<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
REGISTRATION NO. 333-33227
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
CONCORD COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
MASSACHUSETTS 7372 04-2710876
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
CONCORD COMMUNICATIONS, INC.
33 BOSTON POST ROAD WEST
MARLBORO, MASSACHUSETTS 01752
(508) 460-4646
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
JOHN A. BLAESER, CHIEF EXECUTIVE OFFICER AND PRESIDENT
CONCORD COMMUNICATIONS, INC.
33 BOSTON POST ROAD WEST
MARLBORO, MASSACHUSETTS 01752
(508) 460-4646
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
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<S> <C>
EDWIN L. MILLER, JR., ESQ. LEWIS J. GEFFEN, ESQ.
TESTA, HURWITZ & THIBEAULT, LLP MINTZ, LEVIN, COHN, FERRIS,
125 High Street GLOVSKY AND POPEO, P.C.
Boston, Massachusetts 02110 One Financial Center
(617) 248-7000 Boston, Massachusetts 02111
(617) 542-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION DATED OCTOBER 10, 1997
2,900,000 SHARES
[CONCORD COMMUNICATIONS, INC. LOGO]
COMMON STOCK
Of the shares of Common Stock offered hereby, 2,300,000 shares are being
sold by Concord Communications, Inc. ("Concord" or the "Company") and 600,000
shares are being sold by the Selling Stockholders. The Company will not receive
any of the proceeds from the sale of shares by the Selling Stockholders. See
"Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price of the Common Stock will be between $10.00 and $12.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Common Stock has been approved for
quotation on the Nasdaq National Market, upon completion of this offering, under
the symbol "CCRD."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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============================================================================================
Price to Underwriting Proceeds to Proceeds to
Public Discount(1) Company(2) Selling
Stockholders
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Per Share.................... $ $ $ $
Total(3)..................... $ $ $ $
============================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company estimated at
$750,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 435,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , the Underwriting Discount
will total $ , the Proceeds to Company will total
$ and the Proceeds to the Selling Stockholders will total
$ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any orders in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of NationsBanc Montgomery Securities, Inc. on or about
, 1997.
---------------------
NATIONSBANC MONTGOMERY SECURITIES, INC.
BANCAMERICA ROBERTSON STEPHENS
WESSELS, ARNOLD & HENDERSON
, 1997
<PAGE> 3
[PICTURES AND CAPTIONS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
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<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information including "Risk Factors" and financial statements and notes thereto,
appearing elsewhere in this Prospectus.
THE COMPANY
Concord develops, markets and supports a family of turnkey, automated,
scaleable, 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 information technology (IT) executives, managers and
technicians with the information necessary to assess and correct costly network
inefficiencies, make cost-effective network purchasing decisions and predict
network failures.
The Company's Network Health product family is a line of performance
analysis and reporting solutions that automate the collection of critical
network information from the Simple Network Management Protocol (SNMP)
management information bases (MIBs) commonly installed in IT equipment. The
Company uses a proprietary MIB translation module that enables the gathering of
data from diverse network elements and technologies for analysis by Network
Health's patented performance analysis and reporting software. Immediately after
installation, the Company's products automatically generate reports that assess
network characteristics, including baseline performance, bandwidth utilization,
network volume, traffic and trends. Concord currently markets versions of
Network Health which are designed to analyze and report on: local and wide area
network (LAN and WAN) segments; specific applications for various network
elements, such as routers, switches and servers; and traffic pattern analysis of
the various nodes and applications used within the network.
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.
The Company's initial target market has been organizations with large and
medium-size networks comprised of 150 or more network elements. The Company
markets to these potential customers through its own sales force, sales agents,
network service providers, including telecommunications carriers, value added
resellers and OEMs. Frequently, customers initially purchase Network Health
products that analyze and report on a subset of their network elements. Benefits
derived from the initial licensing agreement by customers often lead to expanded
agreements that cover a larger proportion of the customers' networks. The
Company believes that within the performance analysis and reporting market there
are currently over 200 million potentially manageable elements. The Company
believes that to date less than 0.5% of these elements are being managed
utilizing software-based analysis and reporting.
As of August 31, 1997, the Company had over 400 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 Telecommunications Corp., Morgan Stanley Group Inc., Motorola Inc., New
York Stock Exchange, Inc., Pfizer Inc., The Prudential Service Company, The
Procter & Gamble Company, Sprint Corporation, Viacom International Inc., Visa
International and U S WEST, Inc.
3
<PAGE> 5
The Company was incorporated in Massachusetts in 1980 under the name
Concord Data Systems, Inc. and, in 1986, its legal name was changed to Concord
Communications, Inc. As used in this Prospectus, references to the "Company" and
"Concord" refer to Concord Communications, Inc. The Company's principal
executive offices are located at 33 Boston Post Road West, Marlboro,
Massachusetts 01752. The Company's telephone number is (508) 460-4646.
THE OFFERING
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<S> <C>
Common Stock offered by the Company................... 2,300,000 shares
Common Stock offered by the Selling Stockholders...... 600,000 shares
Common Stock to be outstanding after the offering..... 11,505,816 shares (1)
Use of Proceeds....................................... For general corporate purposes,
including working capital. See "Use
of Proceeds."
Nasdaq National Market symbol......................... CCRD
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS
----------------------------------------------- ENDED
DEC. DEC. DEC. JUNE 30,
JAN. 2, JAN. 1, 31, 30, 28, -------------------
1993 1994 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.......................... $ 2,048 $ 3,493 $ 4,065 $ 4,355 $ 9,007 $ 3,469 $ 7,701
Gross profit............................ 603 1,527 2,124 3,191 7,050 2,538 6,422
Loss from continuing operations......... (3,139) (3,004) (4,394) (3,784) (5,055) (2,795) (966)
Income (loss) from discontinued
operations............................ 2,195 (68) 117 -- -- -- --
Net loss................................ $ (944) $(3,072) $(4,277) $(3,784) (5,055) (2,795) (966)
Pro forma net loss per common and common
equivalent share (unaudited) (2)...... $ (0.52) $ (0.29) $ (0.10)
Pro forma weighted average number of
common and common equivalent shares
outstanding (unaudited) (2)........... 9,768 9,768 9,775
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4)
-------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 1,873 $ 1,873 $24,652
Working capital (deficit).................................. (2,467) (2,467) 20,312
Total assets............................................... 5,586 5,586 28,139
Long-term debt, net of current portion..................... 860 860 860
Redeemable convertible preferred stock..................... 14,919 -- --
Total stockholders' equity (deficit)....................... (16,328) (1,409) 21,370
</TABLE>
- ---------------
(1) Based on shares outstanding as of August 31, 1997. Excludes: (i) 2,017,314
shares of Common Stock issuable upon the exercise of options outstanding as
of such date at a weighted average exercise price of $1.10 per share; and
(ii) 1,221,250 additional shares reserved for future grants of issuances
under the Company's stock option and stock purchase plans. See
"Capitalization," "Management--Equity Plans," "--Director Compensation" and
Note 6 of Notes to Financial Statements.
(2) Computed on the basis described in Note 1 of Notes to Financial Statements.
(3) Adjusted to reflect, upon the closing of this offering, the conversion of
all outstanding shares of the Company's Preferred Stock into 8,108,258
shares of Common Stock.
4
<PAGE> 6
(4) Adjusted to reflect the sale of the shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $11.00, after
deducting the estimated underwriting discount and offering expenses. See
"Use of Proceeds" and "Capitalization."
RISK FACTORS
Certain risk factors should be considered by prospective purchasers of the
Company's Common Stock, including, but not limited to, the Company's limited
operating history, the fact that the Company derives substantially all of its
revenues from its Network Health product family and the fact that the Company
has significant accumulated net losses. See "Risk Factors."
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from the
results contemplated in the forward-looking statements as a result of a number
of factors, including, but not limited to, those discussed in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as those discussed elsewhere in this
Prospectus.
------------------------
Except as set forth in the Financial Statements or as otherwise noted
herein, information in this Prospectus: (i) assumes no exercise of the
Underwriters' over-allotment option; (ii) reflects the filing of the Restated
Articles of Organization of the Company and a 1-for-2 reverse split of the
Company's Common Stock, both of which will occur prior to this offering; and
(iii) reflects the conversion of all outstanding shares of Preferred Stock into
an aggregate of 8,108,258 shares of Common Stock, which will occur upon the
closing of this offering.
Network Health and the Concord logo are registered trademarks of the
Company. The Total View(TM) is a trademark of the Company. All other trademarks
or trade names referred to in this Prospectus are the property of their
respective owners.
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby.
LIMITED OPERATING HISTORY; ANTICIPATED CONTINUING LOSSES; 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 last five fiscal years and expects that it will not achieve profitability
on an annual basis until at least fiscal 1998, if at all. As of June 30, 1997,
the Company had accumulated net losses of $32.2 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, 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 achieve or sustain profitability. The Company
must achieve substantial revenue growth in order to become profitable. 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 $27.0 million and federal research and
development credit carryforwards of approximately $1.5 million as of December
28, 1996. 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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;
(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
6
<PAGE> 8
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. See
"Business -- Industry Background."
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 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. See "Business -- Customers."
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,
7
<PAGE> 9
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. See "Business -- Products and
Technology," and "-- Competition."
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 exclusively on industry-standard UNIX operating systems
and although the Company has a Windows NT product in development, 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. See "Business -- Industry
Background," "-- Products and Technology" and "-- Product Development."
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. See "Business -- Industry Background,"
"-- Products and Technology" and "-- Product Development."
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
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<PAGE> 10
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. See "Business -- Competition."
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.
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
9
<PAGE> 11
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. See "Business -- Proprietary Rights."
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 (usually six 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 1994, 1995 and 1996 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. See "Business -- Products and Technology," "-- Customers," and
"-- Product Development."
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 Telecommunications Corporation; other network service providers,
such as The Registry, Inc.; 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 developed internally by these channel partners or otherwise, could
materially adversely affect the Company's business, results of operations and
financial condition. See "Business -- Sales and Marketing."
10
<PAGE> 12
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. See "Business -- Sales and Marketing,"
"-- Employees," and "Management."
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. See "Business -- Employees" and
"Management."
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 into any such contracts
or engaged in any such activities. As the Company increases its international
sales, its
11
<PAGE> 13
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.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the shares of
Common Stock of the Company, and there can be no assurance that an active public
market for the shares of Common Stock of the Company will develop or be
sustained after the offering. The initial public offering price will be
determined by negotiation between the Company and the Underwriters based upon
several factors. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. 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.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Company's Common Stock in
the public market after this offering, or the perception that such sales could
occur, could adversely affect the market price of the shares of the Company's
Common Stock. Of the 11,505,816 shares of Common Stock to be outstanding upon
completion of this offering, the 2,900,000 shares offered hereby will be freely
tradeable without restriction. All of the remaining 8,605,816 shares of Common
Stock are restricted securities as that term is defined in Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). Of these
restricted securities, approximately 137,814 shares which are not subject to the
lock-up agreements described below will become eligible for sale in the public
market immediately following this offering pursuant to Rule 144(k) under the
Securities Act, 19,608 shares which are not subject to the lock-up agreements
described below will become eligible for sale in the public market immediately
following this offering pursuant to Rule 144 under the Securities Act and
approximately 134,096 additional shares which are not subject to the lock-up
agreements described below will become eligible for sale in the public market 90
days following the date of this Prospectus pursuant to Rule 701 under the
Securities Act. Taking into consideration the effect of lock-up agreements
entered into by all officers and directors and certain stockholders of the
Company, an additional 8,314,298 shares will become eligible for sale upon
expiration of the lock-up agreements 180 days after the date of this Prospectus,
subject to the provisions of Rules 144 and 701 under the Securities Act. The
Company intends to file a Registration Statement on Form S-8 not earlier than 30
days after the closing of the offering, to register an additional 3,239,814
shares. The holders of approximately 925,743 shares of Common Stock to be
outstanding upon the closing of this offering are entitled to certain rights
with respect to registration of such shares for sale to the public beginning 180
days after the closing of this offering. See "Management -- Executive
Compensation," and "-- Equity Plans," "Description of Capital Stock" and "Shares
Eligible for Future Sale."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
The completion of the offering will provide significant benefits to the
current stockholders of the Company, including certain of its directors and
officers. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. The completion of this offering will also
create a public market for the Common Stock and thereby is likely to increase
the market value of the investment by current
12
<PAGE> 14
stockholders in the Company. Upon the closing of this offering, assuming a
public offering price of $12.00 per share (which represents the highest price in
the range of initial public offering prices set forth on the front cover of this
Prospectus), the difference between the aggregate purchase paid by the Company's
current stockholders for their shares and the aggregate market value of such
shares will be approximately $77.3 million. See "Dilution," "Management," and
"Principal and Selling Stockholders."
POTENTIAL ISSUANCE OF PREFERRED STOCK; ANTITAKEOVER EFFECT OF CHARTER AND BY-LAW
PROVISIONS AND MASSACHUSETTS LAW
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock and to fix the rights, preferences, privileges and
restrictions of such shares without any further vote or action by the Company's
stockholders. Although the Company has no current plans to issue shares of
Preferred Stock, the potential issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of, and the voting and
other rights of the holders of, Common Stock. The Company's Board of Directors
is divided into three classes, each of which serves for a staggered three-year
term. Such staggered Board may make it more difficult for a third party to gain
control of the Company's Board of Directors. In addition, certain provisions of
the Company's corporate charter and by-laws and of Massachusetts law may be
deemed to have an anti-takeover effect and may discourage takeover attempts not
first approved by the Board of Directors (including takeovers which certain
stockholders may deem to be in their best interests). See "Description of
Capital Stock."
BROAD MANAGEMENT DISCRETION AS TO USE OF PROCEEDS
The net proceeds to be received by the Company in connection with this
offering will be used for working capital and general corporate purposes.
Accordingly, management will have broad discretion with respect to the
expenditure of such proceeds. Purchasers of shares of Common Stock offered
hereby will be entrusting their funds to the Company's management, upon whose
judgement they must depend, with limited information concerning the specific
working capital requirements and general corporate purposes to which the funds
will ultimately be applied. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in this offering will experience an immediate
dilution of $9.11 per share in the pro forma net tangible book value of their
Common Stock from the assumed initial public offering price of $11.00 per share.
Additional dilution is likely to occur upon the exercise of outstanding stock
options. See "Dilution."
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
this offering 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,300,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$22,779,000 ($27,229,050 if the Underwriters' over-allotment option is exercised
in full), after deducting the estimated underwriting discount and offering
expenses. The principal reasons for this offering are to increase the Company's
equity capital and to create a public market for the Company's Common Stock,
which may facilitate future access by the Company to public equity markets and
enhance the ability of the Company to use its Common Stock as a means for
attracting and retaining key employees. The Company expects to use the net
proceeds for general corporate purposes, including working capital. However, the
Company has not allocated any specific portion of the net proceeds to such
purposes, and management will have the ability to allocate such proceeds at its
discretion. From time to time in the ordinary course of business, the Company
evaluates the acquisition of products, businesses and technologies that
complement the Company's business, for which a portion of the net proceeds may
be used. Currently, however, the Company does not have any understandings,
commitments or agreements with respect to any such acquisitions. Pending use of
the net proceeds for the above purposes, the Company intends to invest such
funds in interest-bearing, investment-grade securities. The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders.
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.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the long-term indebtedness and
capitalization of the Company at June 30, 1997 on an actual, pro forma, and pro
forma as adjusted basis. The table should be read in conjunction with the
Company's Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(1)(2)
-------- ------------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, net of current portion............... $ 860 $ 860 $ 860
-------- -------- --------
Redeemable convertible preferred stock:
Preferred stock, par value $0.01 per share:
Authorized, 6,657,030 shares (no shares pro
forma and as adjusted); issued and
outstanding, 6,437,722 shares (no shares
pro forma or as adjusted)................ 14,919 -- --
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $0.01 par value:
Authorized 1,000,000 shares, no shares issued
and outstanding............................... -- -- --
Common stock, $0.01 par value:
Authorized 50,000,000 shares, issued and
outstanding, 909,465 shares (9,017,723 shares
pro forma and 11,317,723 shares as
adjusted)(3).................................. 9 90 113
Additional paid-in capital........................... 18,352 33,190 55,946
Deferred compensation................................ (141) (141) (141)
Accumulated deficit.................................. (34,548) (34,548) (34,548)
-------- -------- --------
Total stockholders' equity (deficit)....... (16,328) (1,409) 21,370
-------- -------- --------
Total capitalization....................... $ (549) $ (549) $ 22,230
======== ======== ========
</TABLE>
- ---------------
(1) Adjusted to give effect to the conversion of all of the outstanding shares
of Preferred Stock into Common Stock upon the closing of this offering.
(2) Adjusted to give effect to the sale by the Company of 2,300,000 shares of
Common Stock at an assumed initial public offering price of $11.00 per share
and the receipt of the estimated net proceeds therefrom. See "Use of
Proceeds."
(3) Based on shares outstanding as of June 30, 1997. Does not include 2,138,256
shares of Common Stock issuable upon the exercise of options outstanding as
of such date at a weighted average exercise price of $0.82 per share. Also
does not include 1,296,000 additional shares reserved for future grants of
issuances under the Company's stock option and stock purchase plans. See
"Capitalization," "Management -- Equity Plans," "-- Director Compensation"
and Note 6 of Notes to Financial Statements.
15
<PAGE> 17
DILUTION
As of June 30, 1997, the net tangible book value (deficit) of the Company
was ($16,553,476) or $(18.20) per share of Common Stock. The pro forma net
tangible book value (deficit) of the Company, assuming the conversion of all
outstanding shares of Preferred Stock, was $(1,634,190) or $(0.18) per share of
Common Stock. Pro forma net tangible book value (deficit) per share represents
the amount of the Company's total tangible assets less total liabilities divided
by the number of shares of Common Stock outstanding on a pro forma basis at that
date.
After giving effect to the sale of the 2,300,000 shares of Common Stock
offered by the Company hereby (at an assumed initial public offering price of
$11.00 per share and after deducting the estimated underwriting discount and
offering expenses), the pro forma net tangible book value of the Company as of
June 30, 1997 would have been approximately $21,371,000 or $1.89 per share. This
represents an immediate increase in net tangible book value of $2.07 per share
to existing stockholders and an immediate dilution of $9.11 per share to new
investors in this offering. The following table illustrates this per share
dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $11.00
Net tangible book value (deficit) per share as of June 30,
1997........................................................ $(18.20)
Increase in net tangible book value per share attributable to
the conversion of Preferred Stock........................... 18.02
-------
Pro forma net tangible book value (deficit) per share as of
June 30, 1997.............................................. (0.18)
Increase in net tangible book value per share attributable to
new investors............................................... 2.07
-------
Pro forma net tangible book value per share after this offering... 1.89
------
Dilution per share to new investors............................... $ 9.11
======
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company, and the average price paid per share by
existing stockholders and by the new investors purchasing shares in this
offering (before deducting the estimated underwriting discount and estimated
offering expenses), at an assumed initial public offering price of $11.00 per
share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER(1) PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 9,017,723 79.7% $33,130,000 56.7% $ 3.67
New investors...................... 2,300,000 20.3 25,300,000 43.3 $ 11.00
---------- ------- ----------- -------
Total......................... 11,317,723 100.0% $58,430,000 100.0%
========= ===== ========== =====
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders of 600,000 shares in this offering will
reduce the number of shares of Common Stock held by existing stockholders to
8,417,723, or 74.4% of the total number of shares of Common Stock
outstanding immediately after this offering, and will increase the number of
shares of Common Stock held by new investors to 2,900,000, or 25.6% of the
total number of shares of Common Stock outstanding immediately after this
offering. See "Principal and Selling Stockholders."
