<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ to ______________
COMMISSION FILE NUMBER 0-23067
CONCORD COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2710876
(State of incorporation) (IRS Employer Identification Number)
33 BOSTON POST ROAD, WEST
MARLBORO, MASSACHUSETTS 01752
(508) 460-4646
(ADDRESS AND TELEPHONE OF PRINCIPAL EXECUTIVE OFFICES)
----------------
INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS
FOR THE PAST 90 DAYS.
YES X NO
12,788,889 SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE, WERE
OUTSTANDING AS OF JULY 31, 1998.
THIS DOCUMENT CONTAINS 20 PAGES.
THE EXHIBIT INDEX IS ON PAGE 19.
<PAGE> 2
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 1998
CONTENTS
<TABLE>
<CAPTION>
Item Number Page
PART I: FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Balance sheets:
June 30, 1998 and December 31, 1997 3
Statements of operations:
Three and six months ended June 30, 1998 and
June 30, 1997 4
Statements of cash flows:
Six months ended June 30, 1998 and June 30, 1997 5
Notes to financial statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
EXHIBIT INDEX 19
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCORD COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash, cash equivalents and marketable securities .......... $ 40,496,935 $ 36,539,303
Accounts receivable, net of allowance of approximately
$347,000 and $240,000, respectively ..................... 3,012,372 3,040,850
Prepaid expenses and other current assets ................. 363,718 282,311
------------ ------------
Total current assets .................................. 43,873,025 39,862,464
------------ ------------
Equipment and Improvements, at cost:
Equipment ................................................. 7,140,135 6,473,305
Leasehold improvements .................................... 280,249 85,957
------------ ------------
7,420,384 6,559,262
Less -- Accumulated depreciation and amortization ......... 4,864,168 4,507,737
------------ ------------
2,556,216 2,051,525
------------ ------------
$ 46,429,241 $ 41,913,989
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................................... $ 2,669,673 $ 1,764,580
Accrued expenses .......................................... 2,677,349 3,368,585
Deferred revenue .......................................... 3,048,527 2,298,092
------------ ------------
Total current liabilities ............................. 8,395,549 7,431,257
------------ ------------
Stockholders' Equity
Preferred stock, $.01 par value --
Authorized -- 1,000,000 shares
no shares issued and outstanding ....................... -- --
Common stock, $.01 par value --
Authorized -- 50,000,000 shares
Issued and outstanding -- 12,646,469 and 12,019,188
shares, respectively .................................. 126,465 120,193
Additional paid-in capital ................................ 68,452,301 67,942,708
Deferred compensation ..................................... (125,173) (149,157)
Unrealized gains on marketable securities ................. 46,143 19,750
Accumulated deficit ....................................... (30,466,044) (33,450,762)
------------ ------------
Total stockholders' equity ............................ 38,033,692 34,482,732
------------ ------------
$ 46,429,241 $ 41,913,989
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE> 4
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License revenues ............ $ 7,104,600 $ 3,784,897 $ 13,204,591 $ 6,889,982
Service revenues ............ 1,435,864 460,296 2,395,920 811,403
------------ ------------ ------------ ------------
Total revenues ......... 8,540,464 4,245,193 15,600,511 7,701,385
Cost of Revenues ................. 998,720 692,591 1,852,259 1,279,495
------------ ------------ ------------ ------------
Gross profit ........... 7,541,744 3,552,602 13,748,252 6,421,890
------------ ------------ ------------ ------------
Operating Expenses:
Research and development .... 1,711,725 1,091,665 3,215,367 2,126,665
Sales and marketing ......... 3,938,812 2,347,989 7,446,108 4,319,816
General and administrative .. 594,122 467,995 1,166,818 899,932
------------ ------------ ------------ ------------
Total operating expenses .... 6,244,659 3,907,649 11,828,293 7,346,413
------------ ------------ ------------ ------------
Operating income(loss) . 1,297,085 (355,047) 1,919,959 (924,523)
------------ ------------ ------------ ------------
Other Income (Expense):
Interest income ............. 554,394 (3,990) 1,104,814 --
Interest expense ............ -- (19,196) (514) (42,886)
Other ....................... 974 (206) (39,541) 992
------------ ------------ ------------ ------------
Total other income
(expense) ............ 555,368 (23,392) 1,064,759 (41,894)
------------ ------------ ------------ ------------
Net income (loss) ...... $ 1,852,453 $ (378,439) $ 2,984,718 $ (966,417)
============ ============ ============ ============
Net income (loss) per common and
potential common share:
Basic .......................... $ .15 $ (0.42) $ .24 $ (1.08)
============ ============ ============ ============
Diluted ........................ $ .13 $ (0.42) $ .21 $ (1.08)
============ ============ ============ ============
Pro forma diluted .............. $ .13 $ (0.04) $ .21 $ (0.11)
============ ============ ============ ============
Weighted average common and
potential common shares
outstanding: ..................... 12,565,017 907,773 12,395,448 892,778
============ ============ ============ ============
Basic .......................... 13,982,741 907,773 13,960,730 892,778
============ ============ ============ ============
Diluted ........................
