,000
=========== ==========
The Company has recorded a 100% valuation allowance against the net
deferred tax asset as of December 28, 1996 and December 31, 1997, as the Company
believes that it is more likely than not that it will not be able to realize
this asset. The decrease in the valuation allowance in 1997 primarily relates to
the Company's operating results.
Pursuant to the Tax Reform Act of 1986, the utilization of net operating
loss carryforwards for tax purposes may be subject to an annual limitation if a
cumulative change of ownership of more than 50% occurs over a three-year period.
As a result of the Company's preferred stock financings, such a change in
ownership occurred. As a result of this ownership change, the utilization of
$17,000,000 of the Company's net operating loss carryforwards will be limited to
approximately $325,000 per year. The Company is currently determining whether
the IPO resulted in another ownership change. If so, the utilization of
additional net operating loss carryforwards may be limited.
(8) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases facilities under an operating lease that expires in June
2002. The approximate future minimum rental payments under this lease, as
amended, are as follows:
AMOUNT
----------
1998........................................................ $ 444,000
1999........................................................ 504,000
2000........................................................ 564,000
2001........................................................ 575,000
2002........................................................ 293,000
----------
$2,380,000
==========
Rent expense was approximately $234,000, $244,000 and $346,000 for the
years ended December 30, 1995, December 28, 1996 and December 31, 1997,
respectively.
(b) Royalties
The Company has entered into several software license agreements that
provide the Company with exclusive worldwide licenses to distribute or utilize
certain patented computer software. The Company is required to pay royalties on
all related sales. Under one software license agreement, as amended, the Company
is obligated to make minimum quarterly royalty payments from 1995 through 1999.
The minimum payments
F-12
33
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are noncancelable and nonrefundable, but any minimum payments in excess of
amounts due for actual license sales in any quarter may be used as a credit
against future royalty fees in excess of the specified minimum payments. The
minimum royalty payments under this agreement are as follows:
AMOUNT
--------
1998........................................................ $490,000
1999........................................................ 450,000
--------
$940,000
========
Royalty expense under royalty agreements was $101,000, $735,000 and
$902,892 for fiscal 1995, 1996 and 1997, respectively.
(c) Legal Proceedings
From time to time, the Company may be exposed to litigation relating to its
products and operations. The Company is not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company's financial conditions or results of operations.
(9) ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 28, DECEMBER 31,
1996 1997
------------ ------------
Payroll and payroll-related........................ $ 537,959 $ 681,923
Royalties.......................................... 213,360 372,853
Outside commissions................................ 255,519 143,543
Customer deposits.................................. 382,075 1,085,521
Other.............................................. 936,014 1,084,745
---------- ----------
$2,324,927 $3,368,585
========== ==========
(10) EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code covering all eligible employees, as defined. The Plan
allows for employees to defer a portion of their salary up to 15% of pretax
compensation. While the Company has the discretion to make contributions to the
plan, no such contributions were made in 1995, 1996 or 1997.
F-13
34
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Revenues by geographic destination and as a percentage of total revenues
are as follows:
GEOGRAPHIC AREA BY DESTINATION 1995 1996 1997
------------------------------ ---------- ---------- -----------
North America......................... $3,965,078 $8,042,984 $17,159,771
Europe................................ 218,559 914,314 2,009,926
Asia.................................. 156,144 49,467 83,249
Other................................. 15,223 -- 316,648
---------- ---------- -----------
$4,355,004 $9,006,765 $19,569,594
========== ========== ===========
GEOGRAPHIC AREA BY DESTINATION 1995 1996 1997
------------------------------ ---- ---- ----
North America....................................... 91% 89% 88%
Europe.............................................. 5 10 10
Asia................................................ 4 1 1
Other............................................... -- -- 1
---- ---- ----
100% 100% 100%
==== ==== ====
(12) VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts
receivable reserve account:
BALANCE AT BALANCE AT
BEGINNING CHARGES TO END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
---------- ---------- ---------- ----------
1995............................ $ 20,000 $110,000 $ -- $130,000
1996............................ 130,000 135,000 (54,884) 210,116
1997............................ $210,116 $ 70,000 $ -- $280,116
F-14
35
CONCORD COMMUNICATIONS, INC.
FORM 10-K, DECEMBER 31, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized this 20th day of March, 1998.
Concord Communications, Inc.
/s/ GARY E. HAROIAN
--------------------------------------
Name: Gary E. Haroian
Title: Vice President of Finance
and Chief Financial Officer
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 and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN A. BLAESER Chief Executive Officer, March 20, 1998
- --------------------------------------------------- President and Director
John A. Blaeser (Principal Executive Officer)
/s/ GARY E. HAROIAN Chief Financial Officer,Vice March 20, 1998
- --------------------------------------------------- President of Finance,
Gary E. Haroian Treasurer and Clerk
(Principal Financial and
Accounting Officer)
/s/ FREDERICK W.W. BOLANDER Director March 20, 1998
- ---------------------------------------------------
Frederick W.W. Bolander
/s/ RICHARD M. BURNES, JR. Director March 20, 1998
- ---------------------------------------------------
Richard M. Burnes, Jr.