The foregoing table assumes: (i) the conversion of all outstanding shares
of Preferred Stock into Common Stock; (ii) no exercise of the Underwriters'
over-allotment option; and (iii) no exercise of stock options outstanding as of
June 30, 1997. As of June 30, 1997, there were options outstanding to purchase a
total of 2,138,256 shares of Common Stock at a weighted average exercise price
of $0.82 per share. To the extent that any of these options are exercised, there
will be further dilution to new investors. See "Capitalization," "Management --
Equity Plans," "Description of Capital Stock" and Note 6 of Notes to Financial
Statements.
16
<PAGE> 18
SELECTED FINANCIAL DATA
The following table sets forth for the periods indicated selected financial
data of the Company. The statement of operations data for the years ended
December 31, 1994, December 30, 1995 and December 28, 1996 and the six months
ended June 30, 1997 and the balance sheet data as of December 30, 1995, December
28, 1996 and June 30, 1997 have been derived from the Company's financial
statements audited by Arthur Andersen LLP, independent public accountants, which
are included elsewhere in this Prospectus. The statement of operations data for
years ended January 2, 1993 and January 1, 1994 and the balance sheet data as of
January 2, 1993, January 1, 1994 and December 31, 1994 have been derived from
financial statements audited by Arthur Andersen LLP not included in this
Prospectus. The statement of operations data for the six months ended June 30,
1996 have been derived from the unaudited financial statements of the Company.
The unaudited financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's financial position and results of operations for the period
presented. The results of operations for the six months ended June 30, 1997 are
not necessarily indicative of future results of operations. The data set forth
below are qualified by the more detailed financial statements and notes thereto
included elsewhere in this Prospectus and should be read in conjunction
therewith and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements and Notes thereto appearing
elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------------------------ JUNE 30,
JAN. 2, JAN. 1, DEC. 31, DEC. 30, DEC. 28, --------------------
1993 1994 1994 1995 1996 1996 1997
------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License revenues........................ $ 2,021 $ 3,232 $ 3,416 $ 3,443 $ 7,845 $ 2,982 $ 6,890
Service revenues........................ 27 261 649 912 1,162 487 811
------- ------- ------- ------- ------- ------- ------
Total revenues...................... 2,048 3,493 4,065 4,355 9,007 3,469 7,701
Cost of revenues............................ 1,445 1,966 1,941 1,164 1,957 931 1,279
------- ------- ------- ------- ------- ------- ------
Gross profit................................ 603 1,527 2,124 3,191 7,050 2,538 6,422
------- ------- ------- ------- ------- ------- ------
Operating expenses:
Research and development................ 1,174 1,514 2,374 2,361 3,933 1,850 2,126
Sales and marketing..................... 1,852 2,300 3,391 3,694 7,040 3,056 4,320
General and administrative.............. 766 754 751 1,000 1,177 492 900
------- ------- ------- ------- ------- ------- ------
Total operating expenses............ 3,792 4,568 6,516 7,055 12,150 5,398 7,346
------- ------- ------- ------- ------- ------- ------
Operating loss.............................. (3,189) (3,041) (4,392) (3,864) (5,100) (2,860) (924)
Other income (expense), net................. 50 37 (2) 80 45 65 (42)
------- ------- ------- ------- ------- ------- ------
Loss from continuing operations......... (3,139) (3,004) (4,394) (3,784) (5,055) (2,795) (966)
Income (loss) from discontinued
operations................................ 2,195 (68) 117 -- -- -- --
------- ------- ------- ------- ------- ------- ------
Net loss............................ $ (944) $(3,072) $(4,277) $(3,784) $ (5,055) $ (2,795) $ (966)
======= ======= ======= ======= ======= ======= ======
Pro forma net loss per common and common
equivalent share (unaudited)(1)........... $ (0.52) $ (0.29) $ (0.10)
Pro forma weighted average common and common
equivalent shares outstanding
(unaudited)(2)............................ 9,768 9,768 9,775
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1997
------------------------------------------------------ --------------------
JAN. 2, JAN. 1, DEC. 31, DEC. 30, DEC. 28, PRO
1993 1994 1994 1995 1996 ACTUAL FORMA(3)
------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 2,102 $ 4,202 $ 1,619 $ 4,397 $ 1,664 $ 1,873 $ 1,873
Working capital (deficit)................... 2,326 4,329 1,907 3,316 (1,387) (2,467) (2,467)
Total assets................................ 3,831 6,288 3,989 6,729 5,584 5,586 5,586
Long-term debt, net of current portion...... -- -- -- -- 668 860 860
Redeemable convertible preferred stock...... -- 5,161 7,527 13,616 14,478 14,919 --
Total stockholders' equity (deficit)........ 3,120 (54) (4,716) (9,126) (15,035) (16,328) (1,409)
</TABLE>
- ---------------
(1) Reflects the conversion of all outstanding shares of the Company's Preferred
Stock into 8,108,258 shares of Common Stock.
(2) Computed on the basis described in Note 1 of Notes to Financial Statements.
(3) Adjusted to reflect, upon the closing of this offering, the conversion of
all outstanding shares of the Company's Preferred Stock into 8,108,258
shares of Common Stock.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Concord develops, markets and supports a family of turnkey, automated,
scaleable, software-based performance analysis and reporting solutions for the
management of computer networks. Substantially all of the Company's revenues are
derived from the Network Health product family which began shipping in the first
quarter of 1995.
From its inception until 1992, the Company manufactured a line of
manufacturing automation hardware and software solutions utilizing the
Manufacturing Automation Protocol (MAP) designed for manufacturing shop floors.
Significant sales of MAP products ended in 1992 when the Company discontinued
all MAP-related operations. During 1990, the Company began to develop the
Trakker product line, the Company's first product for the network performance
analysis and reporting market. Trakker was a hardware and software solution that
performed segment monitoring within a LAN and collected data to be used for
performance analysis and reporting. Trakker was introduced during 1991 and was
the primary source of the Company's revenues from 1992 through 1994. In 1994,
the Company began developing the Network Health product family which began
shipping in 1995. During 1996, the Company discontinued sales of the Trakker
product line and derived substantially all of its revenues from the Network
Health product family.
The Company sells its Network Health product family to organizations with
large and medium-size networks, as well as network service providers which
include telecommunications carriers, ISPs, systems integrators and outsourcers.
Sales of the Network Health product line have come primarily from North America
and Europe. All of the Company's international sales have been made in U.S.
dollars through international distributors. The Company has no direct sales
operations outside of North America. The Company expects that sales made through
current and new international distributors will allow international revenues to
grow as a percentage of total revenues. The Company derives revenues from
software licenses and maintenance service agreements. Pricing for each product
in the Network Health product family includes a fixed price portion plus a
variable portion depending upon the number of elements being analyzed by the
Company's products within the customer's network. Revenues from software
licenses are recognized upon the execution of a purchase order and shipment of
the software provided that no significant obligations on the part of the Company
remain outstanding and collection of the related receivable is deemed probable
by management. Revenues from services are recognized ratably over the period
during which the services are performed. License revenues and service revenues
that have been prepaid or invoiced but that do not yet qualify for recognition
as revenues under the Company's policy, are reflected as deferred revenues. The
Company has not capitalized any software development costs as they have been
expensed as incurred.
As of June 30, 1997, the Company had accumulated net losses of $32.2
million. The Company's operating expenses increased substantially during 1996 as
the Company made investments related to the continued development, sales and
marketing of Network Health products. The market for the Company's products is
new and emerging. Therefore, the Company believes that it is critical to
continue to invest in a market penetration strategy that involves increased
investments in new products and product enhancements, additional sales and
marketing personnel, and new channels of distribution. Consequently, the Company
anticipates that operating expenses related to these areas will continue to
increase on an absolute basis for the foreseeable future.
18
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by each item in the Company's Statement of
Operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30,
-------------------------- -------------------
1994 1995 1996 1996 1997
------ ----- ----- --------- -----
<S> <C> <C> <C> <C> <C>
Revenues:
License revenues......................... 84.0% 79.1% 87.1% 86.0% 89.5%
Service revenues......................... 16.0 20.9 12.9 14.0 10.5
------ ----- ----- ----- -----
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues.............................. 47.7 26.7 21.7 26.8 16.6
Gross profit.................................. 52.3 73.3 78.3 73.2 83.4
------ ----- ----- ----- -----
Operating expenses:
Research and development................. 58.4 54.2 43.7 53.3 27.6
Sales and marketing...................... 83.4 84.8 78.2 88.1 56.1
General and administrative............... 18.5 23.0 13.0 14.2 11.7
------ ----- ----- ----- -----
Total operating expenses...................... 160.3 162.0 134.9 155.6 95.4
------ ----- ----- ----- -----
Operating loss................................ (108.0) (88.7) (56.6) (82.4) (12.0)
Other income (expense), net................... (0.1) 1.8 .5 1.8 (.5)
------ ----- ----- ----- -----
Loss from continuing operations.......... (108.1) (86.9) (56.1) (80.6) (12.5)
Income from discontinued operations...... 2.9 0.0 0.0 0.0 0.0
------ ----- ----- ----- -----
Net loss................................. (105.2)% (86.9)% (56.1)% (80.6)% (12.5)%
====== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES
Total revenues increased 122.0% to $7.7 million in the six months ended
June 30, 1997 from $3.5 million in the six months ended June 30, 1996.
License revenues increased 131.1% to $6.9 million, or 89.5% of total
revenues, in the six months ended June 30, 1997 from $3.0 million, or 86.0% of
total revenues, in the six months ended June 30, 1996. License revenues include
fees from granting the right to use the Company's software products. License
revenues in both periods were derived solely from the Network Health product
family. The increase in license revenues was the result of increased sales of
all products to new customers and sales to existing customers of: (i) the
Network Health-Router/Switch product, introduced in the third quarter of 1996;
(ii) other new and add-on product sales; and (iii) additional network element
license sales. There were no price increases for Network Health products during
the six-month period ended June 30, 1997.
Service revenues increased 66.5% to $811,000, or 10.5% of total revenues,
in the six months ended June 30, 1997 from $487,000, or 14.0% of total revenues,
in the six months ended June 30, 1996. Service revenues consist of fees for
maintenance and training services. During the first six months of 1996, the
Company derived service revenues from services provided for the Trakker product
line, all of which were discontinued during the second half of 1996. During the
first half of 1997, there were no service revenues derived from the maintenance
of the Trakker product line.
COST OF REVENUES
Cost of revenues increased 37.4% to $1.3 million, or 16.6% of total
revenues, in the six months ended June 30, 1997 from $931,000, or 26.8% of total
revenues in the six months ended June 30, 1996, resulting in gross margins of
83.4% and 73.2% in each respective period. Cost of revenues include direct
software product costs, which consist primarily of expenses related to product
component royalty costs, product media duplication and manuals, and personnel
costs associated with providing customer support in connection with maintenance
service contracts. Royalty costs are comprised of third party software costs.
The improvement in
19
<PAGE> 21
the gross margin percentage is attributable to lower royalty unit costs
associated with the higher sales unit volumes during the 1997 period and a
one-time charge of $400,000 for the write-off of inventories associated with the
discontinuation of the Trakker product line during 1996.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 14.9% to $2.1 million, or 27.6%
of total revenues, in the six months ended June 30, 1997 from $1.9 million, or
53.3% of total revenues, in the six months ended June 30, 1996. Research and
development expenses consist primarily of personnel costs associated with
software product development. The absolute dollar spending increased $276,000
due to increased headcount in research and development from 29 to 37 people
associated with the development of future product releases. The Company's
product architecture and higher revenue base have allowed the Company to
introduce new products at lower incremental costs thereby reducing research and
development expenses as a percentage of revenues. 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.
SALES AND MARKETING
Sales and marketing expenses increased 41.4% to $4.3 million, or 56.1% of
total revenues, in the six months ended June 30, 1997 from $3.1 million, or
88.1% of total revenues, in the six months ended June 30, 1996. Sales and
marketing expenses consist primarily of salaries, commissions to sales personnel
and agents, travel, tradeshow participation, public relations and other
promotional expenses. The absolute dollar spending increased $1.3 million; $1.1
million of the increase was due to the building of the direct sales force and
the balance was attributable to marketing and promotional activities to
penetrate the market for the Network Health product family. The decline in sales
and marketing expenses as a percentage of total revenues is due to sales
productivity improvements resulting from the expansion of the Network Health
product family, increased revenues from existing customers, improved lead
generation and reduced sales cycles. Headcount in sales and marketing increased
from 32 to 37 people from June 30, 1996 to June 30, 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 82.9% to $900,000, or 11.7%
of total revenues, in the six months ended June 30, 1997 from $492,000, or 14.2%
of total revenues, in the six months ended June 30, 1996. General and
administrative expenses consist primarily of salaries for financial,
administrative and management personnel and related travel expenses, as well as
legal and accounting expenses. The absolute dollar spending increased $408,000
due to increased headcount in general and administrative from eight to 14
people. General and administrative expenses declined as a percentage of total
revenues during the 1997 period due to a significant increase in revenues during
that period.
OTHER INCOME (EXPENSE), NET
Other income consists of interest earned on funds available for investment
net of interest paid in connection with the financing of capital equipment. The
Company realized net other income of $42,000 for the six months ended June 30,
1997 and had net other expense of $65,000 for the six months ended June 30,
1996.
FISCAL YEARS ENDED 1994, 1995 AND 1996
REVENUES
Total revenues were $4.1 million, $4.4 million and $9.0 million in 1994,
1995 and 1996, respectively, representing increases of 7.1% from 1994 to 1995,
and 106.8% from 1995 to 1996. All 1994 revenues were derived from the Trakker
product line. During the first quarter of 1995, the Company introduced its
current product family, Network Health. During 1995, revenues from Network
Health and Trakker were $2.3 million and $2.1 million, respectively. During
1996, revenues derived from the Network Health product family increased 294.9%
to $8.8 million from $2.2 million in 1995 as the Company began focusing solely
on its
20
<PAGE> 22
Network Health product family and the Trakker product line was discontinued.
There were no price increases for Network Health products during 1996.
License revenues were $3.4 million, $3.4 million and $7.8 million in 1994,
1995 and 1996, respectively, representing increases of 0.8%, from 1994 to 1995,
and 127.9% from 1995 to 1996. License revenues accounted for 84.0%, 79.1% and
87.1% of total revenues in 1994, 1995 and 1996, respectively. License revenues
increased by 0.8% to $3.4 million during 1995 as sales of the Trakker product
line decreased and sales of the Network Health product family increased. During
1996, the Company discontinued development and sales of the Trakker product line
resulting in a decline in Trakker license revenues to $181,000. License revenues
of Network Health increased to $7.7 million in 1996 as the Company began
shipping Network Health - Frame Relay in the first quarter of 1996 and Network
Health - Router/Switch in the third quarter of 1996. During 1996, the Company
added over 175 new Network Health customers.
Service revenues were $649,000, $912,000 and $1.2 million in 1994, 1995 and
1996, respectively, representing increases of 40.5% from 1994 to 1995, and 27.4%
from 1995 to 1996. Service revenues accounted for 16.0%, 20.9%, and 12.9% of
total revenues in 1994, 1995 and 1996, respectively. Service revenues increased
as a percentage of total revenues during 1995 as the Trakker product line
customer base continued to pay for maintenance of their existing Trakker
hardware products while current sales of those products declined as the Company
de-emphasized the Trakker product line. The decline in service revenues as a
percentage of sales during 1996 is attributable to the discontinuance of the
Trakker product line and the cancellation of related service contracts.
COST OF REVENUES
Cost of revenues were $1.9 million, $1.2 million and $2.0 million in 1994,
1995 and 1996, respectively, representing a decrease of 40.0% from 1994 to 1995,
and an increase of 68.1% from 1995 to 1996. Cost of revenues accounted for
47.7%, 26.7% and 21.7% of total revenues in 1994, 1995 and 1996, respectively,
resulting in gross margins of 52.3%, 73.3% and 78.3% in each respective period.
Cost of revenues declined as a percentage of total revenues in each of the three
years due to the decline in sales of the Trakker product line which included
hardware and the associated hardware costs. During 1996, substantially all
product revenues were derived from the licensing of the Network Health product
family and consequently, there was no significant hardware cost of revenues
incurred during 1996. Software product costs consist primarily of expenses
related to product component royalty costs, product media, duplication and
manuals.
RESEARCH AND DEVELOPMENT
Research and development expenses were $2.4 million, $2.4 million and
$3.9 million in 1994, 1995 and 1996, respectively, representing a decrease of
0.5% from 1994 to 1995, and an increase of 66.6% from 1995 to 1996. Research
and development expenses accounted for 58.4%, 54.2%, and 43.7% of total
revenues in 1994, 1995 and 1995, respectively. The absolute dollar spending
increased $1.6 million from 1995 to 1996 due to investments made in the Network
Health product family to add new products and enhance the existing products.
Headcount in research and development increased from 20 to 34 people from 1995
to 1996.
SALES AND MARKETING
Sales and marketing expenses were $3.4 million, $3.7 million and
$7.0 million in 1994, 1995 and 1996, respectively, representing an increase of
8.9% from 1994 to 1995, and 90.6% from 1995 to 1996. Sales and marketing
expenses accounted for 83.4%, 84.8% and 78.2% of total revenues in 1994, 1995
and 1996, respectively. The absolute dollar spending increased $3.3 million
from 1995 to 1996; $2.7 million of this increase was due to building the direct
sales force and the balance was attributable to marketing and promotional
activities to develop and penetrate the market for the Network Health product
family. During 1996, the Company increased sales and marketing personnel
expenses, incurred significantly higher commissions expense due to increased
sales, and increased its participation in industry trade shows, seminars and
other promotional activities. Sales and marketing expenses declined as a
percentage of total revenues from 1995 to 1996 due to sales productivity
improvements. Headcount in sales and marketing at the end of 1994, 1995 and
1996 was 21, 19 and 31 people, respectively.
21
<PAGE> 23
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $751,000, $1.0 million and
$1.2 million in 1994, 1995 and 1996, respectively, representing increases of
33.2% from 1994 to 1995, and 17.7% from 1995 to 1996. General and
administrative expenses accounted for 18.5%, 23.0% and 13.0% of total revenues
in 1994, 1995 and 1996, respectively. The absolute dollar spending increased
$177,000 from 1994 to 1995 due to the addition of personnel. General and
administrative expenses declined as a percentage of total revenues from 1995 to
1996 due to a significant increase in revenues.
OTHER INCOME (EXPENSE), NET
The Company had net other expense of $2,000 in 1994. The Company realized
net other income of $80,000 and $45,000, respectively, in 1995 and 1996.