Pro forma diluted .............. 13,982,741 9,016,031 13,960,730 9, 001,036
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 5
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 2,984,718 $ (966,417)
Adjustments to reconcile net income (loss) to net cash
provided by operations
Depreciation and amortization 380,415 234,853
Changes in current assets and liabilities
Accounts receivable 28,478 572,075
Prepaid expenses and other current assets (81,407) 55,717
Accounts payable 905,093 (26,517)
Accrued expenses (691,236) (287,917)
Deferred revenue 750,435 885,687
----------- -----------
Net cash provided by (used in) operating activities 4,276,496 467,481
----------- -----------
Cash Flows from Investing Activities:
Investments in marketable securities (7,362,273) --
Purchases of equipment and improvements (861,122) (353,816)
----------- -----------
Net cash used in investing activities (8,223,395) (353,816)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from bank borrowings -- 298,788
Repayments of bank borrowings -- (83,223)
Proceeds from exercise of stock options 515,865 105,498
Deferred financing costs -- (225,897)
----------- -----------
Net cash provided by financing activities 515,865 95,166
----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (3,431,034) 208,831
Cash and Cash Equivalents, beginning of period 7,858,186 1,663,896
----------- -----------
Cash and Cash Equivalents, end of period $ 4,427,152 $ 1,872,727
----------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ -- $ 42,886
=========== ===========
Supplemental Disclosure of Noncash Transactions:
Accretion of dividends on preferred stock $ -- $ 441,557
=========== ===========
Deferred compensation related to grants of stock options $ -- $ 149,875
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE> 6
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FORM 10-Q, JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The accompanying financial statements have been presented by Concord
Communications, Inc., (the "Company") without audit (except that the balance
sheet information as of December 31, 1997 has been derived from audited
financial statements) in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to Form
10-Q and Regulation S-X pertaining to interim financial statements. Accordingly,
these interim financial statements do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. The financial statements reflect all adjustments and accruals which
management considers necessary for a fair presentation of financial position as
of June 30, 1998 and December 31, 1997, and results of operations for the three
and six months ended June 30, 1998 and 1997. The results for the interim periods
presented are not necessarily indicative of results to be expected for any
future period. The financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
1997 Annual Report on Form 10-K filed with the Securities and Exchange
Commission in March 1998.
2. NET INCOME (LOSS) PER SHARE
In 1997, the Company adopted SFAS No. 128, Earnings Per Share, effective
December 15, 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. The Company has applied the provisions of SFAS
No. 128 retroactively to all periods presented. In accordance with Staff
Accounting Bulletin (SAB) No.98, the Company has determined that there were no
nominal issuances of common stock or potential common stock in the period prior
to the Company's initial public offering (IPO). The dilutive effect of potential
common shares for the three and six months ended June 30, 1998, consisting of
outstanding stock options is determined using the treasury method. Pro forma
diluted net income (loss) per common and potential common share assumes that all
series of redeemable convertible preferred stock had been converted to common
stock as of the original issuance dates. Calculations of basic, diluted and pro
forma diluted net income (loss) per common share and potential common share are
as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- --------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) .................................. $ 1,852,453 $ (378,439) $ 2,984,718 $ (966,417)
=========== =========== =========== ===========
Weighted average common shares outstanding ........ 12,565,017 907,773 12,395,448 892,778
Potential common shares pursuant to stock options.. 1,417,724 -- 1,565,282 --
----------- ----------- ----------- -----------
Diluted weighted average shares ................... 13,982,741 907,773 13,960,730 892,778
Pro forma conversion of redeemable convertible
preferred stock ................................. -- 8,108,258 -- 8,108,258
----------- ----------- ----------- -----------
Pro forma diluted weighted average
shares outstanding ............................... 13,982,741 9,016,031 13,960,730 9,001,036
----------- ----------- ----------- -----------
Basic net income (loss) per common share ........... $ 0.15 $ (0.42) $ 0.24 $ (1.08)
=========== =========== =========== ===========
Diluted net income (loss) per common
and potential common share ...................... $ 0.13 $ (0.42) $ 0.21 $ (1.08)
=========== =========== =========== ===========
Pro forma diluted net income (loss) per
common and potential common share ............... $ 0.13 $ (0.04) $ 0.21 $ (0.11)
=========== =========== =========== ===========
</TABLE>
6
<PAGE> 7
3. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997 and the Company has adopted the statement in its quarter
ended March 31, 1998. Comprehensive income for the three and six months ended
June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $1,852,453 $ (378,439) $2,984,718 $ (966,417)
Unrealized gains on
marketable securities 19,679 -- 26,393 --
---------- ---------- ---------- ----------
Comprehensive income (loss) $1,832,774 $ (378,439) $2,958,325 $ (966,417)
========== ========== ========== ==========
</TABLE>
4. INITIAL PUBLIC OFFERING
On October 24, 1997, the Company completed its initial public offering of
3,335,000 shares of common stock at a price of $14.00 per share. Of these
shares, 2,735,000 were issued by the Company and 600,000 from selling
shareholders. The Company received net proceeds of approximately $34.7 million.
The Company's redeemable convertible preferred stock automatically converted
into 8,108,258 shares of common stock upon the closing of the public offering.