/s/ ROBERT C. HAWK Director March 20, 1998
- ---------------------------------------------------
Robert C. Hawk
/s/ JOHN ROBERT HELD Director March 20, 1998
- ---------------------------------------------------
John Robert Held
/s/ DEEPAK KAMRA Director March 20, 1998
- ---------------------------------------------------
Deepak Kamra
/s/ ROBERT M. WADSWORTH Director March 20, 1998
- ---------------------------------------------------
Robert M. Wadsworth
36
EXHIBIT INDEX
The following designated exhibits are either filed herewith or, where
information is provided under the SEC Document Reference heading corresponding
to such exhibit, incorporated by reference to such filing.
EXHIBIT
NO. DESCRIPTION SEC DOCUMENT REFERENCE
- ------- ----------- ----------------------
3.01 Restated Articles of Organization of the
Company
3.02 Restated By-laws of the Company
10.01 Working Capital Loan Agreement between the Exhibit No. 10.01 to Registration
Company and Silicon Valley Bank dated Statement on Form S-1 (No. 333-33227)
April 3, 1997
10.02 Revolving Promissory Note made by the Exhibit No. 10.02 to Registration
Company in favor of Silicon Valley Bank Statement on Form S-1 (No. 333-33227)
10.03 Equipment Line of Credit Letter Agreement Exhibit No. 10.03 to Registration
between the Company and Fleet Bank dated Statement on Form S-1 (No. 333-33227)
as of June 9, 1997
10.04 1995 Stock Plan of the Company Exhibit No. 10.04 to Registration
Statement on Form S-1 (No. 333-33227)
10.05 1997 Stock Plan of the Company Exhibit No. 10.05 to Registration
Statement on Form S-1 (No. 333-33227)
10.06 1997 Employee Stock Purchase Plan of the Exhibit No. 10.06 to Registration
Company Statement on Form S-1 (No. 333-33227)
10.07 1997 Non-Employee Director Stock Option Exhibit No. 10.07 to Registration
Plan of the Company Statement on Form S-1 (No. 333-33227)
10.08 The Profit Sharing/401(K) Plan of the Exhibit No. 10.08 to Registration
Company Statement on Form S-1 (No. 333-33227)
10.09 Lease Agreement between the Company and Exhibit No. 10.09 to Registration
John Hancock Mutual Life Insurance Company Statement on Form S-1 (No. 333-33227)
dated March 17, 1994, as amended on March
25,1997
10.10 First Amendment to Lease Agreement between Exhibit No. 10.10 to Registration
the Company and John Hancock Mutual Life Statement on Form S-1 (No. 333-33227)
Insurance Company dated March 25, 1997
10.11 Form of Indemnification Agreement for Exhibit No. 10.11 to Registration
directors and officers of the Company Statement on Form S-1 (No. 333-33227)
10.12 Restated Common Stock Registration Rights Exhibit No. 10.12 to Registration
Agreement between the Company and certain Statement on Form S-1 (No. 333-33227)
investors dated August 7, 1986
10.13 Amended and Restated Registration Rights Exhibit No. 10.13 to Registration
Agreement between the Company and certain Statement on Form S-1(No. 333-33227)
investors dated December 28, 1995
10.14 Management Change in Control Agreement Exhibit No. 10.14 to Registration
between the Company and John A. Blaeser Statement on Form S-1 (No. 333-33227)
dated as of August 7, 1997
10.15 Management Change in Control Agreement Exhibit No. 10.15 to Registration
between the Company and Kevin J. Conklin Statement on Form S-1 (No. 333-33227)
dated as of July 23, 1997
10.16 Management Change in Control Agreement Exhibit No. 10.16 to Registration
between the Company and Ferdinand Engel Statement on Form S-1 (No. 333-33227)
dated as of July 23, 1997
10.17 Management Change in Control Agreement Exhibit No. 10.17 to Registration
between the Company and Gary E. Haroian Statement on Form S-1 (No. 333-33227)
dated as of July 23, 1997
37
EXHIBIT
NO. DESCRIPTION SEC DOCUMENT REFERENCE
- ------- ----------- ----------------------
10.18 Management Change in Control Agreement Exhibit No. 10.18 to Registration
between the Company and Daniel D. Statement on Form S-1 (No. 333-33227)
Phillips, Jr. dated as of July 23, 1997
10.19 Stock Option Agreement dated January 1, Exhibit No. 10.19 to Registration
1996 between the Company and John A. Statement on Form S-1 (No. 333-33227)
Blaeser
10.20 Stock Option Agreement dated January 1, Exhibit No. 10.20 to Registration
1996 between the Company and John A. Statement on Form S-1 (No. 333-33227)
Blaeser
10.21 Letter Agreement between the Company and Exhibit No. 10.21 to Registration
Silicon Valley Bank dated March 25, 1996 Statement on Form S-1 (No. 333-33227)
together with the Loan Modification
Agreement dated November 14, 1996
10.22 Form of Shrink-Wrap License Exhibit No. 10.22 to Registration
Statement on Form S-1 (No. 333-33227)
13.01 Pages 12-28 of the Registrant's 1997
Annual Report to Stockholders
21.01 Subsidiaries of the Company
23.01 Consent of Arthur Andersen LLP
27.01 Financial Data Schedule