INCOME FROM DISCONTINUED OPERATIONS
During 1992, the Company discontinued its MAP business segment and
completed a substantial portion of the disposition during 1992 and 1993. Income
from discontinued operations in 1994 related to the final disposition of the
remaining MAP assets.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly results of
operations in dollar amounts and as a percentage of total revenues for the
periods indicated. The information for each of these quarters includes all
adjustments, consisting only of normal recurring adjustments, which the Company
considers necessary for a fair presentation of this information when read in
conjunction with the Company's Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. The results of operations for any quarter and any
quarter-to-quarter trends are not necessarily indicative of the results to be
expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------
SEPT. DEC. MARCH JUNE SEPT. DEC. MARCH JUNE
1995 1995 1996 1996 1996 1996 1997 1997
----- ------- ------- ------- ------ ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License revenues................. $ 794 $ 1,252 $ 1,288 $ 1,695 $2,017 $ 2,845 $3,105 $3,785
Service revenues................. 258 256 250 237 327 348 351 460
----- ------- ------- ------- ----- ------- ----- -----
Total revenues............... 1,052 1,508 1,538 1,932 2,344 3,193 3,456 4,245
Cost of revenues..................... 231 349 328 604 377 648 587 692
----- ------- ------- ------- ----- ------- ----- -----
Gross profit......................... 821 1,159 1,210 1,328 1,967 2,545 2,869 3,553
----- ------- ------- ------- ----- ------- ----- -----
Operating expenses:
Research and development......... 587 795 898 952 961 1,122 1,035 1,091
Sales and marketing.............. 874 1,213 1,305 1,751 1,647 2,337 1,971 2,349
General and administrative....... 146 299 233 259 234 451 432 468
----- ------- ------- ------- ----- ------- ----- -----
Total operating expenses..... 1,607 2,307 2,436 2,962 2,842 3,910 3,438 3,908
----- ------- ------- ------- ----- ------- ----- -----
Operating loss....................... (786) (1,148) (1,226) (1,634) (875) (1,365) (569) (355)
Other income (expense), net.......... 27 14 42 23 (6) (14) (19) (23)
----- ------- ------- ------- ----- ------- ----- -----
Net loss..................... $(759) $(1,134) $(1,184) $(1,611) $ (881) $(1,379) $ (588) $ (378)
===== ======= ======= ======= ===== ======= ===== =====
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
----------------------------------------------------------------------------------------
SEPT. DEC. MARCH JUNE SEPT. DEC. MARCH JUNE
1995 1995 1996 1996 1996 1996 1997 1997
----- ----- ----- ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License revenues................ 75.5% 83.0% 83.7 % 87.7% 86.0% 89.1% 89.8 % 89.2%
Service revenues................ 24.5 17.0 16.3 12.3 14.0 10.9 10.2 10.8
----- ----- ----- ----- ----- ----- ----- -----
Total revenues.............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues.................... 22.0 23.1 21.3 31.3 16.1 20.3 17.0 16.3
Gross profit........................ 78.0 76.9 78.7 68.7 83.9 79.7 83.0 83.7
Operating expenses:
Research and development........ 55.8 52.7 58.4 49.3 41.0 35.1 29.9 25.7
Sales and marketing............. 83.0 80.5 84.9 90.6 70.2 73.3 57.0 55.4
General and administrative...... 13.9 19.8 15.1 13.4 10.0 14.1 12.6 11.0
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses.... 152.7 153.0 158.4 153.3 121.2 122.5 99.5 92.1
----- ----- ----- ----- ----- ----- ----- -----
Operating loss...................... (74.7) (76.1) (79.7) (84.6) (37.3) (42.8) (16.5) (8.4)
----- ----- ----- ----- ----- ----- ----- -----
Net other income (expense).......... 2.6 0.9 2.7 1.2 (0.3) (0.4) (0.5) (0.5)
----- ----- ----- ----- ----- ----- ----- -----
Net Loss.................... (72.1)% (75.2)% (77.0)% (83.4)% (37.6)% (43.2)% (17.0)% (8.9)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company's revenues, expenses and results of operations have been
subject to significant quarterly fluctuations, due to a variety of factors. See
"Risk Factors--Potential Fluctuations in Quarterly Operating Results." These
factors make the estimation and forecast of revenues difficult on a quarterly
basis. The Company plans to continue increasing its product development and
sales expenses in absolute dollars on a quarterly basis in an effort to increase
its market share. These increases will be based in part on the estimation and
forecasting of future revenues. As a result, the estimation of quarterly results
of operations is difficult and should not be relied upon as any indication of
future performance.
License revenues are difficult to forecast quarter to quarter. Due to the
buying patterns of certain of the Company's customers and also to the Company's
own sales incentive programs which are 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through the
private sale of equity securities and a credit line for equipment purchases. The
Company had a working capital deficit of $2.5 million at June 30, 1997.
Net cash provided by (used in) operating activities was $(4.1) million,
$(2.1) million and $(2.9) million in 1994, 1995 and 1996, respectively, and
$(2.5) million and $467,000 for the six months ended June 30, 1996 and 1997,
respectively. Cash and cash equivalents were $1.6 million, $4.4 million and $1.7
million at December 31, 1994, December 30, 1995 and December 28, 1996,
respectively and $1.9 million at June 30, 1997. In each period, the Company
experienced significant net losses. Deferred revenues increased for the year
ended December 28, 1996 by $958,000 due to an increase in overall sales
activity; $429,000 of this increase came from deferred maintenance contracts and
$529,000 was the result of software license sales with remaining contingencies
such as product acceptance and credit worthiness. Accrued expenses also
increased significantly for the year ended December 28, 1996 due primarily to
compensation expenses associated with the increase in sales volume.
Investing activities have consisted solely of the acquisition of property,
plant and equipment, most notably computer and networking equipment to support
the growing employee base and corporate infrastructure. Financing activities
consisted of the sales of preferred stock in 1994 and 1995 and proceeds from
bank borrowings in connection with equipment purchases during 1996 and the first
six months of 1997.
During 1996, the Company entered into an agreement for an equipment line of
credit in the amount of $1.0 million (the "Equipment Line") with Silicon Valley
Bank. The Equipment Line, as amended, bears interest at the bank's prime rate
(8.50% at June 30, 1997) plus 2% and is collateralized by substantially all of
the Company's assets. As of December 28, 1996, the outstanding borrowings under
the Equipment Line amounted to $925,000. In 1997, the Company received
additional advances of $74,000 through March 25,
23
<PAGE> 25
1997, at which time the total amount of $999,000 due under the Equipment Line
was converted into a term loan payable in 36 even monthly payments of principal
plus interest at the bank's prime rate plus 2% through March 25, 2000. As of
August 31, 1997, the principal balance on the term loan payable was $887,721.
The Company has a revolving working capital line of credit with Silicon
Valley Bank. Borrowings outstanding under the line are limited to the lesser of
$2.5 million or 90% of eligible accounts receivable less the principal amount
that remains outstanding under an existing equipment line of credit. Interest on
this line is at the rate of prime plus 2% and will be reduced to the prime rate
the first day of the month following the closing of this offering. The working
capital line of credit contains covenants which restrict the Company's ability
to incur debt, pay dividends, sell assets and engage in mergers, consolidations
and other acquisitions. In addition, the Company must comply with certain
financial covenants, including maintaining (i) an asset to liabilities ratio of
at least 2:1 and (ii) a tangible net worth of not less than $10.0 million. The
Company's line of credit expires on April 2, 1998. The Company intends to seek
to renew the line of credit prior to its termination or to seek alternative
working capital financing. As of August 31, 1997, the Company had $1,640,000
available for future borrowings under this agreement. The Company entered into a
new equipment line of credit with Fleet National Bank during June of 1997 for up
to $1.0 million. As of August 31, 1997, the Company had available $775,000 for
future borrowings under this agreement.
The Company had available net operating loss carryforwards of approximately
$27.0 million and federal research and development tax credit carryforwards of
approximately $1.5 million as of December 28, 1996 to reduce future income tax
liabilities. These carryforwards expire from 1997 through 2012 and are subject
to review and possible adjustment by the appropriate taxing authorities.
Approximately $13.7 million of the Company's net operating loss and research and
development tax credit carryforwards expire between 1997 and 2001. 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 1995 preferred stock financings, such a change in ownership has
occurred. Also, following the completion of the Offering, the Company expects
that another ownership change may occur. As a result of these ownership changes,
the use of the net operating loss carryforwards will be limited. The Company has
deferred tax assets of approximately $14.0 million comprised primarily of net
operating loss carryforwards and research and development credits. The Company
has fully reserved for these deferred tax assets by recording a valuation
allowance of $14.0 million, as the Company believes that it is more likely than
not that it will not be able to realize this asset.
The Company's current export sales are denominated in United States
dollars. To the extent that international sales continue to be denominated in
United States 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.
See "Risk Factors -- Expansion into International Markets."
As of August 31, 1997, the Company's principal sources of liquidity
included cash and equipment lines of credit. The Company believes that the net
proceeds from this offering, together with its current cash balances, cash
provided by future operations and available borrowings under its lines of
credit, will be sufficient to meet its working capital and anticipated capital
expenditure requirements for at least the next 12 months. Although operating
activities may provide cash in certain periods, to the extent the Company
experiences growth in the future, its operating and investing activities may
require significant cash. Consequently, any such future growth may require the
Company to obtain additional equity or debt financing.
24
<PAGE> 26
BUSINESS
INTRODUCTION
Concord develops, markets and supports a family of turnkey, automated,
scaleable, 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, 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 and
predict network failures.
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 August 31, 1997, the Company had over 400 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 Telecommunications Corp., 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, remote access, electronic commerce and order entry 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 has 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 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 manage-
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<PAGE> 27
ment 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 Company believes that within the
performance analysis and reporting market there are currently over 200 million
potentially manageable elements. The Company believes that to date less than
0.5% of these elements are being managed utilizing software-based analysis and
reporting.
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 over 5,000 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
network performance for chief information officers to a port-by-port analysis of
specific network hardware for managers or technicians.
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<PAGE> 28
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.
STRATEGY
The Company's objective is to maintain its leadership position in the
expanding market for automated network performance analysis and reporting
software solutions for the management of networks. To achieve its objective,
Concord is pursuing the following strategies:
LEVERAGE CORE TECHNOLOGY FOR FUTURE PRODUCT ENHANCEMENTS. The Network
Health product architecture is designed to enable the Company to rapidly develop
and market new product enhancements. The Company has targeted several critical
areas in which it seeks to extend its technology leadership, including
increasing scaleability to poll, analyze and report on over 20,000 elements per
workstation, improving ease-of-use and adding functionality through enhanced
predictive analysis. In addition, the Company is focused on expanding Network
Health's ability to analyze the performance of network applications and IT
technologies such as ATM switches and remote access devices and is focused on
porting the Network Health product family to a Windows NT platform.
EXPAND EXISTING CUSTOMER BASE. The Company has expended significant
resources to build an installed base of over 400 customers and network service
providers which, the Company believes, will create significant barriers to entry
for potential competitors. The Company intends to build upon its installed
customer base by employing a multi-tiered sales strategy that includes proactive
sales to organizations with large and medium-size networks and extending
alliances with network equipment vendors and network service providers. The
Company intends to expand its international presence from Europe and Korea to
include additional distributors in Europe, the Pacific Rim and Latin America.
FOCUS ON TELECOMMUNICATIONS CARRIERS AND OTHER NETWORK SERVICE
PROVIDERS. Telecommunications carriers and other network service providers are
both end users of Network Health products as well as providers of network
services that are enhanced by the Company's products. With many large
organizations outsourcing network services, the Company believes that network
service providers, including telecommunications carriers, ISPs, systems
integrators and outsourcers, can accelerate expansion of the Company's existing
customer base and play a crucial role in determining standards for network
performance analysis and reporting software.
EXPAND RELATIONSHIPS WITH STRATEGIC PARTNERS. The Company currently has
marketing or OEM relationships with Ascend Communications, Inc., Bay Networks,
Inc., Cabletron Systems, Inc., FORE Systems, Inc., NetScout Systems, Inc. and
Newbridge Networks Corporation. The Company's partnering strategy is to
establish cooperative arrangements with as many leading IT companies as
possible, ranging from joint marketing and development arrangements to OEM
arrangements for the development and marketing of integrated product offerings.
BROADEN PENETRATION OF AND LEVERAGE EXISTING CUSTOMER BASE. Concord
intends to aggressively focus on increasing revenues from its existing customer
base through the issuance of expansion licenses for the monitoring of additional
network elements and the securing of additional maintenance contracts. The
Company also intends to proactively target existing customers for new product
sales as well. The Company also intends to proactively target existing customers
for sales of future versions of Network Health which are capable of analyzing
the performance of network applications and technologies such as ATM switches
and remote access devices, and running on the Windows NT platform.
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
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<PAGE> 29
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 through the first six months of 1997, initial
orders with new customers for the Company's Network Health products ranged from
approximately $10,000 to $300,000.
The following table lists certain information with respect to the various
products which comprise the broad Network Health product family:
<TABLE>
<CAPTION>
APPLICATION DESCRIPTION QUARTER FIRST SHIPPED
- ------------------- ------------------------------------------------------- ---------------------
<S> <C> <C>
LAN/WAN Monitors, analyzes and reports on performance of shared Q1 1995
and switched media LANs, WAN links, modem banks and
other RMON or MIB capable media.
Frame Relay Identifies actual utilization and quality of services Q1 1996
provided, compares to current committed information
rates, predicts usage trends and enables modeling of
appropriate purchased bandwidth using data collected
from RMON and other MIBs.
Router/Switch Profiles performance of critical internetworking Q3 1996
devices enabling proactive management, rapid
troubleshooting, and informed upgrade and purchase
decisions.
Traffic Accountant Using data available from RMON2 probes, provides Q4 1996
enterprise level view of traffic content (applications
and users) mapped to user defined business groupings
such as departments, managed domains, business
processes, geographic areas, and customers. Facilitates
chargeback, budget justification, and usage policy
enforcement.
Server Profiles performance of networked servers, enabling Q3 1997
proactive management, rapid troubleshooting and
informed upgrade and purchase decisions.
</TABLE>
Additionally, the Company is currently developing an enhanced version of
Network Health. This version of the software is expected to significantly
increase the number of network elements that can be managed from a single
server, enhance the ability of customers and network service providers to
customize Network Health's reports and extend the operating systems supported by
Network Health to include Windows NT.
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<PAGE> 30
NETWORK HEALTH -- LAN/WAN pioneered 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). A typical initial installation manages approximately 100 segments, rings
or leased lines.
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; (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. A typical initial installation manages approximately 250 PVCs.
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. A typical initial installation manages
approximately 50 devices.
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. A typical
initial installation collects data from 50 RMON2 probes.
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. This product was introduced during July of 1997.
REPORT COMPONENTS
Network Health reports can be viewed daily, weekly and monthly in a secure
manner by IT executives, managers and technicians as well as departments,
divisions and business units. The broad nature of the Network Health model for
displaying information allows a few key components to be used in multiple
products, each of which is described below.
MAIN REPORT
The Main Report provides the user with a number of different ways to view
the elements managed by Network Health in a single report format. This report
provides the following information:
- Daily Network Volume -- Shows historical trend in the entire network
- Hourly Network Volume -- Shows daily trend, compared to an historic
baseline
- Hourly Health Index -- Shows hourly quality of service of the network
- Situations to Watch -- Predicts when problems will occur
- Volume Leaders -- Shows volume and health of the largest elements in the
network
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<PAGE> 31
- Health Index Leaders -- Shows elements most in need of proactive
attention
- Volume Change Leaders -- Shows elements with change that create
performance problems
- Health Index Change Leaders -- Shows elements improving or declining in
the quality of service
- Daily Volume vs. Baseline -- Shows per element volume and historical
trend comparisons
- Bandwidth Utilization -- Shows per element daily bandwidth distribution
- Average Health Index -- Shows per element quality of service indicator
EXCEPTION REPORT
The Exception Report is often used as the morning "To do" list for the
network managers. This report provides the following information:
- Exception Summary -- "To do" list naming elements in need of proactive
attention
- Exception Detail Report -- Per element detail of "To do" list detailing
problems and accompanied by graphic historical information
AT-A-GLANCE AND DRILL DOWN REPORTS
The At-A-Glance and Drill Down Reports allow the user to view the element
in sufficient detail to understand the next action required and what resources
are necessary to dispatch in order to troubleshoot and proactively eliminate the
problem. These reports provide the following information:
- At-A-Glance -- Shows a detailed history of essential performance and
service indicators of routers, switches and servers
- Bandwidth Utilization -- Displays historical information on any data
collected
- Multi-variable trend -- Displays a range of historical information on
elements in the database
TRAFFIC ACCOUNTANT REPORTS
Traffic Accountant has a broad range of reports and capability to aggregate
nodes, networks and data. These reports provide the following information:
- Accounting Report -- Displays total network volume consumed by
individual departments
- Security Report -- Shows unauthorized access to the network and the use
of network resources
- Audit Trail -- Shows detailed activity of individual nodes
- Re-configuration reports -- Shows percentage utilization of networks
thereby allowing simulation of changes and their positive and negative
effects
- Application Traffic -- Shows application activity by department, or by
user, over historical time periods
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<PAGE> 32
CUSTOMERS
The Company sells its products to organizations with large and medium-size
networks, as well as network service providers which include telecommunications
carriers, ISPs, systems integrators and outsourcers. The Company's products are
used by a diverse set of customers in a variety of industries. As of August 31,
1997, the Company had over 400 customers in the following 12 countries: the
United States, Germany, Canada, the United Kingdom, Holland, France, Korea,
Belgium, Sweden, Switzerland, Australia and South Africa. The following is a
representative list of customers that have purchased in excess of $50,000 of the
Company's products and services for the period from January 1, 1996 through
August 31, 1997.
<TABLE>
<S> <C> <C>
Abbott Laboratories Dresdner Bank AG New York Stock Exchange, Inc.
Allied Signal Inc. DSC Communications Corporation Northrop Grumman Corporation
America Online, Inc. Dun & Bradstreet Corporation NYNEX Corporation
Ameritech Corporation Ernst & Young LLP Pfizer Inc.
Analog Devices, Inc. First Union National Bank Reuters America Inc.
AT&T Corporation Fleet Financial Group, Inc. Scientific Atlanta, Inc.
Bell South Frontier Information Technologies, Scudder, Stevens & Clark
Bloomberg L.P. Inc. Sprint Corporation
Blue Cross/Blue Shield Association Gateway 2000, Inc. State of Arizona Public Services
Booz, Allen, & Hamilton Inc. Government of British Columbia Tennaco Packaging
British Telecommunications plc HiServ (formerly Hoehcst Celanese) The Bear Stearns Companies, Inc.
Bureau of Census Lexis-Nexis The Procter & Gamble Company
Burlington Northern Santa Fe MCI Telecommunications Corporation The Prudential Service Company
Corporation Memorial Sloan-Kettering Toys "(LOGO)" Us, Inc.
Citizens Utilities Company Metropolitan Life Insurance Co. U S WEST, Inc.
Computer Sciences Corporation MFS Communications Company, Inc. United Technologies Corporation
Dell Computer Corporation Morgan Stanley Group Inc. Viacom International Inc.
Department of Commerce Motorola Inc. Visa International
Donaldson, Lufkin & Jenrette, Inc. Navy Federal Credit Union WilTel Communications, LLC
Dow Jones & Company, Inc. New York Mercantile Exchange
New York State Department of Social
Services
</TABLE>
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 12 field pre-sales technical
support representatives in the event that an on-site visit is necessary. At
August 31, 1997, the Company employed nine technical post-sales support
personnel as well as one product trainer.
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 August 31, 1997, the Company had 11 domestic sales teams each comprised
of one direct sales person and one technical support person targeting the
following 11 different geographic regions: Atlanta and the Southeast; Dallas;
Detroit; Denver; New England; New York; the Carolinas; Northern California;
Philadelphia; Southern California; and Washington, D.C. In addition, the Company
employs four 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 August 31, 1997 the Company
utilized 11 international
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<PAGE> 33
distributors in nine geographic regions, including: the United Kingdom, Germany,
France, Sweden, Korea, the Benelux region, Australia 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. Typically, the sales process encompasses an initial sales
presentation, a proof-of-concept evaluation, a closing meeting and a purchasing
process. The sales process typically takes 90 to 120 days. Add-on business to
the customer base occurs as a result of customers increasing the size of their
networks and customers wishing to utilize additional products offered by the
Company.
The Company distributes its products through a network of more than 15
VARs, and at August 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 August 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 August 31, 1997, the Company employed six 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
August 31, 1997, the Company employed 34 sales personnel, consisting of three
management personnel, 13 sales persons, 14 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 July of 1997, the Company
introduced its Network Health -- Server product. The Company is currently
developing an enhanced version of Network Health. This version of the software
is expected to significantly increase the number of network elements that can be
managed from a single server, enhance the ability of large customers and network
service providers to customize the reports generated by the products, and extend
the operating systems supported by the products to include Windows NT. The
Company intends to continue to enhance its current product line in the areas of
scaleability, reporting options and types, and predictive analysis capabilities.
The Company also plans to develop and deliver new products aimed at performance
analysis and reporting for other networking, computing and application
environments.