Effective upon the closing of the offering, the Company amended and restated its
articles of incorporation to increase its authorized common to 50,000,000 shares
and to authorize 1,000,000 shares of preferred stock, $.01 par value.
7
<PAGE> 8
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 1998
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company 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.
The Company does not provide forecasts of the future financial performance of
the Company. From time to time, however, the information provided by the Company
or statements made by its employees may contain forward-looking statements. In
particular, statements contained in this Form 10-Q that are not historical
statements (including, but not limited to, statements concerning operating
expense levels and such operating expense levels relative to the Company's total
revenues, research and development expenses and expenses associated with Y2000)
constitute forward-looking statements. These statements, like all
forward-looking statements, are subject to risks and uncertainties that may
cause future results to differ materially from those expected. Factors that may
cause such differences include, but are not limited to, the factors discussed
beginning on page 10 under the heading "Certain Factors That May Affect Future
Results".
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as percentages of the Company's total revenue:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License revenues 83.2% 89.2% 84.6% 89.5%
Service revenues 16.8% 10.8% 15.4% 10.5%
------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 11.7% 16.3% 11.9% 16.6%
------------------------------------------------------------------
Gross profit 88.3% 83.7% 88.1% 83.4%
Operating expenses:
Research and development 20.0% 25.7% 20.6% 27.6%
Sales and marketing 46.1% 55.3% 47.7% 56.1%
General and administrative 7.0% 11.0% 7.5% 11.7%
------------------------------------------------------------------
Income (loss) from operations 15.2% (8.3%) 12.3% (12.0%)
------------------------------------------------------------------
Other income (expense), net 6.5% (0.6%) 6.8% (0.5%)
------------------------------------------------------------------
Net income (loss) 21.7% (8.9%) 19.1% (12.5%)
------------------------------------------------------------------
</TABLE>
TOTAL REVENUES. The Company's total revenues increased 101.2% to $8.5 million
in the three months ended June 30, 1998 from $4.2 million in the three months
ended June 30, 1997. The Company's total revenues increased 102.6% to $15.6
million in the six months ended June 30, 1998 from $7.7 million in the six
months ended June 30, 1997.
LICENSE REVENUES. The Company's license revenues are derived from the
licensing of software products. License revenues increased 87.7% to $7.1
million, or 83.2% of total revenues, in the three months ended June 30, 1998
from $3.8 million, or 89.2% of total revenues, in the three months ended June
30, 1997. License revenues increased 91.6% to $13.2 million, or 84.6% of total
revenues, in the six months ended June 30, 1998 from $6.9 million, or 89.5% of
total revenues, in the six months ended June 30, 1997. The increase in license
revenues resulted from increased sales to new customers and additional sales to
existing customers for new products and upgrades of existing licenses.
8
<PAGE> 9
SERVICE REVENUES. The Company's service revenues consist of fees for
maintenance, training and professional services. Service revenues increased
211.9% to $1.4 million or 16.8% of total revenues, in the three months ended
June 30, 1998 from $460,000, or 10.8% of total revenues, in the three months
ended June 30, 1997. Service revenues increased 195.3% to $2.4 million or 15.4%
of total revenues, in the six months ended June 30, 1998 from $811,000, or 10.5%
of total revenues, in the six months ended June 30, 1997. The increase in
service revenues was primarily attributed to an increase in revenue from
maintenance contracts for new and existing customers.
COST OF REVENUES. Cost of revenues include expenses associated with royalty
costs, production, fulfillment and product documentation, along with personnel
costs associated with providing customer support in connection with maintenance
and professional service contracts. Royalty costs are comprised of third party
software costs. Cost of revenues increased 44.2% to $999,000, or 11.7% of total
revenues, in the three months ended June 30, 1998 from $693,000, or 16.3% of
total revenues, in the three months ended June 30, 1997, resulting in gross
margins of 88.3% and 83.7% in each respective period. Cost of revenues increased
44.8% to $1.9 million or 11.9% of total revenues, in the six months ended June
30, 1998 from $1.3 million or 16.6% of total revenues, in the six months ended
June 30, 1997, resulting in gross margins of 88.1% and 83.4% in each respective
period. The increase in cost of revenues was primarily the result of increased
spending in customer support to be more responsive to a growing customer base.
The improvement in the gross margin percentages were attributable to lower
royalty unit costs associated with the higher sales volumes during the 1998
period.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist
primarily of personnel costs associated with software development. Research and
development expenses increased 56.8% to $1.7 million, or 20.0% of total
revenues, in the three months ended June 30, 1998 from $1.1 million, or 25.7% of
total revenues, in the three months ended June 30, 1997. Research and
development expenses increased 51.2% to $3.2 million, or 20.6% of total
revenues, in the six months ended June 30, 1998 from $2.1 million, or 27.6% of
total revenues, in the six months ended June 30, 1997. The increase in absolute
dollars was primarily due to the use of outside contractors for consulting and
recruiting along with increased headcount in research and development from 37 to
43. 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 EXPENSES. Sales and marketing expenses consist primarily
of salaries, commissions to sales personnel and agents, travel, tradeshow
participation, public relations and other promotional expenses. Sales and
marketing expenses increased 67.8% to $3.9 million, or 46.1 % of total revenues,
in the three months ended June 30, 1998 from $2.3 million, or 55.3% of total
revenues, in the three months ended June 30, 1997. Sales and marketing expenses
increased 72.4% to $7.4 million, or 47.7% of total revenues, in the six months
ended June 30, 1998 from $4.3 million, or 56.1% of total revenues, in the six
months ended June 30, 1997. The increase in absolute dollars was primarily the
result of increased headcount to continue to build the direct sales force along
with additional marketing and promotional activities to penetrate the market.