The Company's total expenses for research and development for the years
1994, 1995 and 1996 and the six months ended June 30, 1997 were $2.4 million,
$2.4 million, $3.9 million and $2.1 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
August 31, 1997, the Company's product development organization consisted of 40
people.
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<PAGE> 34
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 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. 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. See "Risk Factors --
Competition; New Entrants."
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-
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<PAGE> 35
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.
EMPLOYEES
As of August 31, 1997, the Company had a total of 104 employees, all but
two of whom were based in the United States. Of the total, 40 were in research
and development, 10 were in customer support, 34 were in sales, six were in
marketing, and 14 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. See "Risk
Factors -- Management of Growth; Dependence Upon Key Personnel."
FACILITIES
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 lease in this facility from 20,000 to 30,000 square feet.
The amended lease expires in June of 2002. This facility accommodates finance,
administration and operations, research and development, customer support and
marketing. The Company also leases, on a short term basis, sales office space in
Dallas, Texas and London, England. The Company believes that its current
facilities will meet its needs through at least the next 12 months.
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.
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<PAGE> 36
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
August 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- -------------------------------------------
<S> <C> <C>
John A. Blaeser........................... 55 Chief Executive Officer, President and
Director
Kevin J. Conklin.......................... 44 Vice President, Marketing
Ferdinand Engel........................... 49 Vice President, Engineering
Gary E. Haroian........................... 45 Vice President, Finance and Administration,
Chief Financial Officer, Clerk and
Treasurer
Daniel D. Phillips, Jr.................... 43 Vice President, Worldwide Sales
Frederick W.W. Bolander(1)................ 35 Director
Richard M. Burnes, Jr.(1)(2).............. 56 Director
Robert C. Hawk............................ 57 Director
John Robert Held(1)....................... 59 Director
Deepak Kamra(2)........................... 40 Director
Robert M. Wadsworth(1).................... 37 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
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. Mr. Blaeser is also
a Director of Datawatch Corp.
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.
Frederick W.W. Bolander has been a Director of the Company since April
1995. Mr. Bolander has been associated with Apex Investment Partners, a venture
capital firm and an affiliate of the Company, in various capacities since
October 1994 and has been a General Partner of the firm since April 1996. From
May 1993 to September 1993, Mr. Bolander was a Consultant to the African
Communications Group, a venture capital and project management firm, and from
September 1985 to September 1992, Mr. Bolander held the position of Manager for
AT&T Corporation.
35
<PAGE> 37
Richard M. Burnes, Jr. has been a Director of the Company since December
1995. Mr. Burnes has been a General Partner of Charles River Ventures, a venture
capital firm and an affiliate of the Company, since 1970.
Robert C. Hawk has been a Director of the Company since December 1996. Mr.
Hawk has served as President of Hawk Communications since April 1997. Prior to
joining Hawk Communications, Mr. Hawk served as President and Chief Executive
Officer of US WEST Multimedia Communications, Inc. from April 1996 until April
1997, and from 1988 until April 1996 as President of the Carrier Division of U S
WEST Communications, Inc. Mr. Hawk is also a director of DIVA Communications,
PairGain Technologies, Xylan Corp. and Premisys Communications.
John Robert Held has been a Director of the Company since December 1996.
Previously, Mr. Held had served as President of Chipcom Corporation from 1988
until 1995. Mr. Held is also a Director of Brown & Sharpe Manufacturing Company.
Deepak Kamra has been a Director of the Company since November 1993. Mr.
Kamra has been associated with Canaan Partners, a venture capital firm and an
affiliate of the Company, since March 1991 and a General Partner of the firm
since March 1995. Prior to joining Canaan Partners, Mr. Kamra was the General
Manager, National Sales Force, of Aspect Telecommunications, a
telecommunications equipment company. Mr. Kamra is also a Director of Hello
Direct.
Robert M. Wadsworth has been a Director of the Company since April 1993.
Mr. Wadsworth has been Vice President of Hancock Venture Partners, Inc. since
April 1990, and Managing Director of HVP Partners, LLC since January 1997.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors are duly elected and qualified.
There are no family relationships among any of the executive officers or
directors of the Company.
Upon the closing of the offering, the Company's Board of Directors will be
divided into three classes, with the members of each class of directors serving
for staggered three-year terms. Messrs. Hawk and Held will serve in the class
the term of which expires in 1998; Messrs. Bolander, Kamra and Wadsworth will
serve in the class the term of which expires in 1999; and Messrs. Blaeser and
Burnes will serve in the class the term of which expires in 2000. Upon the
expiration of the term of each class of directors, directors comprising such
class of directors will be elected for a three-year term at the next succeeding
annual meeting of stockholders. The Company's classified Board of Directors
could have the effect of increasing the length of time necessary to change the
composition of a majority of the Board of Directors. In general, at least two
annual meetings of stockholders will be necessary for stockholders to effect a
change in a majority of the members of the Board of Directors. See "Description
of Capital Stock -- Massachusetts Law and Certain Provisions of the Company's
Restated Articles of Organization and By-Laws."
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee consists of Messrs. Burnes and Kamra. The Audit
Committee reviews, with the Company's independent auditors, the scope and timing
of their audit services and any other services they are asked to perform, the
auditor's report on the Company's financial statements following completion of
their audit and the Company's policies and procedures with respect to internal
accounting and financial controls. In addition, the Audit Committee will make
annual recommendations to the Board of Directors for the appointment of
independent auditors for the ensuing year.
The Compensation Committee consists of Messrs. Bolander, Burnes, Held and
Wadsworth. The Compensation Committee will review and evaluate the compensation
and benefits of all officers of the Company, review general policy matters
relating to compensation and benefits of employees of the Company and make
recommendations concerning these matters to the Board of Directors. The
Compensation Committee also will administer the Company's stock option and stock
purchase plans. See "-- Equity Plans."
36
<PAGE> 38
DIRECTOR COMPENSATION
Directors who are not employees of the Company (also referred to as
"outside directors"), who currently consist of Messrs. Bolander, Burnes, Hawk,
Held, Kamra and Wadsworth, do not receive an annual retainer or any fees for
attending regular meetings of the Board of Directors. Directors are reimbursed
for reasonable out-of-pocket expenses incurred in attending such meetings.
Non-employee directors are also eligible for participation in the Company's 1997
Non-Employee Director Stock Option Plan. See "-- Equity Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee reviews and approves compensation and
benefits for the Company's key executive officers, administers the Company's
stock purchase and stock option plans and makes recommendations to the Board
regarding such matters. The Compensation Committee is comprised of Frederick
W.W. Bolander, Richard M. Burnes, Jr., John Robert Held and Robert M. Wadsworth.
No member of the Compensation Committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Board or Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned by John A. Blaeser, the Company's Chief Executive Officer and President,
and the Company's three other most highly compensated executive officers who
were serving as executive officers at the end of fiscal 1996 (collectively, the
"Named Executive Officers") for services rendered in all capacities to the
Company in fiscal 1996. No other executive officer of the Company received
salary and bonus of $100,000 or more in fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------
AWARDS
ANNUAL SECURITIES
COMPENSATION(1) UNDERLYING
FISCAL ------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION(2) YEAR SALARY BONUS(3) (NO. OF SHARES)(4) COMPENSATION(5)
- ------------------------------------ ------- -------- -------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
John A. Blaeser..................... 1996 $175,000 $ 87,500 647,017 $ --
Chief Executive Officer and
President
Ferdinand Engel..................... 1996 $156,489 $ 82,500 223,352 $ 1,197
Vice President, Engineering
Kevin J. Conklin.................... 1996 $119,999 $ 44,450 123,384 $ 977
Vice President, Marketing
Daniel D. Phillips, Jr.............. 1996 $137,417 $110,708 214,269 --
Vice President, Worldwide Sales
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation set forth in the table does not include medical, group life
insurance or other benefits which are available to all salaried employees of
the Company, and certain perquisites and other benefits, securities or
property which do not exceed the lesser of $50,000 or 10% of the person's
salary and bonus shown in the table.
(2) Mr. Haroian, the Vice President, Finance and Administration, Chief Financial
Officer, Clerk and Treasurer of the Company, who joined the Company in
February 1997, would be among the five most highly compensated individuals
had he been with the Company during fiscal 1996. Mr. Haroian's base salary
is $156,000; upon joining the Company, he also received a stock option to
purchase 136,250 shares of Common Stock at an exercise price of $1.90 per
share.
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<PAGE> 39
(3) Represents bonuses earned in 1996 for services rendered in 1996. Mr.
Phillips' bonus amount represents commissions earned in 1996 on the shipment
of product.
(4) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during fiscal
1996 to its executive officers. Options granted to the Named Executive
Officers were granted at fair market value as determined by the Board of
Directors based on all factors available to them on the grant date. These
factors included the history of, and prospects for, the Company and the
industry in which it competes, an assessment of the Company's past and
present operations and financial performance, the prospects for future
earnings of the Company, the present state of the Company's development, the
possibility of an initial public offering by the Company and market prices
of publicly traded common stocks of comparable companies in recent periods.
(5) The Company paid insurance premiums for disability insurance coverage for
Messrs. Engel and Conklin.
The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted during the year ended
December 28, 1996 by the Company to each of the Named Executive Officers:
OPTION GRANTS DURING FISCAL 1996
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
---------------------------------------------------------- RATES OF STOCK
NUMBER OF PERCENT OF PRICE
SECURITIES TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(2)
OPTIONS TO EMPLOYEES IN BASE PRICE/ EXPIRATION -------------------
NAME(3) GRANTED FISCAL 1996 SHARE(1) DATE 5% 10%
- -------------------------- ---------- --------------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
John A. Blaeser........... 547,017 $0.10 1/1/04 $26,118 $ 62,556
100,000 0.90 11/1/04 42,971 102,923
------- ------ ------- ------- --------
Total................ 647,017 34.4% $69,089 $165,479
Ferdinand Engel........... 198,352 $0.10 1/1/04 $ 9,470 $ 22,683
12,500 0.10 5/1/04 597 1,429
12,500 0.40 10/1/04 2,387 5,718
------- ------ ------- ------- --------
Total................ 223,352 11.9% $12,454 $ 29,830
Kevin J. Conklin.......... 110,884 $0.10 1/1/04 $ 5,294 $ 12,681
12,500 0.40 10/1/04 2,387 5,718
------- ------ ------- ------- --------
Total................ 123,384 6.6% $ 7,681 $ 18,399
Daniel D. Phillips, Jr.... 201,769 $0.10 1/1/04 $ 9,634 $ 23,074
12,500 0.40 10/1/04 2,387 5,718
------- ------ ------- ------- --------
Total................ 214,269 11.4% $12,021 $ 28,792
</TABLE>
- ---------------
(1) All options were incentive stock options and were granted pursuant to the
Company's 1995 Stock Plan at not less than fair market value as determined
by the Board of Directors of the Company as of the date of grant. Options
vest in installments over a period of four years with 25% of the options
vesting twelve months from the date of grant and the remaining options
vesting quarterly on an equal basis over a three year period. The options
expire eight years from the date of grant. No stock options have been
exercised by these executive officers subsequent to December 28, 1996,
except that on July 31, 1997, Mr. Engel exercised an option for 30,000
shares of Common Stock at $.10 per share and Mr. Phillips exercised an
option for 94,367 shares of Common Stock at $.10 per share and on August 29,
1997, Mr. Engel exercised an option for 20,000 shares at $.10 per share.
(2) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming that the stock price on the date of grant appreciates
at the specified annual rates of appreciation, compounded annually over the
term of the
38
<PAGE> 40
options. These numbers are calculated based on rules promulgated by the
Securities and Exchange Commission. Actual gains, if any, on stock option
exercises and Common Stock holdings are dependent on the time of such exercise
and the future performance of the Company's Common Stock.
(3) Mr. Haroian, who joined the Company in 1997, was granted an option to
purchase 136,250 shares of Common Stock at an exercise price per share of
$1.90.
The following table provides information regarding unexercised stock
options held as of December 28, 1996 by each of the Named Executive Officers.
Such persons did not exercise any stock options in fiscal 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END OPTIONS AT YEAR-END(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John A. Blaeser.......................... 31,453 615,564 $56,615 $ 1,028,017
Ferdinand Engel.......................... 36,327 187,025 65,389 332,895
Kevin J. Conklin......................... 17,715 105,669 31,886 186,456
Daniel D. Phillips, Jr................... 31,315 182,954 56,366 325,569
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of December 28,
1996. Accordingly, these values have been calculated by determining the
difference between the fair market value of the securities underlying the
option as of December 28, 1996 ($1.90 per share as determined by the Board
of Directors) and the exercise price of the Named Executive Officer's
options. In determining the fair market value of the Company's Common Stock,
the Board of Directors considered various factors, including the Company's
financial condition and business prospects, its operating results, the
absence of a market for its Common Stock and the risks normally associated
with technology companies. The actual realizable value of the options based
on the price to the public in the Offering may substantially exceed the
potential realizable value shown in the table.
EQUITY PLANS
1995 Stock Plan. The Company has granted incentive stock options ("ISOs")
and non-qualified stock options ("NQOs") (collectively, "Stock Options") to
directors, officers and other employees of and consultants to the Company under
its 1995 Stock Plan (the "1995 Plan"). The 1995 Plan is administered by the
Board of Directors. Pursuant to the terms of the 1995 Plan, Stock Options
granted under the 1995 Plan are exercisable within eight years of the original
grant date and generally vest over a period of four years from the date of
grant. Under the 1995 Plan, as of August 31, 1997, Stock Options to purchase
2,467,402 shares of Common Stock, at a weighted average exercise price of $0.95
per share, have been granted, of which Stock Options to purchase 336,932 shares
of Common Stock have been exercised and Stock Options to purchase 113,156 shares
of Common Stock have been canceled. Upon the consummation of a "change in
control" of the Company, each employee's stock option agreement provides for the
acceleration of vesting of the option by eighteen months. The 1995 Plan will be
terminated upon completion of the offering and the Company will adopt the 1997
Stock Plan.
1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") was
adopted by the Board of Directors in July 1997 and, subject to stockholder
approval, is expected to be put in place by the Company upon completion of this
offering. Under the terms of the 1997 Plan, the Company will be authorized to
grant ISOs and NQOs (as well as awards of stock ("Awards") and opportunities to
make direct purchases of stock ("Purchases")) to directors, officers and other
employees of and consultants to the Company. The aggregate number of shares of
Common Stock which may be issued pursuant to the 1997 Plan is 750,000.
The 1997 Plan will be administered by the Compensation Committee of the
Board of Directors. Subject to the provisions of the 1997 Plan, the Compensation
Committee will have the authority to select the
39
<PAGE> 41
optionees and determine the terms of the Stock Options, Awards and Purchases
granted under the 1997 Plan, including: (i) the time or times at which Stock
Options, Awards and Purchases may be granted; (ii) whether Stock Options granted
will be ISOs or NQOs; (iii) the number of shares subject to each Stock Option,
Award or Purchase; (iv) when each Stock Option becomes exercisable; (v) the
exercise price of the Stock Option, which in the case of an ISO cannot be less
than the fair market value of the Common Stock as of the date of grant, or not
less than 110% of the fair market value in the case of ISOs granted to an
employee or officer holding 10% or more of the voting stock of the Company; (vi)
the duration of the Stock Option; and (vii) the time, manner and form of payment
upon exercise of a Stock Option. A Stock Option shall not be transferable by the
recipient except by will or by the laws of descent and distribution, or in the
case of NQOs, only to the extent set forth in the agreement relating to such
option or pursuant to a valid domestic relations order. Generally, no ISO may be
exercised more than 60 days following termination of employment and no Stock
Options may be exercised following termination of employment for cause. However,
in the event that termination is due to death or disability, the Stock Option is
exercisable for a maximum of 180 days after such termination. To date, no Stock
Options have been granted pursuant to the 1997 Plan.
1997 Employee Stock Purchase Plan. The form of 1997 Employee Stock
Purchase Plan (the "1997 Purchase Plan") was adopted by the Board of Directors
in July 1997 and is expected to be put in place by the Company upon completion
of the offering. The 1997 Purchase Plan will provide for the issuance of a
maximum of 375,000 shares of Common Stock pursuant to the exercise of
nontransferable options granted to participating employees.
The 1997 Purchase Plan will be administered by the Compensation Committee
of the Board of Directors. All employees of the Company who have completed more
than 180 days of employment and whose customary employment is more than 20 hours
per week and for more than five months in any calendar year will be eligible to
participate in the 1997 Purchase Plan. Employees who would own five percent or
more of the total combined voting power or value of the Company's stock
immediately after the grant and non-employee directors may not participate in
the 1997 Purchase Plan. To participate in the 1997 Purchase Plan, an employee
must authorize the Company to deduct an amount (not less than one percent nor
more than ten percent of a participant's total cash compensation) from his or
her pay during six-month payment periods (the "Payment Period"). The first
Payment Period will begin on the day that the offering is commenced and will end
on April 30, 1998. Thereafter, the Payment Periods will commence on May 1 and
November 1 of each year, but in no case shall an employee be entitled to
purchase more than 20,000 shares in any one Payment Period. The exercise price
for the option granted in each Payment Period shall be 85% of the lesser of the
market price of the Common Stock on the first or last business day of the
Payment Period. If an employee is not a participant on the last day of the
Payment Period, such employee shall not be entitled to exercise his or her
option, and the amount of his or her accumulated payroll deductions will be
refunded. Options granted under the 1997 Purchase Plan shall not be transferable
by a participant except by will or by the laws of descent and distribution. An
employee's rights under the 1997 Purchase Plan shall terminate upon his or her
voluntary withdrawal from the plan at any time or upon termination of
employment. No options have been granted to date under the 1997 Purchase Plan.
1997 Non-Employee Director Stock Option Plan. The form of 1997
Non-Employee Director Stock Option Plan (the "Directors Plan"), providing for
the annual grant of stock options to purchase shares of Common Stock to outside
directors, was adopted by the Board of Directors in July 1997. A total of 95,000
shares of Common Stock have been reserved for issuance under the Directors Plan.
The Directors Plan will be administered by the Compensation Committee of
the Board of Directors. Under the Directors Plan, following completion of the
offering, each new eligible director will be granted an option to purchase 7,500
shares of Common Stock upon the later of the adoption of the plan or the
director's first appointment or election to the Board of Directors and starting
with the 1998 Annual Meeting of Stockholders of the Company, each eligible
director shall be automatically granted an option to purchase 1,875 shares of
Common Stock each year following the final adjournment of the Company's Annual
Meeting of Stockholders.
40
<PAGE> 42
The exercise price of options granted under the Directors Plan will be 100%
of the fair market value per share of the Common Stock on the date the option is
granted. Options initially granted to each director under the Directors Plan
will become exercisable over a four-year period from the date of grant. The
options will expire on the tenth anniversary of the grant date. If an optionee
ceases to be a director of the Company after his or her option becomes fully
exercisable, the option will remain exercisable in accordance with its terms. If
an optionee ceases to be a director of the Company for any reason prior to the
time his or her option becomes fully exercisable, the option will terminate with
respect to the shares as to which the option is not then exercisable and any
portion of his or her option which is vested but has not been exercised may be
exercised within sixty days of the date such director ceased to be a director.
In the event of a merger, consolidation or similar corporate transaction, the
vesting of all outstanding options under the Directors Plan will be accelerated
so that all outstanding options are vested and exercisable in full prior to the
consummation of such transaction. If such options are not exercised prior to the
consummation of such transaction, and are not assumed or replaced by the
successor entity, such options will terminate.
401(k) PROFIT SHARING PLAN
The Company has a Section 401(k) Retirement Savings Plan (the "401(k)
Plan"). The 401(k) Plan is a tax-qualified plan covering Company employees who
have completed six consecutive months of service with the Company, are over 21
years of age and elect to participate in the 401(k) Plan. Under the 401(k) Plan,
participants may elect to defer a portion of their compensation, subject to
certain limitations. In addition, at the discretion of the Board of Directors,
the Company may make profit sharing contributions into the 401(k) Plan. During
1996, the Company did not contribute to the 401(k) Plan.