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 45 to 53 people from June 30, 1997 to June 30, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. 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.
General and administrative expenses increased 27.0% to $594,000, or 7.0% of
total revenues, in the three months ended June 30, 1998 from $468,000, or 11.0%
of total revenues, in the three months ended June 30, 1997. General and
administrative expenses increased 29.7% to $1.2 million or 7.5% of total
revenues, in the six months ended June 30, 1998 from $900,000, or 11.7% of total
revenues, in the six months ended June 30, 1997. The increase in absolute
dollars reflects personnel growth and associated costs in general support areas.
Headcount in general and administrative increased from 12 to 13 people from June
30, 1997 to June 30, 1998. General and administrative expenses declined as a
percentage of total revenues during the 1998 period due to a significant
increase in revenues during that period.
OTHER INCOME(EXPENSE). 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 had net other income of $555,000 for the three
months ended June 30, 1998 and net other expense of ($23,000) for the three
months ended June 30, 1997. The Company had net other income of $1.1 million for
the six months ended June 30, 1998 and net other expense of ($42,000) for the
six months ended June 30, 1997. The increase in net other income for the six
months ended June 30, 1998 is attributed to the investment of proceeds from the
Company's IPO and also the payoff of all outstanding capital equipment
financing.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations, prior to its initial public
offering, primarily through the private sale of equity securities and a credit
line for equipment purchases. On October 24, 1997, the Company completed its
initial public offering of 3,335,000 shares of Common Stock at a price of $14.00
per share. Of these shares, 2,735,000 were issued by the Company and 600,000
from selling shareholders. The Company received net proceeds of approximately
$34.7 million. The Company had working capital of $35.5 million at June 30,
1998.
Net cash provided by operating activities was $4.3 million and $467,000 for
the six months ended June 30, 1998 and 1997, respectively. Cash, cash
equivalents and marketable securities were $40.5 million at June 30, 1998, and
$2.3 million at June 30, 1997. Deferred revenues increased for the six months
ended June 30, 1998 by $750,000 due to an increase in overall sales activity;
the increase consisted of $839,000 from deferred maintenance contracts and a
decrease of ($89,000) from service and software license sales with remaining
contingencies such as completion of services, product acceptance and credit
worthiness.
Investing activities have consisted of the acquisition of property and
equipment, most notably computer and networking equipment to support the
growing employee base and corporate infrastructure and also investments in
marketable securities. The Company manages its market risk on its investment
securities by selecting investment grade securities with the highest credit
ratings of relatively short duration that trade in highly liquid markets.
Financing activities consisted of the proceeds from bank borrowings in
connection with equipment purchases and costs associated with the initial
public offering during the six months ended June 30, 1997 and the issuance of
common stock from the exercise of stock options during the six months ended
June 30, 1998 and 1997.
The Company had available net operating loss carryforwards of approximately
$23.0 million and federal research and development tax credit carryforwards of
approximately $1.5 million as of December 31, 1997 to reduce future income tax
liabilities. These carryforwards expire from 1999 through 2011 and are subject
to review and possible adjustment by the appropriate taxing authorities.
Approximately $11.1 million of the Company's net operating loss and research and
development tax credit carryforwards expire between 1999 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. As a result of this ownership change, the use of the net operating
loss carryforwards will be limited. Based on a preliminary analysis, the Company
has determined that another ownership change has not occurred, as a result of
it's initial public offering. The Company has deferred tax assets of
approximately $13.6 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
$13.6 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.
As of June 30, 1998, the Company's principal sources of liquidity included
cash. The Company believes that the net proceeds from its initial public
offering, together with its current cash balances and cash provided by future
operations, 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.
YEAR 2000 COMPLIANCE
The company is aware of the issues associated with the programming code in
existing computer systems and software products as the millennium (Year 2000)
approaches. In 1997, the Company initiated the necessary development to ensure
Year 2000 compliance in the Network Health family of applications and believes
it has achieved Y2000 compliance in Network Health 4.1 scheduled for release in
August 1998. Also in 1998, the Company commenced a Year 2000 date conversion
project to address all internal existing computer systems and applications.
Management has not yet assessed the Year 2000 compliance expense, but based on
a preliminary review to date, does not expect the amounts required to be
expensed over the next two years to have a material effect on its financial
position or results of operations. There can be no assurance, however, that
further assessment of the Company's internal systems and applications will not
indicate that additional Company efforts to assure Year 2000 compliance are
necessary, and that such efforts may be costly. Further, there can be no
assurance that the systems operated by other companies upon which the Company
relies will be Year 2000
10
<PAGE> 11
compliant on a timely basis. The Company's business, financial condition or
results of operations could be materially adversely affected by the failure of
the Company's products and its internal systems and applications to properly
operate or manage data beyond 1999.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information provided by the Company from time to time including statements in
this Form 10-Q which are not historical facts, are so-called "forward-looking
statements" that involve risks and uncertainties, made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. In
particular, statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical facts
(including, but not limited to, statements concerning the plans and objectives
of management; increases in sales and marketing, research and development and
general and administrative expenses; expenses associated with Y2000 and the
Company's expected liquidity and capital resources) may constitute
forward-looking statements. The Company's actual future results may differ
significantly from those stated in any forward-looking statements. Factors that
may cause such differences include, but are not limited to, the factors
discussed below, and the other risks discussed in the Company's 1997 Annual
Report on Form 10-K filed with the Securities and Exchange Commission in March
1998.
LIMITED OPERATING HISTORY; UNCERTAINTY OF FUTURE OPERATING RESULTS
The Company changed its focus to network management software in 1991 and
commercially introduced its first Network Health product in 1995. Accordingly,
the Company has only a limited operating history in the network performance
analysis and reporting market upon which an evaluation of its business and
prospects can be based. The Company has incurred significant net losses in each
of the last five fiscal years preceding fiscal year 1997. As of June 30, 1998,
the Company had accumulated net losses of $28.0 million. The limited operating
history of the Company and its dependence on a single product family in an
emerging market makes the prediction of future results of operations difficult
or impossible, and the Company and its prospects must be considered in light of
the risks, costs and difficulties frequently encountered by emerging companies,
particularly companies in the competitive software industry. Although the
Company has achieved recent revenue growth, and profitability for the fiscal
year ended 1997, there can be no assurance that the Company can generate
substantial additional revenue growth on a quarterly or annual basis, or that
any revenue growth that is achieved can be sustained. Revenue growth that the
Company has achieved or may achieve may not be indicative of future operating
results. In addition, the Company has increased, and plans to increase further,
its operating expenses in order to fund higher levels of research and
development, increase its sales and marketing efforts, develop new distribution
channels, broaden its customer support capabilities and expand its
administrative resources in anticipation of future growth. To the extent that
increases in such expenses precede or are not subsequently followed by increased
revenues, the Company's business, results of operations and financial condition
would be materially adversely affected. There can be no assurance that the
Company will sustain profitability on a quarterly or annual basis. The Company
must achieve substantial revenue growth in order to sustain profitability. In
addition, in view of recent revenue growth, the rapidly evolving nature of its
business and markets and its limited operating history in its current market,
the Company believes that period-to-period comparisons of financial results are
not necessarily meaningful and should not be relied upon as an indication of
future performance. Management believes that it is more likely than not that the
Company will not generate sufficient income to utilize available net operating
loss carryforwards of approximately $23.0 million and federal research and
development credit carryforwards of approximately $1.5 million as of December
31, 1997. In addition, there are limitations on the Company's use of net
operating loss carryforwards. Accordingly, the Company has recorded a full
valuation allowance for these assets.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company is likely to experience significant fluctuations in quarterly
operating results caused by many factors, including, but not limited to: (i)
changes in the demand for the Company's products; (ii) the timing, composition
and size of orders from the Company's customers, including the tendency for
significant bookings to occur in the last month of each fiscal quarter; (iii)
spending patterns and budgetary resources of its customers on network management
software solutions; (iv) the success of the Company's new customer generation
activities; (v) introductions or enhancements of products, or delays in the
introductions or enhancements of products, by the Company or its competitors;
(vi) changes in the Company's pricing policies or those of its competitors;
(vii) changes in the distribution channels through which products are sold;
(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
11
<PAGE> 12
may tend to mitigate quarterly fluctuations in operating results. Furthermore,
the Company is attempting to expand its channels of distribution, and increases
in the Company's revenues will be dependent on its ability to implement
successfully its distribution strategy. Due to the buying patterns of certain of
the Company's customers and also to the Company's own sales incentive programs
focused on annual sales goals, revenues in the Company's fourth quarter could be
higher than revenues in the first quarter of the succeeding year. There also may
be other factors that significantly affect the Company's quarterly results which
are difficult to predict given the Company's limited operating history, such as
seasonality and the timing of receipt and delivery of orders within a fiscal
quarter.
Consistent with software industry practice, the Company expects to operate
with a limited amount of backlog. As a result, quarterly sales and operating
results depend generally on the volume and timing of orders within the quarter,
the tendency of sales to occur late in fiscal quarters and the ability of the
Company to fill orders received within the quarter, all of which are difficult
to forecast and manage. The Company's expense levels are based in part on its
expectations of future orders and sales, which, given the Company's limited
operating history, are extremely difficult to predict. A substantial portion of
the Company's operating expenses are related to personnel, facilities, and sales
and marketing programs. This level of spending for such expenses cannot be
adjusted quickly and is, therefore, relatively fixed in the short term.
Accordingly, any significant shortfall in demand for the Company's products in
relation to the Company's expectations would have an immediate and material
adverse effect on the Company's business, results of operations and financial
condition.