EMPLOYMENT AGREEMENTS
The Company has entered into a Management Change in Control Agreement (the
"Management Agreements") with each of John A. Blaeser, Kevin J. Conklin,
Ferdinand Engel, Gary E. Haroian and Daniel D. Phillips, Jr. Pursuant to the
terms of the Management Agreements, each of the foregoing management members
(other than Mr. Blaeser) is entitled to receive a single severance payment in
cash in an amount equal to six months' base annual salary (and equal to twelve
months' base annual salary in the case of Mr. Blaeser) if any such management
member is terminated by the Company without cause or such management member
voluntarily terminates his employment with the Company for "good reason" (each a
"Termination Event"), in each case within six months of a change in control of
the Company. In addition, effective upon a change in control of the Company, the
vesting date for each such management member's unvested options shall be
accelerated by a period of 24 months. If within 24 months of a change in control
of the Company there is a Termination Event, all of such management member's
remaining unvested options shall become fully vested. Each such management
member has entered into a non-competition agreement with the Company pursuant to
which each such management member has agreed following a change in control of
the Company not to compete with the Company for a period of six months if such
management member has been terminated with or without cause by the Company or
has voluntarily terminated his employment for "good reason."
In addition, certain of John A. Blaeser's option agreements provide for
automatic acceleration of all of his unvested options following a merger,
consolidation, or a sale, conveyance or disposition of all or substantially all
of the assets of the Company or if he is no longer a director of the Company,
other than by reason of death, disability, or resignation.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated By-Laws of the Company (the "Restated By-Laws") and the
Restated Articles of Organization of the Company provide that the directors and
officers of the Company shall be indemnified by the Company to the fullest
extent authorized by Massachusetts law, as it now exists or may in the future be
amended, against all expenses and liabilities reasonably incurred in connection
with service for or on behalf of the Company. Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"), may be permitted to directors, officers and controlling
persons of the Company
41
<PAGE> 43
pursuant to the Restated By-Laws, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. The Company intends to obtain
insurance which insures the directors and officers of the Company against
certain losses and which insures the Company against certain of its obligations
to indemnify such directors and officers. In addition, the Restated Articles of
Organization of the Company provide that the directors of the Company will not
be personally liable for monetary damages to the Company for breaches of their
fiduciary duty as directors, unless they violated their duty of loyalty to the
Company or its stockholders, acted in bad faith, knowingly or intentionally
violated the law, authorized illegal dividends or redemptions or derived an
improper personal benefit from their action as directors. Such limitations of
personal liability under the Massachusetts Business Corporation Law do not apply
to liabilities arising out of certain violations of the federal securities laws.
While non-monetary relief such as injunctive relief, specific performance and
other equitable remedies may be available to the Company, such relief may be
difficult to obtain or, if obtained, may not adequately compensate the Company
for its damages.
The Company intends to enter into Indemnification Agreements with each of
its current directors and executive officers to give such directors and officers
additional contractual assurances regarding the scope of the indemnification set
forth in the Restated By-Laws and to provide additional procedural protections.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. There is no pending litigation or proceeding
involving any director, officer, employee or agent of the Company where
indemnification by the Company will be required or permitted. The Company is not
aware of any threatened litigation or proceeding that might result in a claim
for such indemnification.
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<PAGE> 44
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of September 1,
1997, and as adjusted to reflect the sale of the shares of Common Stock offered
hereby, by (i) each person known by the Company to be the beneficial owner of
more than five percent of the Company's Common Stock; (ii) each of the Company's
directors; (iii) each Named Executive Officer (see "Management -- Executive
Compensation"); (iv) all executive officers and directors as a group; and (v)
each Selling Stockholder. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options held by that person that are
currently exercisable or that are or may become exercisable within 60 days of
September 1, 1997 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of any other
person. Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares set forth opposite such
stockholder's name.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) BENEFICIAL OWNERSHIP
----------------------- AFTER OFFERING(1)(2)
NUMBER OF SHARES -----------------------
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE OFFERED NUMBER PERCENTAGE
- ----------------------------------------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Charles River Partnership VII,
Limited Partnership(3)................. 1,960,785 21.3% -- 1,960,785 17.0%
Apex Investment Fund II, L.P.(4)......... 1,569,335 17.0% -- 1,569,335 13.6%
Canaan Ventures II Offshore C.V.(5)...... 821,033 8.9% -- 821,033 7.1%
Hancock Venture Partners, Inc.(6)........ 724,999 7.9% -- 724,999 6.3%
The Productivity Fund II, L.P.(7)........ 628,167 6.8% -- 628,167 5.5%
Bay Partners IV(8)....................... 576,901 6.3% -- 576,901 5.0%
Bay Partners SBIC, L.P.(9)............... 576,901 6.3% -- 576,901 5.0%
California BPIV, L.P.(10)................ 576,901 6.3% -- 576,901 5.0%
Pioneer Capital Corporation(11).......... 567,220 6.2% -- 567,220 4.9%
Pioneer Ventures Limited
Partnership(12)........................ 567,220 6.2% -- 567,220 4.9%
Canaan Ventures II Limited
Partnership(13)........................ 520,525 5.7% -- 520,525 4.5%
B.U.N.P.................................. 216,768 2.4% 216,768 -- *
Massachusetts Technology Development
Corporation............................ 321,854 3.5% 150,117 171,737 1.5%
First Century Partnership III............ 57,609 * 57,609 -- *
TVM Techno Venture Enterprises No. 1
Limited Partnership.................... 43,207 * 43,207 -- *
Harvest Ventures, Inc.(14)............... 33,990 * 33,990 -- *
Grace Ventures Corp...................... 28,388 * 28,388 -- *
Kanematsu USA Inc........................ 19,203 * 9,603 9,600 *
Kanematsu Electronics Ltd................ 19,203 * 19,203 -- *
Kanematsu Corporation.................... 19,203 * 19,203 -- *
South East Asia Venture
Investment Co., N.V.................... 14,608 * 14,608 -- *
Venture Investment (Singapore) Ltd....... 7,304 * 7,304 -- *
John A. Blaeser(15)...................... 295,347 3.1% -- 295,347 2.5%
Kevin J. Conklin(16)..................... 82,196 * -- 82,196 *
Ferdinand Engel(17)...................... 115,239 1.2% -- 115,239 1.0%
Daniel D. Phillips, Jr.(18).............. 107,930 1.2% -- 107,930 *
Frederick W.W. Bolander(19).............. 7,500 * -- 7,500 *
Richard M. Burnes, Jr.(20)............... 1,960,785 21.3% -- 1,960,785 17.0%
</TABLE>
43
<PAGE> 45
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) BENEFICIAL OWNERSHIP
NUMBER OF SHARES AFTER OFFERING(1)(2)
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE OFFERED NUMBER PERCENTAGE
- ----------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Robert Hawk(21).......................... 20,000 * -- 20,000 *
John Robert Held(22)..................... 20,000 * -- 20,000 *
Deepak Kamra(23)......................... 1,345,308 14.6% -- 1,345,308 11.7%
Robert Wadsworth(24)..................... 732,499 8.0% -- 732,499 6.4%
All executive officers and directors as
a group (11 persons)(25)............... 4,686,804 48.6% -- 4,686,804 39.3%
</TABLE>
- ---------------
* Indicates less than one percent.
(1) Assumes conversion of all of the Company's outstanding shares of Preferred
Stock into Common Stock.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
435,000 shares from the Company is not exercised.
(3) The address of Charles River Partnership VII, Limited Partnership is 1000
Winter Street, Suite 3300, Waltham, MA 02154.
(4) The address of Apex Investment Fund II, L.P. is 233 South Wacker Drive,
Suite 9500, Chicago, IL 60606.
(5) The address of Canaan Ventures II Offshore C.V. is 2884 Sand Hill Road,
Suite 115, Menlo Park, CA 94025.
(6) Consists of the shares described in Note (24) below which may be deemed to
be beneficially owned by Hancock Venture Partners, Inc. ("HVP"). HVP is a
General Partner of Back Bay Partners L.P. II, which is the General Partner
of John Hancock Venture Capital Fund Limited Partnership II, and is also a
General Partner of Back Bay Partners L.P., which is the General Partner of
Evergreen I Limited Partnership. HVP has sole voting and investment power
over the shares of Common Stock owned by John Hancock Venture Capital Fund
Limited Partnership II and Evergreen I Limited Partnership. HVP disclaims
beneficial ownership of all such shares. HVP's address is One Financial
Center, 44th Floor, Boston, MA 02111.
(7) The address of The Productivity Fund II, L.P. is 233 South Wacker Drive,
Suite 9500, Chicago, IL 60606.
(8) Includes 192,301 and 30,769 shares of Common Stock held of record by Bay
Partners SBIC, L.P. and California BPIV, L.P., respectively, which may be
deemed to be beneficially owned by Bay Partners IV by virtue of its
relationship to such entities. The address of Bay Partners IV is 10600 N.
DeAnza Blvd., Suite 100, Cupertino, CA 95014.
(9) Includes 353,831 and 30,769 shares of Common Stock held of record by Bay
Partners IV and California BPIV, L.P., respectively, which may be deemed to
be beneficially owned by Bay Partners SBIC, L.P. by virtue of its
relationship to such entities. The address of Bay Partners SBIC, L.P. is
10600 N. DeAnza Blvd., Suite 100, Cupertino, CA 95014.
(10) Includes 353,831 and 192,301 shares of Common Stock held of record by Bay
Partners IV and Bay Partners SBIC, L.P., respectively, which may be deemed
to be beneficially owned by California BPIV, L.P. by virtue of its
relationship to such entities. The address of California BPIV, L.P. is
10600 N. DeAnza Blvd., Suite 100, Cupertino, CA 95014.
(11) Includes 564,833 shares of Common Stock held of record by Pioneer Ventures
Limited Partnership which may be deemed to beneficially owned by Pioneer
Capital Corporation by virtue of its relationship to such entity. The
address of Pioneer Capital Corporation is 60 State Street, Boston, MA
02109.
(12) Includes 2,387 shares of Common Stock held of record by Pioneer Capital
Corporation which may be deemed to beneficially owned by Pioneer Ventures
Limited Partnership by virtue of its relationship to such entity. The
address of Pioneer Ventures Limited Partnership is 60 State Street, Boston,
MA 02109.
44
<PAGE> 46
(13) The address of Canaan Ventures II Limited Partnership is 2884 Sand Hill
Road, Suite 115, Menlo Park, CA 94025.
(14) Consists of 5,761 shares of Common Stock held of record by ASEA-Harvest
Partners I, 4,321 shares of Common Stock held of record by Nordic Investors
Limited, 11,523 shares of Common Stock held of record by NORO Venture
Partners IV, 2,880 shares of Common Stock held of record by Campanius
Harvest Partners I, 2,880 shares of Common Stock held of record by
WFG-Harvest Partners and 6,625 shares of Common Stock held of record by 767
VCI Ventures NV, all of which may be deemed to be beneficially owned by
Harvest Partners, Inc. by virtue of its relationship to such entities.
(15) Includes 278,800 shares of Common Stock issuable upon exercise of options
granted to Mr. Blaeser.
(16) All such shares of Common Stock are issuable upon exercise of options
granted to Mr. Conklin.
(17) Includes 65,239 shares of Common Stock issuable upon exercise of options
granted to Mr. Engel.
(18) Includes 13,563 shares of Common Stock issuable upon exercise of options
granted to Mr. Phillips.
(19) Consists of shares of restricted stock which vest over a period of four
years. The Company has a right of repurchase with respect to these shares
upon certain events.
(20) Consists of 1,960,785 shares of Common Stock held of record by Charles
River Partnership VII, Limited Partnership which Mr. Burnes may be deemed
to beneficially own. Mr. Burnes, a director of the Company, is a General
Partner of Charles River Ventures, the General Partner of Charles River
Partnership VII, Limited Partnership. Mr. Burnes disclaims beneficial
ownership of all such shares.
(21) Consists of shares of restricted stock which vest over a period of four
years. The Company has a right of repurchase with respect to these shares
upon certain events.
(22) Consists of shares of restricted stock which vest over a period of four
years. The Company has a right of repurchase with respect to these shares
upon certain events.
(23) Includes 520,525 and 821,033 shares of Common Stock held of record by
Canaan Ventures II Limited Partnership and Canaan Ventures II Offshore
C.V., respectively, which Mr. Kamra may be deemed to beneficially own. Mr.
Kamra, a director of the Company, is a General Partner of Canaan Venture
Partners II, L.P., the General Partner of Canaan Ventures II Limited
Partnership and Canaan Ventures II Offshore C.V. Mr. Kamra disclaims
beneficial ownership of all such shares. Also includes 3,750 shares of
restricted stock which vest over a period of four years. The Company has a
right of repurchase with respect to these 3,750 shares upon certain events.
(24) Includes 202,855 and 522,144 shares of Common Stock held of record by
Evergreen I Limited Partnership and John Hancock Venture Capital Fund
Limited Partnership II, respectively, which Mr. Wadsworth may be deemed to
beneficially own. Mr. Wadsworth, a director of the Company, is the Managing
Director of HVP, a General Partner of the General Partner of each of these
entities. Mr. Wadsworth disclaims beneficial ownership of all such shares.
Also includes 7,500 shares of restricted stock which vest over a period of
four years. The Company has a right of repurchase with respect to these
shares upon certain events. See Note (6).
(25) Includes 439,798 shares of Common Stock issuable upon exercise of options.
45
<PAGE> 47
CERTAIN TRANSACTIONS
The following table sets forth the number of shares of the Company's Common
Stock, Series A Convertible Preferred Stock, Series A-1 Convertible Preferred
Stock and/or Series B Convertible Preferred Stock (collectively, the "Preferred
Stock") purchased by each director, executive officer, nominee for election as
director and five percent stockholder of the Company and each immediate family
member of any of the foregoing persons over the three preceding fiscal years.
<TABLE>
<CAPTION>
SHARES OF SHARES OF
SHARES OF SERIES SHARES OF COMMON
NAME SERIES A(1) A-1(1) SERIES B STOCK(1)
- ----------------------------------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Apex Investment Fund II, L.P............. 369,633 -- 770,000 --
Battery Ventures, L.P.................... 73,927 -- 147,059 --
Bay Partners IV.......................... 323,790 -- 120,261 196,457
Bay Partners SBIC, L.P................... 175,973 -- 65,360 106,770
B.U.N.P.................................. 180,340(2) -- 78,432 106,770(3)
Canaan Ventures II Limited Partnership... 172,102 -- 148,353 --
Canaan Ventures II Offshore C.V.......... 271,459 -- 234,000 --
California BPIV, L.P..................... 28,156 -- 10,458 17,083
Charles River Partnership VII, Limited
Partnership............................ -- -- 1,960,785 --
Evergreen I Limited Partnership.......... 44,357 -- 63,726 --
Grace Ventures Corp...................... -- 24,510(4) -- --
H&Q Ventures IV.......................... 1,164 1,353(5) -- --
H&Q Ventures International C.V........... 1,164 1,353(5) -- --
Hambrecht 1980 Revocable Trust........... 149 174(6) -- --
Anthony Helies........................... -- -- 19,608 --
HLM Partners II, L.P..................... -- 8,680(7) -- --
John Hancock Venture Capital Fund Limited
Partnership II......................... 133,068 -- 191,177 --
Massachusetts Technology Development
Corporation............................ 103,497 -- 98,040 --
Pioneer Ventures Limited Partnership..... 147,854 -- 245,098 --
The Productivity Fund II, L.P............ 147,854 -- 308,432 --
</TABLE>
- ---------------
(1) Share numbers do not give effect to a 1-for-3 reverse stock split in
December 1995.
(2) Includes 175,973 shares purchased by Trustees of Boston University but
transferred to B.U.N.P.
(3) Includes 106,770 shares purchased by Trustees of Boston University but
transferred to B.U.N.P.
(4) All of such shares were received in exchange for 78,125 shares of Series A
Convertible Preferred Stock purchased prior to December 1994 (without giving
effect to a 1-for-2 reverse stock split in December 1994).
(5) All of such shares were received in exchange for 2,895 shares of Series A
Convertible Preferred Stock purchased prior to December 1994 (without giving
effect to a 1-for-2 reverse stock split in December 1994).
(6) All of such shares were received in exchange for 371 shares of Series A
Convertible Preferred Stock purchased prior to December 1994 (without giving
effect to a 1-for-2 reverse stock split in December 1994).
(7) All of such shares were received in exchange for 27,665 shares of Series A
Convertible Preferred Stock purchased prior to December 1994 (without giving
effect to a 1-for-2 reverse stock split in December 1994).
The shares of Series A Convertible Preferred Stock were issued by the
Company in three separate closings in December 1994 and February and March of
1995, in each case, at a price of $1.36 per share. The shares of Series A-1
Convertible Preferred Stock were issued by the Company in December 1995 to
certain holders of the Company's Series A Convertible Preferred Stock in
exchange for shares of Series A Convertible Preferred Stock. The shares of
Series B Convertible Preferred stock were issued by the Company in two separate
closings in December 1995 and January 1996, in each case, at a price of $1.02
per share. The
46
<PAGE> 48
shares of Common Stock were issued by the Company in two separate closings in
February and March 1995, in each case, at a price of $.10 per share.
Automatic conversion of each share of Series A Convertible Preferred Stock
into 1.860721040 shares of Common Stock will occur immediately upon the
consummation of this offering. As set forth elsewhere in this Prospectus, each
share of Common Stock purchased in the above-described transactions will be
adjusted through a 1-for-2 reverse stock split. Automatic conversion of each
share of the Series A-1 Convertible Preferred Stock and the Series B Convertible
Preferred Stock into one share of Common Stock will occur immediately upon the
consummation of this offering.
The holders of the Preferred Stock are entitled to certain registration
rights with respect to the shares of Common Stock issued or issuable upon
conversion thereof. See "Description of Capital Stock -- Registration Rights."
Mr. Burnes, a director of the Company, is affiliated with Charles River
Partnership VII, Limited Partnership. Mr. Kamra, a director of the Company, is
affiliated with Canaan Ventures II Limited Partnership and Canaan Ventures II
Offshore C.V. Mr. Wadsworth, a director of the Company is affiliated with
Evergreen I Limited Partnership and John Hancock Venture Capital Fund Limited
Partnership II. Mr. Bolander, a director of the Company, is affiliated with Apex
Investment Fund II, L.P. and The Productivity Fund II, L.P.
The Company believes that all transactions set forth above were made on
terms no less favorable to the Company than would have been obtained from
unaffiliated third parties. The Company has adopted a policy whereby all future
transactions between the Company and its officers, directors and affiliates will
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties and will be approved by a majority of disinterested
members of the Board of Directors.
47
<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering and the filing of the Company's
Restated Articles of Organization (the "Restated Articles"), the authorized
capital stock of the Company will consist of 50,000,000 shares of Common Stock,
$.01 par value per share, and 1,000,000 shares of preferred stock, $.01 par
value per share (the "Preferred Stock").
COMMON STOCK
As of August 31, 1997, there were 9,205,816 shares of Common Stock
outstanding on a pro forma basis (giving effect to the 1-for-2 reverse stock
split and the conversion of all outstanding Preferred Stock upon the closing of
this offering), held of record by 263 stockholders. Based upon the pro forma
number of shares outstanding as of that date and giving effect to the issuance
of the 2,300,000 shares of Common Stock offered hereby, there will be 11,505,816
shares of Common Stock outstanding upon the closing of this offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred
Stock will be converted into shares of Common Stock. Thereafter, the Board of
Directors will be authorized, subject to certain limitations prescribed by law,
without further stockholder approval, to issue from time to time up to an
aggregate of 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, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of such series. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change of control of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
MASSACHUSETTS LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED ARTICLES OF
ORGANIZATION AND BY-LAWS
Following the offering, the Company expects that it will have more than 200
stockholders, thus making it subject to Chapter 110F of the Massachusetts
General Laws, an anti-takeover law. In general, this statute prohibits a
publicly-held Massachusetts corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person becomes an interested
stockholder, unless (i) the interested stockholder obtains the approval of the
Board of Directors prior to becoming an interested stockholder, (ii) the
interested stockholder acquires 90% of the outstanding voting stock of the
corporation (excluding shares held by certain affiliates of the corporation) at
the time it becomes an interested stockholder, or (iii) the business combination
is approved by both the Board of Directors and the holders of two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder). An "interested stockholder" is a person who, together
with affiliates and
48
<PAGE> 50
associates, owns (or at any time within the prior three years did own) five
percent or more of the outstanding voting stock of the corporation. A "business
combination" includes a merger, a stock or asset sale, and certain other
transactions resulting in a financial benefit to the interested stockholder. By
a vote of a majority of its stockholders, the Company may elect not to be
governed by Chapter 110F, but such an amendment would not be effective for
twelve months and would not apply to a business combination with any person who
became an interested stockholder prior to the adoption of the amendment.
Massachusetts General Laws Chapter 156B, Section 50A generally requires
that publicly-held Massachusetts corporations have a classified board of
directors consisting of three classes as nearly equal in size as possible,
unless the corporation elects to opt out of the statute's coverage. The Board of
Directors has opted out of the statute's coverage. The Company's Restated
Articles do, however, contain provisions which give effect to Section 50A.
The Restated By-Laws include a provision excluding the Company from the
applicability of Massachusetts General Laws Chapter 110D, entitled "Regulation
of Control Share Acquisitions." In general, this statute provides that any
stockholder of a corporation subject to this statute who acquires 20% or more of
the outstanding voting stock of a corporation may not vote such stock unless the
stockholders of the corporation so authorize. The Board of Directors may amend
the Restated By-Laws at any time to subject the Company to this statute
prospectively.
The Restated Articles require that nominations for the Board of Directors
made by a stockholder comply with certain notice procedures. A notice by a
stockholder of a planned nomination must be given not less than 60 and not more
than 90 days prior to a scheduled meeting, provided that if less than 70 days'
notice is given of the date of the meeting, a stockholder will have ten days
within which to give such notice. The stockholder's notice of nomination must
include particular information about the stockholder, the nominee and any
beneficial owner on whose behalf the nomination is made. The Company may require
any proposed nominee to provide such additional information as is reasonably
required to determine the eligibility of the proposed nominee.
The Restated By-Laws also require that a stockholder seeking to have any
business conducted at a meeting of stockholders give notice to the Company not
less than 60 and not more than 90 days prior to the scheduled meeting, provided
in certain circumstances that a ten-day notice rule applies. The notice from the
stockholder must describe the proposed business to be brought before the meeting
and include information about the stockholder making the proposal, any
beneficial owner on whose behalf the proposal is made, and any other stockholder
known to be supporting the proposal. The Restated By-Laws require the Company to
call a special stockholders meeting at the request of stockholders holding at
least 40% of the voting power of the Company.
The Restated Articles and the Restated By-Laws provide that the directors
and officers of the Company shall be indemnified by the Company to the fullest
extent authorized by Massachusetts law, as it now exists or may in the future be
amended, against all expenses and liabilities reasonably incurred in connection
with service for or on behalf of the Company. Insofar as indemnification for
liabilities arising under the Securities Act, may be permitted to directors,
officers and controlling persons of the Company pursuant to the Restated
By-Laws, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. The Company intends to obtain insurance which
insures the directors and officers of the Company against certain losses and
which insures the Company against certain of its obligations to indemnify such
directors and officers. In addition, the Restated Articles provide that the
directors of the Company will not be personally liable for monetary damages to
the Company for breaches of their fiduciary duty as directors, unless they
violated their duty of loyalty to the Company or its stockholders, acted in bad
faith, knowingly or intentionally violated the law, authorized illegal dividends
or redemptions or derived an improper personal benefit from their action as
directors. Such limitations of personal liability under the Massachusetts
Business Corporation Law do not apply to liabilities arising out of certain
violations of the federal securities laws. While non-monetary relief such as
injunctive relief, specific performance and other equitable remedies may be
available to the Company, such relief may be difficult to obtain or, if
obtained, may not adequately compensate the Company for its damages.
49
<PAGE> 51
The Restated Articles provide that any amendment to the Restated Articles,
the sale, lease or exchange of all or substantially all of the Company's
property and assets, or the merger or consolidation of the Company into or with
any other corporation may be authorized by the approval of the holders of a
majority of the shares of each class of stock entitled to vote thereon, rather
than by two-thirds as otherwise provided by statute, provided that the
transactions have been authorized by a majority of the members of the Board of
Directors and the requirements of any other applicable provisions of the
Restated Articles have been met.
In addition, the Restated Articles provide that shares of the Company's
Preferred Stock may be issued in the future without stockholder approval and
upon such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine. See "-- Preferred Stock".
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston EquiServe,
LP.
LISTING
The Common Stock has been approved for quotation on the Nasdaq National
Market, upon completion of this offering, under the symbol "CCRD."
50
<PAGE> 52
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 11,505,816 shares
of Common Stock outstanding (assuming no exercise of outstanding stock options).
Of these shares, the 2,900,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
except that any shares purchased by "affiliates" of the Company, as that term is
defined in Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), may
generally only be sold in compliance with the limitations of Rule 144 described
below.
SALES OF RESTRICTED SHARES
The remaining 8,605,816 shares of Common Stock are deemed "Restricted
Shares" under Rule 144. Of the Restricted Shares, up to 618,384 shares may be
eligible for sale in the public market immediately after this offering pursuant
to Rule 144(k) under the Securities Act; 480,570 of these 618,384 shares are
subject to the lock-up agreements described below (the "Lock-up Agreements"). An
additional 19,608 shares may be eligible for sale in the public market
immediately after this offering pursuant to Rule 144; none of these 19,608
shares are subject to the Lock-up Agreements. Of the remaining Restricted
Shares, approximately 353,760 shares may be eligible for sale in the public
market in accordance with Rule 701 under the Securities Act beginning 90 days
after the date of this Prospectus; 219,664 of these shares are subject to the
Lock-up Agreements. Taking into consideration the effect of the Lock-up
Agreements entered into by all officers and directors and certain stockholders
of the Company, an additional 7,614,064 shares will become eligible for sale
upon expiration of the Lock-up Agreements 180 days after the date of this
Prospectus, subject to the provisions of Rules 144 and 701 under the Securities
Act. Certain security holders have the right to have their Restricted Shares
registered by the Company under the Securities Act as described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated with those of others), including an Affiliate, who
has beneficially owned Restricted Shares for at least one year is entitled to
sell, within any three-month period, a number of such shares that does not
exceed the greater of (i) one percent of the then outstanding shares of Common
Stock (approximately 115,058 shares immediately after this offering) or (ii) the
average weekly trading volume in the Common Stock on the Nasdaq National Market
during the four calendar weeks preceding the date on which notice of such sale
is filed. Sales under Rule 144 are also subject to certain limitations on manner
of sale, notice requirements, and availability of current public information
about the Company. In addition, under Rule 144(k), a person who is not an
Affiliate and has not been an Affiliate for at least three months prior to the
sale and who has beneficially owned Restricted Shares for at least two years may
resell such shares without compliance with the foregoing requirements. In
meeting the one and two year holding periods described above, a holder of
Restricted Shares can include the holding periods of a prior owner who was not
an Affiliate.
Rule 701 under the Securities Act provides that the shares of Common Stock
acquired on the exercise of currently outstanding options may be resold by
persons, other than Affiliates, beginning 90 days after the date of this
Prospectus, subject only to the manner of sale provisions of Rule 144, and by
Affiliates under Rule 144 without compliance with its one-year minimum holding
period, subject to certain limitations.
STOCK OPTIONS
As of August 31, 1997, options to purchase a total of 2,017,314 shares of
Common Stock were outstanding and 1,636,391 of the shares issuable pursuant to
such options are not yet exercisable. Holders of these options who own
beneficially in the aggregate 430,759 have executed Lock-up Agreements. An
additional 1,221,250 shares of Common Stock are available for future grants
under the Company's stock option and stock purchase plans. See
"Management -- Equity Plans."
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding stock options and Common Stock issuable pursuant to the Company's
stock option plans. The Company expects to file these registration statements
approximately 30 days following the closing of this offering, and such
registration statements are expected to become effective upon filing. Shares
covered by these registration statements will thereupon be eligible for sale
51
<PAGE> 53
in the public markets, subject to the Lock-Up Agreements, to the extent
applicable. The Company intends to file a registration statement on Form S-8 to
register all shares of Common Stock issuable pursuant to its 1997 Employee Stock
Purchase Plan upon commencement of the offering.
LOCK-UP AGREEMENTS
Certain security holders and all officers and directors of the Company, who
in the aggregate hold 8,314,298 of the outstanding shares of Common Stock and
optionholders who own beneficially in the aggregate 430,759 of the outstanding
shares of Common Stock have agreed, pursuant to the Lock-up Agreements, that
they will not, without the prior written consent of NationsBanc Montgomery
Securities, Inc., offer, sell, contract to sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock beneficially owned by them
for a period of 180 days after the date of this Prospectus.
REGISTRATION RIGHTS
Upon the expiration of contractual lock-up periods, certain security
holders of the Company (the "Rights Holders") will be entitled to require the
Company to register under the Securities Act the sale of up to a total of
925,743 shares of outstanding Common Stock (the "Registrable Shares") under the
terms of certain agreements between the Company and the Rights Holders (the
"Registration Agreements"). The Registration Agreements provide that in the
event the Company proposes to register any of its securities under the
Securities Act at any time or times, the Rights Holders, subject to certain
exceptions, shall be entitled to include Registrable Shares in such
registration. However, the managing underwriter of any such offering may exclude
for marketing reasons some or all of such Registrable Shares from such
registration. The Rights Holders have, subject to certain conditions and
limitations, additional rights to require the Company to prepare and file a
registration statement under the Securities Act with respect to their
Registrable Shares. The Company is generally required to bear the expenses of
all such registrations, except underwriting discounts and commissions.
52
<PAGE> 54
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities, Inc., BancAmerica Robertson Stephens and
Wessels, Arnold & Henderson, L.L.C. (the "Representatives"), have severally
agreed, subject to the terms and conditions set forth in the Underwriting
Agreement (the "Underwriting Agreement") by and among the Company, the Selling
Stockholders and the Underwriters, to purchase from the Company and the Selling
Stockholders the number of shares of Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent and that the Underwriters are committed to purchase
all of the shares if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------------- ---------
<S> <C>
NationsBanc Montgomery Securities, Inc. .................................
BancAmerica Robertson Stephens...........................................
Wessels, Arnold & Henderson, L.L.C.......................................
---------
Total............................................................... 2,900,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters initially propose to offer the shares of Common Stock to
the public on the terms set forth on the cover page of this Prospectus. The
Underwriters may allow to selected dealers a concession of not more than
$ per share, and the Underwriters may allow, and such dealers may
reallow, a concession of not more than $ per share to certain other
dealers. After the initial public offering, the offering price and other selling
terms may be changed by the Representatives. The Common Stock is offered subject
to receipt and acceptance by the Underwriters, and to certain other conditions,
including the right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 435,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover
over-allotments made in connection with this offering.
At the request of the Company, the Underwriters have reserved approximately
145,000 of the shares of Common Stock offered by the Company hereby for sale at
the initial public offering price to directors, officers, employees and certain
individuals associated with the Company, its directors, its officers or its
employees. The number of shares of Common Stock available to the public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares that are not so purchased will be offered by the Underwriters to the
general public on the same basis as the other shares offered hereby.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters and their employees and controlling
persons against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock, including over-allotments, entering stabilizing bids, effecting
53
<PAGE> 55
syndicate short covering transactions and penalty bids. An over-allotment means
the confirming of sales of Common Stock in excess of the number of shares of
Common Stock offered hereby. A stabilizing bid means the placing of any bid, or
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of the Common Stock. A syndicate short covering transaction means the
placing of any bid on behalf of the underwriting syndicate or the effecting of
any purchase to reduce a short position created in connection with the offering.
A penalty bid means an arrangement that permits the Underwriters to reclaim a
selling concession from a syndicate member in connection with the offering when
shares of Common Stock sold by the syndicate member are purchased in syndicate
covering transactions. Such transactions may stabilize the market price of the
Common Stock at a level above that which otherwise might prevail in the open
market and, if commenced, may be discontinued at any time.
Stockholders of the Company who will hold an aggregate of 8,314,298 of the
outstanding shares of Common Stock of the Company following completion of this
offering (plus 554,997 shares of Common Stock issuable upon the exercise of
stock options that will have vested within 180 days from the date of this
Prospectus), including all of the directors and executive officers of the
Company, have agreed, subject to certain limited exceptions, that they will not,
without the prior written consent of NationsBanc Montgomery Securities, Inc.
(which consent may be withheld in the sole discretion of NationsBanc Montgomery
Securities, Inc.), directly or indirectly, sell, offer, contract or grant any
option to sell, make any short sale (including without limitation any "short vs.
the box"), pledge, transfer, establish an open put equivalent position within
the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any
shares of Common Stock, options or warrants to acquire shares of Common Stock,
or securities exchangeable or exercisable for or convertible into shares of
Common Stock, currently owned or hereafter acquired (excluding any shares of
Common Stock purchased on the open market), either of record or beneficially (as
defined in Rule 13d-3 under the Exchange Act) by such party, or publicly
announce such party's intention to do any of the foregoing, for a period of 180
days after the date of this Prospectus. In addition, the Company has agreed in
the Underwriting Agreement that, during the period of 180 days after the date of
this Prospectus, without the prior written consent of NationsBanc Montgomery
Securities, Inc. (which consent may be withheld in the sole discretion of
NationsBanc Montgomery Securities, Inc.), it will not issue, offer, sell, grant
options to purchase or otherwise dispose of any of the Company's equity
securities or any other securities convertible into or exchangeable with the
Company's Common Stock or other equity security, subject to certain limited
exceptions. NationsBanc Montgomery Securities, Inc. may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to these lock-up agreements. See "Shares Eligible for Future Sale."
The Representatives have advised the Company that the Underwriters will not
confirm sales of Common Stock offered by this Prospectus to accounts over which
they exercise discretionary authority in excess of five percent of the number of
shares of Common Stock offered hereby.
Prior to the offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiations between the Company and the
Representatives. Among the factors expected to be considered in such
negotiations are the history of, and prospects for, the Company and the industry
in which it competes, an assessment of the Company's management, its past and
present operations, its past and present earnings and the trend of such
earnings, the prospects for future earnings of the Company, the present state of
the Company's development, the general condition of the securities markets at
the time of the offering and the market prices of and demand for publicly traded
common stocks of comparable companies in recent periods and other factors deemed
relevant.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston,
Massachusetts.
54
<PAGE> 56
EXPERTS
The Financial Statements of the Company as of December 30, 1995 and
December 28, 1996 and for each of the three years in the period ended December
28, 1996 and as of June 30, 1997 and the six months then ended included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments thereto, the "Registration Statement") under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Common Stock offered hereby, reference is
hereby made to the Registration Statement and to the exhibits and schedules
filed therewith. Statements contained in this Prospectus regarding the contents
of any agreement or other document filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance reference is made
to the copy of such agreement filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, DC 20549, and at
its regional offices in New York (Seven World Trade Center, New York, New York
10007) and in Chicago (Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60611) and copies of all or any part thereof may be obtained
from such offices upon payment of the prescribed fees. In addition, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants (including the Company)
that file electronically with the Commission which can be accessed at
http://www.sec.gov.
The Company intends to furnish holders of its Common Stock offered hereby
with annual reports containing financial statements audited by an independent
accounting firm and with quarterly reports containing unaudited summary
financial statements for each of the first three quarters of each fiscal year.