Due to all of the foregoing factors, the Company believes that its quarterly
operating results are likely to vary significantly in the future. Therefore, in
some future quarter the Company's results of operations may fall below the
expectations of securities analysts and investors. In such event, the trading
price of the Company's Common Stock would likely be materially adversely
affected.
EMERGING NETWORK MANAGEMENT SOFTWARE MARKET
The market for the Company's products is in an early stage of development.
Although the rapid expansion and increasing complexity of computer networks in
recent years has increased the demand for network management software products,
the awareness of and the need for such products is a recent development. Because
the market for these products is only beginning to develop, it is difficult to
assess the size of this market, the appropriate features and prices for products
to address this market, the optimal distribution strategy and the competitive
environment that will develop. The development of this market and the Company's
growth will be significantly dependent on the willingness of network service
providers, including telecommunications carriers, ISPs, systems integrators and
outsourcers, to integrate network performance analysis and reporting software
into their product and service offerings. Failure of the network performance
analysis and reporting market to grow or failure of the Company to properly
assess and address such market would have a material adverse effect on the
Company's business, results of operations and financial condition.
DEPENDENCE ON TELECOMMUNICATIONS CARRIERS
A significant portion of the Company's revenues are, and are expected to
continue to be, attributable to sales of products to telecommunications
carriers. The Company's future performance is significantly dependent upon
telecommunications carriers' increased incorporation of the Company's solutions
as part of their package of product and service offerings to end users. The
failure of the Company's products to perform favorably in and become an accepted
component of the telecommunications carriers' product and service offerings, or
a slower than expected increase or a decrease in the volume of sales of the
Company's products and services to telecommunications carriers, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
CONCENTRATED PRODUCT FAMILY
The Company currently derives substantially all of its revenues from its
Network Health product family, and the Company expects that revenues from these
products will continue to account for substantially all of the Company's
revenues for the foreseeable future. Broad market acceptance of these products
is, therefore, critical to the Company's future success, and any factor
adversely affecting sales or pricing levels of these products could have a
material adverse effect on the Company's business, results of operations and
financial condition. There can be no assurance that market acceptance of Network
Health will increase or even remain at current levels. Factors that may affect
the market acceptance of the Company's products include the availability and
price of competing products and technologies and the success of the sales
efforts of the Company and its marketing partners. Moreover, the Company
anticipates that its competitors will introduce additional competitive products,
particularly if demand for network management software products increases, which
may reduce future market acceptance of the Company's products. In addition, new
competitors could enter the Company's market and offer alternative products
which may impact the market acceptance of the Company's products.
12
<PAGE> 13
The Company's future performance will also depend in part on the successful
development, introduction and market acceptance of new and enhanced products.
There can be no assurance that any such new or enhanced products will be
successfully developed, introduced and marketed, and failure to do so would have
a material adverse effect on the Company's business, results of operations and
financial condition.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON STANDARD PROTOCOLS
The software industry is characterized by rapid technological change,
frequent introductions of new products, changes in customer demands and evolving
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards can render existing products obsolete
and unmarketable. Network Health's ability to analyze and generate reports, as
well as the quality of the reports, is dependent on Network Health's utilization
of the industry-standard SNMP protocol and the data resident in conventional
MIBs. Any change in these industry standards, the development of vendor-
specific proprietary MIB technology, or the emergence of new network
technologies could affect the compatibility of Network Health with these devices
which, in turn, could affect Network Health's ability to analyze and generate
comprehensive reports or the quality of the reports. Furthermore, although the
Company's products currently run on industry-standard UNIX operating systems and
Windows NT, any significant change in industry-standard operating systems could
affect the demand for, or the pricing of, the Company's products. Any of the
foregoing developments could have a material adverse effect on the Company's
business, results of operations and financial condition.
PRODUCT ENHANCEMENTS AND NEW PRODUCTS
Because of rapid technological change in the software industry and potential
changes in the network management software market and industry standards, the
life cycle of versions of Network Health is difficult to estimate. The Company's
future success will depend upon its ability to address the increasingly
sophisticated needs of its customers by developing and introducing enhancements
to Network Health on a timely basis that keep pace with technological
developments, emerging industry standards and customer requirements. There can
be no assurance that the Company will be successful in developing and marketing
enhancements to Network Health or in developing new products that respond to
technological changes, evolving industry standards or customer requirements,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and sale of such enhancements or new
products, or that such enhancements or new products will adequately address the
requirements of the marketplace and achieve any significant degree of market
acceptance.