55
<PAGE> 57
CONCORD COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of December 30, 1995, December 28, 1996, June 30, 1997 and Pro Forma
June 30, 1997 (Unaudited)........................................................... F-3
Statements of Operations for the Years Ended December 31, 1994, December 30, 1995 and
December 28, 1996 and for the Six Months Ended June 30, 1996 (Unaudited) and 1997... F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit for the
Years Ended December 31, 1994, December 30, 1995 and December 28, 1996 and for the
Six Months Ended June 30, 1997 and Pro Forma June 30, 1997 (Unaudited).............. F-5
Statements of Cash Flows for the Years Ended December 31, 1994, December 30, 1995 and
December 28, 1996 and for the Six Months Ended June 30, 1996 (Unaudited) and 1997... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 58
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 30, 1995, December 28, 1996
and June 30, 1997, and the related statements of operations, redeemable
convertible preferred stock and stockholders' deficit and cash flows for each of
the three years in the period ended December 28, 1996 and the six months ended
June 30, 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 30, 1995, December 28, 1996 and June 30, 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 28, 1996 and the six months ended June 30, 1997, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 1, 1997 (except for the matter
discussed in Note 4 for which
the date is October 9, 1997)
F-2
<PAGE> 59
CONCORD COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, 1997
DECEMBER 30, DECEMBER 28, JUNE 30, (UNAUDITED)
1995 1996 1997 (NOTE 1(h))
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 4,396,538 $ 1,663,896 $ 1,872,727 $ 1,872,727
Accounts receivable, net of allowance of approximately
$130,000, $210,000, $280,000 and $280,000,
respectively.......................................... 1,018,802 2,273,255 1,701,180 1,701,180
Prepaid expenses and other current assets............... 140,462 148,934 93,217 93,217
------------ ------------ ------------ ------------
Total current assets................................ 5,555,802 4,086,085 3,667,124 3,667,124
------------ ------------ ------------ ------------
Equipment and Improvements, at cost:
Equipment............................................... 4,650,292 5,376,966 5,795,515 5,795,515
Leasehold improvements.................................. 70,862 78,759 85,957 85,957
------------ ------------ ------------ ------------
4,721,154 5,455,725 5,881,472 5,881,472
Less -- Accumulated depreciation and amortization....... 3,548,035 3,957,519 4,188,704 4,188,704
------------ ------------ ------------ ------------
1,173,119 1,498,206 1,692,768 1,692,768
------------ ------------ ------------ ------------
Deferred Financing Costs.................................... -- -- 225,897 225,897
------------ ------------ ------------ ------------
$ 6,728,921 $ 5,584,291 $ 5,585,789 $ 5,585,789
============ ============ ============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable........................................ $ 1,186,848 $ 1,560,312 $ 1,533,796 $ 1,533,796
Accrued expenses........................................ 678,840 2,324,927 2,037,010 2,037,010
Deferred revenue........................................ 373,666 1,331,291 2,216,978 2,216,978
Current portion of long-term debt....................... -- 257,000 346,763 346,763
------------ ------------ ------------ ------------
Total current liabilities........................... 2,239,354 5,473,530 6,134,547 6,134,547
------------ ------------ ------------ ------------
Long-Term Debt.............................................. -- 667,502 859,535 859,535
------------ ------------ ------------ ------------
Commitments and Contingencies (Note 8)
Redeemable Convertible Preferred Stock:
Series A, $.01 par value --
Authorized -- 1,965,373 shares, none pro forma
Issued and outstanding -- 1,940,863 shares, none pro
forma recorded at redemption value.................... 8,893,639 9,427,506 9,704,662 --
Series A-1, $.01 par value --
Authorized -- 212,044 shares, none pro forma
Issued and outstanding -- 36,070 shares, none pro
forma recorded at redemption value.................... 169,399 179,106 184,257 --
Series B, $.01 par value --
Authorized -- 4,479,613 shares, none pro forma
Issued and outstanding -- 4,460,789 shares, none pro
forma recorded at redemption value.................... 4,552,617 4,871,117 5,030,367 --
------------ ------------ ------------ ------------
Total redeemable convertible preferred stock........ 13,615,655 14,477,729 14,919,286 --
------------ ------------ ------------ ------------
Stockholders' Deficit --
Preferred Stock, $.01 par value --
Authorized -- 1,000,000 shares
Issued and outstanding -- none........................ -- -- -- --
Common stock, $.01 par value -- Authorized -- 50,000,000
shares Issued and outstanding -- 760,345, 844,482,
909,465 and 9,017,723 shares, respectively............ 7,603 8,445 9,095 90,177
Additional paid-in capital.............................. 18,089,332 18,097,045 18,351,768 33,189,972
Deferred compensation................................... -- -- (140,508) (140,508)
Accumulated deficit..................................... (27,223,023) (33,139,960) (34,547,934) (34,547,934)
------------ ------------ ------------ ------------
Total stockholders' deficit......................... (9,126,088) (15,034,470) (16,327,579) (1,408,293)
------------ ------------ ------------ ------------
$ 6,728,921 $ 5,584,291 $ 5,585,789 $ 5,585,789
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 60
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------------ -------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30,
1994 1995 1996 JUNE 30, 1997
------------ ------------ ------------ 1996 ----------
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License revenues............ $ 3,416,229 $ 3,443,040 $ 7,844,523 $ 2,981,941 $6,889,982
Service revenues............ 648,533 911,964 1,162,242 487,555 811,403
----------- ----------- ----------- ----------- ----------
Total revenues......... 4,064,762 4,355,004 9,006,765 3,469,496 7,701,385
Cost of Revenues................. 1,940,632 1,163,863 1,956,889 931,736 1,279,495
----------- ----------- ----------- ----------- ----------
Gross profit........... 2,124,130 3,191,141 7,049,876 2,537,760 6,421,890
----------- ----------- ----------- ----------- ----------
Operating Expenses:
Research and development.... 2,373,858 2,360,287 3,933,483 1,849,803 2,126,665
Sales and marketing......... 3,391,321 3,694,198 7,039,662 3,055,962 4,319,816
General and
administrative............ 750,879 1,000,228 1,176,938 491,883 899,932
----------- ----------- ----------- ----------- ----------
Total operating
expenses............. 6,516,058 7,054,713 12,150,083 5,397,648 7,346,413
----------- ----------- ----------- ----------- ----------
Operating loss......... (4,391,928) (3,863,572) (5,100,207) (2,859,888) (924,523)
----------- ----------- ----------- ----------- ----------
Other Income (Expense):
Interest income............. 47,086 48,015 79,832 63,653 --
Interest expense............ (2,027) -- (48,564) (11,164) (42,886)
Other....................... (47,370) 31,877 14,076 12,357 992
----------- ----------- ----------- ----------- ----------
Total other income
(expense)............ (2,311) 79,892 45,344 64,846 (41,894)
----------- ----------- ----------- ----------- ----------
Loss from continuing
operations........... (4,394,239) (3,783,680) (5,054,863) (2,795,042) (966,417)
Income from Disposition of
Discontinued Operations........ 117,593 -- -- -- --
----------- ----------- ----------- ----------- ----------
Net loss............... $ (4,276,646) $ (3,783,680) $ (5,054,863) $ (2,795,042) $ (966,417)
=========== =========== =========== =========== ==========
Pro Forma Net Loss per Common and
Common Equivalent Share
(Unaudited).................... $ (0.52) $ (0.29) $ (0.10)
=========== =========== ==========
Pro Forma Weighted Average Number
of Common and Common Equivalent
Shares Outstanding
(Unaudited).................... 9,767,993 9,767,585 9,774,910
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 61
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
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 TOTAL
---------- ----------- --------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994.......... 1,216,856 $ 5,010,682 35,248 $ 149,994 -- $ -- $ 5,160,676
Issuance of preferred stock, net
of issuance costs of $38,286... 489,376 1,998,882 822 1,118 -- -- 2,000,000
Accretion of dividends on
preferred stock................ -- 355,976 -- 9,945 -- -- 365,921
Exercise of stock options........ -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- --
--------- ---------- ------ -------- --------- ---------- -----------
BALANCE, DECEMBER 31, 1994........ 1,706,232 7,365,540 36,070 161,057 -- -- 7,526,597
Issuance of preferred stock and
common stock, net of issuance
costs of $98,813............... 234,631 957,292 -- -- 4,460,789 4,550,000 5,507,292
Accretion of dividends on
preferred stock................ -- 570,807 -- 8,342 -- 2,617 581,766
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 13,615,655
Accretion of dividends on
preferred stock................ -- 533,867 -- 9,707 -- 318,500 862,074
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 14,477,729
Accretion of dividends on
preferred stock................ -- 277,156 -- 5,151 -- 159,250 441,557
Exercise of stock options........ -- -- -- -- -- -- --
Deferred compensation related to
grants of stock options........ -- -- -- -- -- -- --
Amortization of deferred
compensation related to grants
of stock options............... -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- --
--------- ---------- ------ -------- --------- ---------- -----------
BALANCE, JUNE 30, 1997............ 1,940,863 9,704,662 36,070 184,257 4,460,789 5,030,367 14,919,286
Pro forma conversion of redeemable
convertible preferred stock to
common stock (unaudited)......... (1,940,863) (9,704,662) (36,070) (184,257) (4,460,789) (5,030,367) (14,919,286)
--------- ---------- ------ -------- --------- ---------- -----------
PRO FORMA BALANCE, JUNE 30, 1997
(UNAUDITED)...................... -- $ -- -- $ -- -- $ -- $ --
========= ========== ====== ======== ========= ========== ===========
<CAPTION>
STOCKHOLDERS' DEFICIT
---------------------------------------------------------------------------
COMMON STOCK
-------------------- ADDITIONAL
NUMBER $.01 PAID-IN DEFERRED ACCUMULATED
OF SHARES PAR VALUE CAPITAL COMPENSATION DEFICIT TOTAL
--------- --------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994.......... 667,049 $ 6,670 $18,154,900 $ -- $(18,215,010) $ (53,440)
Issuance of preferred stock, net
of issuance costs of $38,286... -- -- (38,286) -- -- (38,286)
Accretion of dividends on
preferred stock................ -- -- -- -- (365,921) (365,921)
Exercise of stock options........ 15,438 154 18,371 -- -- 18,525
Net loss......................... -- -- -- -- (4,276,646) (4,276,646)
--------- ------- ----------- --------- ------------ ------------
BALANCE, DECEMBER 31, 1994........ 682,487 6,824 18,134,985 -- (22,857,577) (4,715,768)
Issuance of preferred stock and
common stock, net of issuance
costs of $98,813............... 71,180 712 (50,451) -- -- (49,739)
Accretion of dividends on
preferred stock................ -- -- -- -- (581,766) (581,766)
Exercise of stock options........ 6,678 67 4,798 -- -- 4,865
Net loss......................... -- -- -- -- (3,783,680) (3,783,680)
--------- ------- ----------- --------- ------------ ------------
BALANCE, DECEMBER 30, 1995........ 760,345 7,603 18,089,332 -- (27,223,023) (9,126,088)
Accretion of dividends on
preferred stock................ -- -- -- -- (862,074) (862,074)
Exercise of stock options........ 84,137 842 7,713 -- -- 8,555
Net loss......................... -- -- -- -- (5,054,863) (5,054,863)
--------- ------- ----------- --------- ------------ ------------
BALANCE, DECEMBER 28, 1996........ 844,482 8,445 18,097,045 -- (33,139,960) (15,034,470)
Accretion of dividends on
preferred stock................ -- -- -- -- (441,557) (441,557)
Exercise of stock options........ 64,983 650 104,848 -- -- 105,498
Deferred compensation related to
grants of stock options........ -- -- 149,875 (149,875) -- --
Amortization of deferred
compensation related to grants
of stock options............... -- -- -- 9,367 -- 9,367
Net loss......................... -- -- -- -- (966,417) (966,417)
--------- ------- ----------- --------- ------------ ------------
BALANCE, JUNE 30, 1997............ 909,465 9,095 18,351,768 (140,508) (34,547,934) (16,327,579)
Pro forma conversion of redeemable
convertible preferred stock to
common stock (unaudited)......... 8,108,258 81,082 14,838,204 -- -- 14,919,286
--------- ------- ----------- --------- ------------ ------------
PRO FORMA BALANCE, JUNE 30, 1997
(UNAUDITED)...................... 9,017,723 $90,177 $33,189,972 $ (140,508) $(34,547,934) $ (1,408,293)
========= ======= =========== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 62
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------------ -------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30,
1994 1995 1996 JUNE 30, 1997
------------ ------------ ------------ 1996 ----------
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Continuing operations --
Net loss............................................. $(4,394,239) $(3,783,680) $(5,054,863) $(2,795,042) $ (966,417)
Adjustments to reconcile net loss to net cash (used
in) provided by continuing operations --
Depreciation and amortization...................... 320,883 335,837 409,484 212,312 234,853
Changes in current assets and liabilities --
Accounts receivable............................. (482,954) 147,562 (1,254,453) (918,018) 572,075
Prepaid expenses and other current assets....... 325,897 159,387 (8,472) 62,250 55,717
Accounts payable................................ (271,817) 598,989 373,464 (297,488) (26,517)
Accrued expenses................................ 121,311 369,333 1,646,087 700,018 (287,917)
Deferred revenue................................ 125,220 92,648 957,625 576,209 885,687
----------- ----------- ----------- ----------- ----------
Net cash (used in) provided by continuing
operations................................... (4,255,699) (2,079,924) (2,931,128) (2,459,759) 467,481
----------- ----------- ----------- ----------- ----------
Discontinued operations................................ 117,593 -- -- -- --
----------- ----------- ----------- ----------- ----------
Net cash (used in) provided by operating
activities................................... (4,138,106) (2,079,924) (2,931,128) (2,459,759) 467,481
----------- ----------- ----------- ----------- ----------
Cash Flows from Investing Activities:
Purchases of equipment and improvements................ (448,524) (604,838) (734,571) (377,055) (353,816)
----------- ----------- ----------- ----------- ----------
Cash Flows from Financing Activities:
Proceeds from bank borrowings.......................... -- -- 924,502 637,140 298,788
Repayments of borrowings............................... -- -- -- -- (83,223)
Proceeds from issuance of preferred and common stock... 1,961,714 5,457,553 -- -- --
Proceeds from exercise of stock options................ 18,525 4,865 8,555 173 105,498
Deferred financing costs............................... -- -- -- -- (225,897)
----------- ----------- ----------- ----------- ----------
Net cash provided by financing activities..... 1,980,239 5,462,418 933,057 637,313 95,166
----------- ----------- ----------- ----------- ----------
Net (Decrease) Increase in Cash and Cash Equivalents..... (2,606,391) 2,777,656 (2,732,642) (2,199,501) 208,831
Cash and Cash Equivalents, beginning of period........... 4,225,273 1,618,882 4,396,538 4,396,538 1,663,896
----------- ----------- ----------- ----------- ----------
Cash and Cash Equivalents, end of period................. $ 1,618,882 $ 4,396,538 $ 1,663,896 $ 2,197,037 $1,872,727
=========== =========== =========== =========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest................................. $ -- $ -- $ 48,564 $ 11,164 $ 42,886
=========== =========== =========== =========== ==========
Supplemental Disclosure of Noncash Transactions:
Accretion of dividends on preferred stock.............. $ 365,921 $ 581,766 $ 862,074 $ 431,038 $ 441,557
=========== =========== =========== =========== ==========
Deferred compensation related to grants of stock
options.............................................. $ -- $ -- $ -- $ -- $ 149,875
=========== =========== =========== =========== ==========
Purchase of equipment through issuance of debt......... $ -- $ -- $ -- $ -- $ 66,231
=========== =========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 63
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Concord Communications, Inc. (the Company) is primarily engaged in the
development and sale of high-technology automated network reporting software to
companies principally in the United States.
The Company is subject to the risks associated with emerging,
technology-oriented companies. Primary among these risks are competition from
substitute products, the ability to successfully develop and market its current
and future products, and the ability to obtain additional financing to fund
operations. Management believes that the Company's current cash resources, along
with the line of credit described in Note 3, will be sufficient to fund
operations for at least the next year.
(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 1994, 1995
and 1996 are for the 52-week periods ended December 31, 1994, December 30, 1995
and December 28, 1996, respectively. Beginning in 1997, the Company has changed
to a calendar year-end.
(b) Cash and Cash Equivalents
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 as held-to-maturity
and recorded them at amortized cost, which approximates market value. 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 equivalents
consist principally of time deposits and money market mutual funds at December
30, 1995, December 28, 1996 and June 30, 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 30, 1995
relates to prepayments on software maintenance contracts, which is recognized
ratably as it is earned. The deferred revenue balance at December 28, 1996 and
June 30, 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-7
<PAGE> 64
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(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-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 and cash equivalent
securities with established financial institutions. The Company does not believe
it has accounts receivable collection risk in excess of existing reserves. For
the year ended December 31, 1994, one customer accounted for approximately 16%
of revenue. For the years ended December 30, 1995 and December 28, 1996 and for
the six months ended June 30, 1996 and 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 30, 1995,
December 28, 1996 and June 30, 1997.
(h) Unaudited Pro Forma Presentation
Under the terms of the Company's agreements with the holders of the
redeemable convertible preferred stock (See Note 5), all of such preferred stock
will be converted automatically into shares of common stock upon the closing of
the Company's proposed initial public offering. The unaudited pro forma
information at June 30, 1997 reflects the conversion of the Series A, Series A-1
and Series B preferred stock into 8,108,258 shares of common stock as if the
conversion occurred on June 30, 1997.
(i) Pro Forma Net Loss per Common and Common Equivalent Share (Unaudited)
Unaudited pro forma net loss per common and common equivalent share for the
year ended December 28, 1996 and for the six-month periods ended June 30, 1996
and 1997, was based on the weighted average number of common and common
equivalent shares outstanding during the period, computed in accordance with the
treasury stock method. The unaudited pro forma weighted average number of common
shares assumes that all series of redeemable convertible preferred stock had
been converted to common stock as of the original issuance dates and that common
stock options issued subsequent to June 30, 1996 have been outstanding for all
periods presented, computed in accordance with the treasury stock method.
Historical net loss per share data have not been presented, as such information
is not considered to be relevant or meaningful.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. 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. This statement is effective for fiscal years
ending after December 15, 1997, and early adoption is not permitted. When
adopted, the statement will require restatement of prior years' earnings per
share. The Company will adopt this statement for its fiscal year ending December
31, 1997. The Company believes that the adoption of SFAS No. 128 will not have a
material effect on its financial statements.
(j) Interim Financial Statements
The accompanying statements of operations and cash flows for the six months
ended June 30, 1996 are unaudited but, in the opinion of management, include all
adjustments (consisting of normal, recurring
F-8
<PAGE> 65
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
adjustments) necessary for a fair presentation for results of this interim
period. The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of results to be expected for the entire year.
(2) DISCONTINUED OPERATIONS
During fiscal 1992, the Company discontinued its MAP/OSI business segment.
This disposition was substantially completed during 1992 and 1993. Income from
discontinued operations in 1994 relates to the final disposition of the
remaining MAP/OSI assets. No tax provision was recorded for the results of
continuing or discontinuing operations because of the Company's overall net
operating loss carryforward position.
(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, bears interest at the bank's prime rate (8.50% at
June 30, 1997) plus 2% and is collateralized by substantially all of the
Company's assets. As of December 28, 1996, the outstanding borrowings under the
Equipment Line amounted to $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 under the Equipment Line was converted to a term loan payable in 36
even monthly payments of principal plus interest through March 25, 2000. As of
June 30, 1997, the principal balance on the term loan payable was $915,463.
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 holds 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 (except for those assets that serve as collateral under
the equipment term loans described below) and requires compliance with certain
financial covenants, including the maintenance of minimum levels of tangible net
worth, profitability and revenues, as defined. Under the agreement, the bank has
agreed to ease the requirement of certain financial covenants following the
completion of a qualified public offering, as defined. As of June 30, 1997, no
borrowings have been made by the Company under the Working Capital Line and
$842,133 is available for future borrowings.
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 is due and payable monthly in arrears at the prime rate (8.50% at
June 30, 1997) plus 0.75%. Borrowings under the Equipment Term Loans are
permitted through December 31, 1997, at which time the outstanding principal is
due and payable in 36 even, consecutive monthly installments beginning January
30, 1998 through December 29, 2000. The Equipment Term Loans are secured by the
equipment acquired. In addition, the Company is required to comply with certain
financial covenants, which include, among other items, minimum levels of capital
base, liquidity and profitability. At June 30, 1997, the principal under the
Equipment Term Loans was $224,603 and the Company was in compliance with the
terms of the agreement.
F-9
<PAGE> 66
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
At June 30, 1997 the Company has certain other debt of approximately
$66,000 payable through 2002. Aggregate maturities of long-term debt as of June
30, 1997 are as follows:
<TABLE>
<S> <C>
Period Ending December 31,
1997 (six months)..................................... $ 171,996
1998.................................................. 419,714
1999.................................................. 420,951
2000.................................................. 172,656
2001.................................................. 16,062
2002.................................................. 4,919
----------
$1,206,298
==========
</TABLE>
(4) STOCKHOLDERS' DEFICIT
In December 1994, the Company's Board of Directors approved a one-for-two
reverse stock split of its preferred and common stock. Subsequently, the Company
paid a stock dividend to its existing Series A and Series A-1 preferred
stockholders at the rate of 0.8823537 shares for each share of preferred stock
owned. In December 1995, the Company's Board of Directors approved a
one-for-three reverse stock split of its preferred and common stock. The stock
splits and stock dividend have been retroactively reflected in the accompanying
financial statements and notes for all periods presented.
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, increase
the number of authorized shares of common stock to 50,000,000 and to authorize
the issuance of up to 1,000,000 shares of preferred stock. All share and per
share amounts of common stock for all periods presented have been retroactively
adjusted to reflect the stock split.
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company's Board of Directors had authorized 10,000,000 shares of
preferred stock, $.01 par value: 1,965,373 shares are designated as Series A,
212,044 shares are designated as Series A-1, 4,479,613 shares are designated as
Series B and 3,342,970 shares are undesignated. The rights, preferences and
privileges of the Series A, Series A-1 and Series B (collectively the Preferred
Stock) are as follows:
Dividends
Preferred stockholders are entitled to a 7% cumulative annual dividend. The
dividend accrues whether or not declared.
Voting Rights
Preferred stockholders are entitled to full voting rights based on the
number of common equivalent shares held.
Conversion
The Preferred Stock is convertible to common stock, at any time, at the
stockholder's option. The Preferred Stock automatically converts to common stock
upon the closing of an initial public offering that meets certain criteria, as
defined. The Series A preferred stock is convertible at the rate of 1.86:1, and
the Series A-1 and Series B preferred stock are convertible at the rate of 1:1,
subject to adjustment for certain dilutive events, as defined. Upon the
completion of the proposed initial public offering, all outstanding shares of
the Preferred Stock will convert into 8,108,258 shares of common stock.
F-10
<PAGE> 67
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
Right of First Refusal
Preferred stockholders hold a right of first refusal on any subsequent
sales of Preferred Stock or common stock.
Liquidation
Preferred stockholders hold a liquidation preference over common
stockholders. Upon liquidation of the Company, preferred stockholders are
entitled to receive $4.08, $4.08 and $1.02 per share for Series A, Series A-1,
and Series B stock, respectively, plus the greater of accrued and unpaid
dividends or the pro rata portion of remaining assets to be liquidated, based on
common equivalent shares held. The liquidation preference of the Preferred Stock
at June 30, 1997 is the same as its redemption price.
Redemption
Beginning on December 28, 2000, the Company is required to redeem the
Preferred Stock. The redemption price is payable in three annual installments.
The redemption price per share is the original investment plus accrued and
unpaid dividends.