COMPETITION; NEW ENTRANTS
The market for the Company's products is new, intensely competitive, rapidly
evolving and subject to technological change. Competitive and alternative
offerings are available from the major product categories of remote monitoring
(RMON) probe vendors, element management software, and other performance
analysis and reporting offerings. Another area of competition comes from a
number of companies offering network performance reporting services; including
International Network Services (INS). In addition, the Company expects the large
network management platform vendors to begin to offer products directly
competitive with the Company's products. These companies may bundle their
products with other hardware and software in a manner that may discourage users
from purchasing products offered by the Company. This strategy may be
particularly effective for companies with leading market shares in the network
hardware and software market, including Hewlett-Packard Company, International
Business Machines Corporation and Cabletron Systems, Inc. Developers of network
element management solutions such as Cisco Systems, Inc., 3Com Corporation and
Bay Networks, Inc. may also compete with the Company in the future. The Company
expects competition to persist, increase and intensify in the future with
possible price competition developing in the Company's markets. Many of the
Company's current and potential competitors have longer operating histories and
significantly greater financial, technical and marketing resources and name
recognition than the Company. The Company does not believe its market will
support a large number of competitors and their products. In the past, a number
of software markets have become dominated by one or a small number of suppliers,
and a small number of suppliers or even a single supplier may dominate the
Company's market. If the Company does not provide products that achieve success
in its market in the short term, the Company could suffer an insurmountable loss
in market share and brand name acceptance, which would result in a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that the Company will be able to compete
effectively with current and future competitors.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company's success depends significantly upon its proprietary technology.
The Company relies on a combination of patent, copyright, trademark and trade
secret laws, non-disclosure agreements and other contractual provisions to
establish, maintain and protect its proprietary rights, all of which afford only
limited protection. The Company has four issued U.S. patents, three pending
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<PAGE> 14
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 Company can cause product release delays, require the Company to
redesign its products or require the Company to enter into royalty or license
agreements, which agreements may not be available on terms acceptable to the
Company or at all.
RISK OF PRODUCT DEFECTS; PRODUCT LIABILITY
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and testing and use by
current and potential customers, errors will not be found in new products after
commencement of commercial shipments or, if discovered, that the Company will be
able to successfully correct such errors in a timely manner or at all. The
occurrence of errors and failures in the Company's products could result in loss
of or delay in market acceptance of the Company's products, and alleviating such
errors and failures could require significant expenditure of capital and other
resources by the Company. The consequences of such errors and failures could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Since the Company's products are used by its customers to predict future
network problems and avoid failures of the network to support critical business
functions, design defects, software errors, misuse of the Company's products,
incorrect data from network elements or other potential problems within or out
of the Company's control that may arise from the use of the Company's products
could result in financial or other damages to the Company's customers. The
Company does not maintain product liability insurance. Although the Company's
license agreements with its customers typically contain provisions designed to
limit the Company's exposure to potential claims as well as any liabilities
arising from such claims, such provisions may not effectively protect the
Company against such claims and the liability and costs associated therewith.
Accordingly, any such claim could have a material adverse effect upon the
Company's business, results of operations and financial condition. The Company
provides warranties for its products for a period of time (currently three
months) after the software is purchased. The Company's license agreements
generally do not permit product returns by the customer, and product returns and
warranty expense for fiscal 1995, 1996 and 1997 represented less than 1.0% of
total revenues during each of such periods. However, no assurance can be given
that product returns will not increase as a percentage of total revenues in
future periods.
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<PAGE> 15
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 and OEM's, such as Cabletron Systems, Inc.: telecommunications
carriers and network service providers, such as MCI Communications Corporation;
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.
MANAGEMENT OF POTENTIAL GROWTH
The Company recently has experienced significant growth in its sales and
operations and in the complexity of its products and product distribution
channels. The Company has recently increased and is continuing to increase the
size of its sales force and coverage territories. Furthermore, the Company has
recently established and is continuing to establish additional distribution
channels through third party relationships. The Company's growth, coupled with
the rapid evolution of the Company's markets, has placed, and is likely to
continue to place, significant strains on its administrative, operational and
financial resources and increase demands on its internal systems, procedures and
controls. If the Company is unable to manage future growth effectively, the
Company's business, results of operations and financial condition could be
materially adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its key technical and senior management personnel, none of whom is bound by an
employment agreement. The loss of the services of any of such personnel could
have a material adverse effect on the business, results of operations and
financial condition of the Company. The Company does not maintain key person
life insurance policies on any of its employees. The Company's success is highly
dependent on its continuing ability to identify, hire, train, motivate and
retain highly qualified management, technical, and sales and marketing
personnel, including recently hired officers and other employees. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to attract, assimilate or retain highly qualified technical and
managerial personnel in the future. The inability to attract and retain the
necessary management, technical, and sales and marketing personnel could have a
material adverse effect on the Company's business, results of operations and
financial condition.
EXPANSION INTO INTERNATIONAL MARKETS
The Company intends to expand its operations outside of the United States and
enter additional international markets, primarily through the establishment of
additional reseller arrangements. The Company expects to commit additional time
and development resources to customizing its products and services for selected
international markets and to developing international sales and support
channels. There can be no assurance that such efforts will be successful.
In addition to the uncertainty as to the Company's ability to establish an
international presence, there are certain difficulties and risks inherent in
doing business internationally, including, but not limited to: (i) costs of
customizing products and services for international markets; (ii) dependence on
independent resellers; (iii) multiple and conflicting regulations; (iv) exchange
controls; (v) longer payment cycles; (vi) unexpected changes in regulatory
requirements; (vii) import and export restrictions and tariffs; (viii)
difficulties in staffing and managing international operations; (ix) greater
difficulty or delay in accounts receivable collection; (x) potentially adverse
tax consequences; (xi) the burden of complying with a variety of laws outside
the United States; (xii) the impact of possible recessionary environments in
economies outside the United States; and (xiii) political and economic
instability. In addition, the Company's ability to expand its business in
certain countries will require modification of its products, particularly
national language support. The Company's current export sales are denominated in
United States dollars and the Company currently expects to
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<PAGE> 16
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 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.