(6) STOCK OPTION PLANS
In 1995, the Company's Board of Directors (the Board) approved the 1995
Stock Plan (the Plan), which provides for the granting of incentive stock
options (ISOs) and nonqualified stock options. Prior to the adoption of the
Plan, the Board granted options under the 1982 Employee Incentive Stock Option
Plan, the 1986 Nonqualified Stock Option Plan and the 1986 Stock Plan.
Under the Plan, as amended, the Company may issue options to purchase up to
2,445,429 shares of common stock. 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 Plan 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 weighted average assumptions are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS
DECEMBER 30, DECEMBER 28, ENDED JUNE 30,
1995 1996 1997
------------ ------------ --------------
<S> <C> <C> <C>
Risk-free interest rate.............. 6.5% 6.3% 5.1%
Expected dividend yield.............. -- -- --
Expected lives....................... 7 years 7 years 7 years
Expected volatility.................. 80% 80% 80%
</TABLE>
F-11
<PAGE> 68
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net loss and pro forma net loss per common and common
equivalent share would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED JUNE
DECEMBER 30, DECEMBER 28, 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss
As reported................................... $ (3,783,680) $ (5,054,863) $ (966,417)
=========== =========== ===========
Pro forma..................................... $ (3,812,217) $ (5,105,339) $ (1,103,599)
=========== =========== ===========
Pro forma net loss per common and common
equivalent share
As reported................................... $ (0.52) $ (0.10)
=========== ===========
Pro forma..................................... $ (0.52) $ (0.11)
=========== ===========
</TABLE>
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
June 30, 1997:
<TABLE>
<CAPTION>
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
- -------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .10 - .40 1,485,231 6.6 $ .11 516,581 $ .10
.90 - 1.90 422,375 7.4 1.51 -- --
4.10 230,650 7.7 4.10 -- --
2,138,256
</TABLE>
F-12
<PAGE> 69
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
The following schedule summarizes the activity under the stock option plans
for the three-year period ended December 28, 1996 and the six months ended June
30, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF PRICE PER PRICE
SHARES SHARE PER SHARE
--------- ------------ ----------------
<S> <C> <C> <C>
Outstanding at January 1, 1994............... 101,998 $ 1.20 $1.20
Granted................................. 157,389 1.20 1.20
Exercised............................... (15,438) 1.20 1.20
Terminated.............................. (23,620) 1.20 1.20
--------- ------------ -----
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................................. 511,397 1.90 - 4.10 2.91
Exercised............................... (64,983) .10 - 1.90 1.62
Terminated.............................. (12,500) .10 - 4.10 2.23
--------- ------------ -----
Outstanding at June 30, 1997................. 2,138,256 $ .10 - 4.10 $ .82
========= ============ =====
Exercisable at June 30, 1997................. 516,581 $ .10 $ .10
========= ============ =====
</TABLE>
In 1997, the Company granted an option to purchase 136,250 shares of common
stock at an exercise price of $1.90 per share to an officer of the Company. 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 $149,875 related to this difference at the
date of grant. For the six months ended June 30, 1997, the Company has recorded
compensation expense of $9,367 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, as determined by
the Board.
Following the completion of the proposed initial public offering, and
subject to stockholder approval, the Company expects to adopt the 1997 Stock
Plan (which will replace the 1995 Stock Plan), the 1997 Employee Stock Purchase
Plan and the 1997 Nonemployee Director Stock Option Plan, for which the Company
will reserve 750,000, 375,000 and 95,000 shares of common stock, respectively,
for future issuance.
(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.
F-13
<PAGE> 70
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
The approximate income tax effects of these temporary differences are as
follows:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net operating loss and federal tax credit
carryforwards............................ $ 10,898,000 $ 12,291,000 $ 12,442,000
Reserves not yet deductible for tax
purposes................................. 84,000 282,000 340,000
Depreciation............................... 98,000 145,000 145,000
Deferred revenue........................... 43,000 43,000 43,000
Capitalized research and development
expenses................................. 916,000 1,276,000 1,442,000
Valuation allowance........................ (12,039,000) (14,037,000) (14,412,000)
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
</TABLE>
The Company has available net operating loss carryforwards of approximately
$27,000,000 and federal research and development tax credit carryforwards of
approximately $1,500,000 as of December 28, 1996 to reduce future income tax
liabilities. These carryforwards are subject to review and possible adjustment
by the appropriate taxing authorities and expire from 1997 through 2012 as
follows:
<TABLE>
<CAPTION>
RESEARCH AND
NET OPERATING LOSS DEVELOPMENT TAX
FISCAL YEAR CARRYFORWARDS CREDIT CARRYFORWARDS
------------------------------------------------- ------------------ ---------------------
<S> <C> <C>
1997........................................... $ 122,000 $ --
1998........................................... 326,000 --
1999........................................... 5,483,000 --
2000........................................... 3,659,000 --
2001........................................... 2,870,000 1,252,000
2002-2006...................................... 1,369,000 150,000
2007-2012...................................... 13,171,000 98,000
----------- ----------
$ 27,000,000 $ 1,500,000
=========== ==========
</TABLE>
The Company has recorded a 100% valuation allowance against the net
deferred tax asset as of December 30, 1995, December 28, 1996 and June 30, 1997,
as the Company believes that it is more likely than not that it will not be able
to realize this asset. The increase in the valuation allowance during these
periods 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 recent preferred stock financings, such a change in
ownership has occurred. Also, following the completion of the proposed initial
public offering, the Company expects that another ownership change will occur.
As a result of these ownership changes, the utilization of $17,000,000 of the
Company's net operating loss carryforwards will be limited to approximately
$325,000 per year. The utilization of the remaining $10,000,000 of net operating
loss carryforwards will be limited to approximately $5,000,000 per year.
F-14
<PAGE> 71
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(8) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases facilities under certain operating leases that expire
through June 2002. The approximate future minimum rental payments under these
leases, as amended, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
---------------------------------------------------- ----------
<S> <C>
1997 (six months)................................. $ 222,000
1998.............................................. 444,000
1999.............................................. 504,000
2000.............................................. 564,000
2001.............................................. 575,000
Thereafter........................................ 293,000
----------
$2,602,000
==========
</TABLE>
Rental expense was approximately $238,000, $234,000, $244,000, $134,000 and
$197,000 for the years ended December 31, 1994, December 30, 1995 and
December 28, 1996 and the six months ended June 30, 1996, and 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 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:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
---------------------------------------------------- ----------
<S> <C>
1997 (six months)................................. $ 220,500
1998.............................................. 490,000
1999.............................................. 450,000
----------
$1,160,500
==========
</TABLE>
Royalty expense under royalty agreements was $76,000, $101,000, $735,000,
$228,000 and $356,000 for fiscal 1994, 1995 and 1996 and for the six months
ended June 30, 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.
F-15
<PAGE> 72
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(9) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
Payroll and payroll-related..................... $219,778 $ 537,959 $ 304,982
Royalties....................................... 50,508 213,360 165,764
Commissions..................................... 64,929 255,519 187,262
Customer deposits............................... -- 382,075 582,948
Other........................................... 343,625 936,014 796,054
-------- ---------- ----------
$678,840 $2,324,927 $2,037,010
======== ========== ==========
</TABLE>
(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 1994, 1995, 1996 or the six-month
periods ended June 30, 1996 and 1997.
(11) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Revenues by geographic destination and as a percentage of total revenues
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR JUNE 30,
GEOGRAPHIC AREA BY ---------------------------------------- -------------------------
DESTINATION 1994 1995 1996 1996 1997
- ----------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
North America................ $3,785,898 $3,965,078 $8,042,984 $3,193,020 $6,993,961
Europe....................... 83,704 218,559 914,314 249,468 613,037
Asia......................... 105,200 156,144 49,467 27,008 60,545
Other........................ 89,960 15,223 -- -- 33,842
---------- ---------- ---------- ---------- ----------
$4,064,762 $4,355,004 $9,006,765 $3,469,496 $7,701,385
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR JUNE 30,
GEOGRAPHIC AREA BY ------------------------------ -----------------
DESTINATION 1994 1995 1996 1996 1997
- ------------------------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
North America............................. 93% 91% 89% 92% 91%
Europe.................................... 2 5 10 7 8
Asia...................................... 3 4 1 1 1
Other..................................... 2 -- -- -- --
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
F-16
<PAGE> 73
======================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with the
offering other than those contained in this Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the shares of Common Stock to which it relates or an offer to, or a
solicitation of, any person in any jurisdiction where such offer or solicitation
would be unlawful. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company or that the information contained
herein is correct as of any time subsequent to the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................ 3
Risk Factors...................................... 6
Use of Proceeds................................... 14
Dividend Policy................................... 14
Capitalization.................................... 15
Dilution.......................................... 16
Selected Financial Data........................... 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 18
Business.......................................... 25
Management........................................ 35
Principal and Selling Stockholders................ 43
Certain Transactions.............................. 46
Description of Capital Stock...................... 48
Shares Eligible for Future Sale................... 51
Underwriting...................................... 53
Legal Matters..................................... 54
Experts........................................... 55
Additional Information............................ 55
Index to Financial Statements..................... F-1
</TABLE>
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock offered hereby, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters, and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
2,900,000 SHARES
[CONCORD COMMUNICATIONS, INC. LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
NATIONSBANC MONTGOMERY SECURITIES, INC.
BANCAMERICA ROBERTSON STEPHENS
WESSELS, ARNOLD & HENDERSON
, 1997
======================================================
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the Common Stock offered hereby are as
follows:
<TABLE>
<S> <C>
SEC registration fee................................................ $ 12,178
NASD filing fee..................................................... 4,502
Nasdaq National Market listing fee.................................. 50,000
Printing and engraving expenses..................................... 100,000
Legal fees and expenses............................................. 250,000
Accounting fees and expenses........................................ 185,000
Blue Sky fees and expenses (including legal fees)................... 5,000
Transfer agent and registrar fees and expenses...................... 5,000
Miscellaneous....................................................... 138,320
--------
Total..................................................... $750,000
========
</TABLE>
- ---------------
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Restated Articles of Organization of the Company and the Restated
By-Laws provide for indemnification of the Company's directors and officers
unless such indemnification is prohibited by the Massachusetts Business
Corporation Law. The Massachusetts Business Corporation Law generally permits
indemnification of the Company's directors and officers for liabilities and
expenses that they may incur in such capacities, except with respect to any
matter that the indemnified person shall have been adjudicated in any proceeding
not to have acted in good faith in the reasonable belief that his or her action
was in the best interest of the Company. Reference is made to the Company's
corporate charters filed as Exhibit 3.01 and 3.02 and Restated By-Laws filed as
Exhibit 3.03.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). Reference is made
to the form of Underwriting Agreement filed as Exhibit 1.01 hereto.
Pursuant to an agreement between Charles River Partnership VII Limited
Partnership and Mr. Burnes, Charles River Partnership VII has agreed to
indemnify Mr. Burnes against any liability incurred in his capacity as a
director of the Company.
The Company expects to enter into indemnification agreements with its
directors and officers and to obtain directors and officers liability insurance
for the benefit of its directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, the
Company has issued the following securities that were not registered under the
Act:
(a) Issuances of Capital Stock.
In December 1994, the Company issued and sold an aggregate of 1,470,595
shares (without giving effect to a one-for-three reverse stock split in December
1995) of its Series A Convertible Preferred Stock at a price per share of $1.36
to 13 investors in a private financing for $2,000,009.20 in cash.
In February 1995 and March 1995, the Company issued and sold an aggregate
of 703,892 shares (without giving effect to a one-for-three reverse stock split
in December 1995) of its Series A Convertible Preferred Stock at a price per
share of $1.36 and 427,080 shares (without giving effect to a one-for-three
reverse stock
II-1
<PAGE> 75
split in December 1995) of Common Stock at a price per share of $.10 to an
aggregate of four investors in a private financing for $1,000,001.12 in cash.
In December 1995 and January 1996, the Company issued and sold an aggregate
of 4,460,789 shares of its Series B Convertible Preferred Stock at a price per
share of $1.02 to 15 investors in a private financing for $4,550,004.78 in cash.
In December 1995 certain holders of Series A Convertible Preferred Stock
exchanged 36,070 shares of such stock for an equal number of shares of Series
A-1 Convertible Preferred Stock of the Company.
(b) Certain Grants and Exercises of Stock Options.
Pursuant to the 1995 Stock Plan, the Company has as of August 31, 1997
issued options to purchase an aggregate of 2,467,402 shares of Common Stock,
exercisable at a weighted average exercise price of $0.95 per share. As of
August 31, 1997, the Company had issued 336,932 shares of Common Stock pursuant
to the exercise of options under the 1995 Stock Plan, at a weighted average
exercise price of $0.26 per share.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase Common Stock, Rule 701 under
the Securities Act. All of the foregoing securities are deemed restricted
securities for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- --------------------------------------------------------------------------------
<C> <S>
1.01 Form of Underwriting Agreement*
3.01 Form of Restated Articles of Organization of the Company*
3.02 Form of Restated Articles of Organization of the Company*
3.03 Form of Restated By-laws of the Company*
4.01 Specimen Certificate for shares of the Company's Common Stock*
5.01 Legal Opinion of Testa, Hurwitz & Thibeault, LLP*
10.01 Working Capital Loan Agreement between the Company and Silicon Valley Bank dated
April 3, 1997*
10.02 Revolving Promissory Note made by the Company in favor of Silicon Valley Bank*
10.03 Equipment Line of Credit Letter Agreement between the Company and Fleet Bank
dated as of June 9, 1997*
10.04 1995 Stock Plan of the Company*
10.05 1997 Stock Plan of the Company*
10.06 1997 Employee Stock Purchase Plan of the Company*
10.07 1997 Non-Employee Director Stock Option Plan of the Company*
10.08 The Profit Sharing/401(K) Plan of the Company*
10.09 Lease Agreement between the Company and John Hancock Mutual Life Insurance
Company dated March 17, 1994, as amended on March 25, 1997*
10.10 First Amendment to Lease Agreement between the Company and John Hancock Mutual
Life Insurance Company dated March 25, 1997*
10.11 Form of Indemnification Agreement for directors and officers of the Company*
10.12 Restated Common Stock Registration Rights Agreement between the Company and
certain investors dated August 7, 1986*
10.13 Amended and Restated Registration Rights Agreement between the Company and
certain investors dated December 28, 1995*
10.14 Management Change in Control Agreement between the Company and John A. Blaeser
dated as of August 7, 1997*
</TABLE>
II-2
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- --------------------------------------------------------------------------------
<C> <S>
10.15 Management Change in Control Agreement between the Company and Kevin J. Conklin
dated as of July 23, 1997*
10.16 Management Change in Control Agreement between the Company and Ferdinand Engel
dated as of July 23, 1997*
10.17 Management Change in Control Agreement between the Company and Gary E. Haroian
dated as of July 23, 1997*
10.18 Management Change in Control Agreement between the Company and Daniel D.
Phillips, Jr. dated as of July 23, 1997*
10.19 Stock Option Agreement dated January 1, 1996 between the Company and John A.
Blaeser*
10.20 Stock Option Agreement dated January 1, 1996 between the Company and John A.
Blaeser*
10.21 Letter Agreement between the Company and Silicon Valley Bank dated March 25,
1996 together with the Loan Modification Agreement dated November 14, 1996*
10.22 Form of Shrink-Wrap License*
11.01 Statement re: Computation of Per Share Earnings*
23.01 Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit 5.01)*
23.02 Consent of Arthur Andersen LLP
24.01 Power of Attorney (contained on page II-4)*
27.01 Financial Data Schedule*
</TABLE>
- ---------------
* Previously submitted.
(B) FINANCIAL STATEMENT SCHEDULES.
Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted or
have been provided for in the footnotes to the Financial Statements.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser; (2) that for purposes
of determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; and (3) that for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Marlboro, Massachusetts on October
10, 1997.
CONCORD COMMUNICATIONS, INC.
By: /s/ JOHN A. BLAESER
------------------------------------
JOHN A. BLAESER
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ---------------------------------------- --------------------------------- ------------------
<C> <S> <C>
/s/ JOHN A. BLAESER Chief Executive Officer, October 10, 1997
- ---------------------------------------- President and Director (Principal
JOHN A. BLAESER Executive Officer)
/s/ GARY E. HAROIAN Vice President, Finance and October 10, 1997
- ---------------------------------------- Administration, Chief Financial
GARY E. HAROIAN Officer, Clerk and Treasurer
(Principal Financial and
Accounting Officer)
* Director October 10, 1997
- ----------------------------------------
FREDERICK W.W. BOLANDER
* Director October 10, 1997
- ----------------------------------------
RICHARD M. BURNES, JR.
* Director October 10, 1997
- ----------------------------------------
ROBERT C. HAWK
* Director October 10, 1997
- ----------------------------------------
JOHN ROBERT HELD
* Director October 10, 1997
- ----------------------------------------
DEEPAK KAMRA
* Director October 10, 1997
- ----------------------------------------
ROBERT M. WADSWORTH
* Executed pursuant to power of
attorney.
/s/ GARY E. HAROIAN
- ----------------------------------------
GARY E. HAROIAN
as attorney-in-fact
</TABLE>
II-4
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- ---------------------------------------------------------------------------------
<C> <S> <C>
1.01 Form of Underwriting Agreement*
3.01 Form of Restated Articles of Organization of the Company*
3.02 Form of Restated Articles of Organization of the Company*
3.03 Form of Restated By-laws of the Company*
4.01 Specimen Certificate for shares of the Company's Common Stock*
5.01 Legal Opinion of Testa, Hurwitz & Thibeault, LLP*
10.01 Working Capital Loan Agreement between the Company and Silicon Valley Bank dated
April 3, 1997*
10.02 Revolving Promissory Note made by the Company in favor of Silicon Valley Bank*
10.03 Equipment Line of Credit Letter Agreement between the Company and Fleet Bank
dated as of June 9, 1997*
10.04 1995 Stock Plan of the Company*
10.05 1997 Stock Plan of the Company*
10.06 1997 Employee Stock Purchase Plan of the Company*
10.07 1997 Non-Employee Director Stock Option Plan of the Company*
10.08 The Profit Sharing/401(K) Plan of the Company*
10.09 Lease Agreement between the Company and John Hancock Mutual Life Insurance
Company dated March 17, 1994, as amended on March 25, 1997*
10.10 First Amendment to Lease Agreement between the Company and John Hancock Mutual
Life Insurance Company dated March 25, 1997*
10.11 Form of Indemnification Agreement for directors and officers of the Company*
10.12 Restated Common Stock Registration Rights Agreement between the Company and
certain investors dated August 7, 1986*
10.13 Amended and Restated Registration Rights Agreement between the Company and
certain investors dated December 28, 1995*
10.14 Management Change in Control Agreement between the Company and John A. Blaeser
dated as of August 7, 1997*
10.15 Management Change in Control Agreement between the Company and Kevin J. Conklin
dated as of July 23, 1997*
10.16 Management Change in Control Agreement between the Company and Ferdinand Engel
dated as of July 23, 1997*
10.17 Management Change in Control Agreement between the Company and Gary E. Haroian
dated as of July 23, 1997*
10.18 Management Change in Control Agreement between the Company and Daniel D.
Phillips, Jr. dated as of July 23, 1997*
10.19 Stock Option Agreement dated January 1, 1996 between the Company and John A.
Blaeser*
10.20 Stock Option Agreement dated January 1, 1996 between the Company and John A.
Blaeser*
10.21 Letter Agreement between the Company and Silicon Valley Bank dated March 25, 1996
together with the Loan Modification Agreement dated November 14, 1996*
10.22 Form of Shrink-Wrap License*
11.01 Statement re: Computation of Per Share Earnings*
23.01 Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit 5.01)*
23.02 Consent of Arthur Andersen LLP
24.01 Power of Attorney (contained on page II-4)*
27.01 Financial Data Schedule*
</TABLE>
- ---------------
* Previously submitted.
II-5
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 9, 1997