POSSIBLE VOLATILITY OF STOCK PRICE
The Company completed an initial public offering of its common stock during
October of 1997. The market price of the shares of Common Stock may be highly
volatile and could be subject to wide fluctuations in response to variations in
results of operations, announcements of technological innovations or new
products by the Company or its competitors, changes in financial estimates by
securities analysts or other events or factors. In addition, the financial
markets have experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many high
technology companies and that often have been unrelated to the operating
performance of such companies or have resulted from the failure of the operating
results of such companies to meet market expectations in a particular quarter.
Broad market fluctuations or any failure of the Company's operating results in a
particular quarter to meet market expectations may adversely affect the market
price of the shares of Common Stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business, results of operations and financial condition.
FUTURE CAPITAL FUNDING
The Company plans to continue to expend substantial funds on the continued
development, sales and marketing of the Network Health product family. There can
be no assurance that the Company's existing capital resources, the proceeds from
the Company's initial public offering during October of 1997 and any funds that
may be generated from future operations together will be sufficient to finance
the Company's future operations or that other sources of funding will be
available on terms acceptable to the Company, if at all. In addition, future
sales of substantial amounts of the Company's securities in the public market
could adversely affect prevailing market prices and could impair the Company's
future ability to raise capital through the sale of its securities. The failure
to obtain such funding, if required, could have a material adverse effect on the
Company's business, results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 1998
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on the business, results of operations and financial
condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d)Use of Proceeds
On October 16, 1997, the Company commenced an initial public offering ("IPO")
of 2,900,000 shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company pursuant to the Company's final prospectus dated October
15, 1997 (the "Prospectus"). The Prospectus was contained in the Company's
Registration Statement on Form S-1, which was declared effective by the
Securities and Exchange Commission (SEC File No. 333-33227) on October 15, 1997.
Of the 2,900,000 shares of Common Stock offered, 2,300,000 shares were offered
and sold by the Company and 600,000 shares were offered and sold by certain
stockholders of the Company. As part of the IPO, the Company granted the several
underwriters an overallotment option to purchase up to an additional 435,000
shares of Common Stock (the "Underwriters' Option"). The IPO closed on October
21, 1997 upon the sale of 2,900,000 shares of Common Stock to the underwriters.
On October 24, 1997, the Representatives, on behalf of the several underwriters,
exercised the Underwriters' Option, purchasing 435,000 additional shares of
Common Stock from the Company. The aggregate offering price of the IPO to the
public was $40,600,000 (exclusive of the Underwriters' Option), with proceeds to
the Company and selling shareholders, after deduction of the underwriting
discount, of $29,946,000 (before deducting offering expenses payable by the
Company) and $7,812,000 respectively. The aggregate offering price of the
Underwriters' Option exercised was $6,090,000, with proceeds to the Company,
after deduction of the underwriting discount, of $5,663,700 (before deducting
offering expenses payable by the Company). The aggregate amount of expenses
incurred by the Company in connection with the issuance and distribution of the
shares of Common Stock offered and sold in the IPO were approximately $3.6
million, including $2.7 million in underwriting discounts and commissions and
$950,000 in other offering expenses.
The net proceeds to the Company from the IPO, after deducting underwriting
discounts and commissions and other offering expenses were approximately $34.7
million.
To date, the Company has not utilized any of the net proceeds from the IPO.
The Company has invested all such net proceeds primarily in US treasury
obligations and other interest bearing investment grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of stockholders on April 30, 1998. At
the Annual Meeting, the stockholders of the Company elected two Class I
Directors, approved the Company's 1997 Stock Plan (as amended) and ratified the
selection of the firm of Arthur Andersen LLP as auditors for the Company for the
fiscal year ending December 31, 1998. The voting results were as follows:
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<PAGE> 18
<TABLE>
<CAPTION>
Total Vote For Total Vote Withheld
-------------- -------------------
<S> <C> <C>
Election of Directors
Robert C. Hawk 9,265,930 62,550
John Robert Held 9,265,930 62,550
</TABLE>
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
<S> <C> <C> <C> <C>
Approval of 1997 Stock
Plan, as amended 7,893,069 798,746 4,011 632,654
Ratification of Selection
of Arthur Andersen LLP 9,319,921 5,214 3,345 0
</TABLE>
ITEM 5. OTHER INFORMATION
Proposals of stockholders intended for inclusion in the proxy statement to
be furnished to all stockholders entitled to vote at the 1999 Annual Meeting
must be received at the Company's principal executive offices not later than
January 15, 1999. The deadline for providing timely notice to the Company of
matters that stockholders otherwise desire to introduce at the next Annual
Meeting is February 5, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed in the accompanying Exhibit Index on page 20 are filed
or incorporated by reference as part of this Report.
(b) Reports on Form 8-K
None
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<PAGE> 19
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 1998
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Concord Communications, Inc.
/s/ Gary E. Haroian
----------------------------------
Date: August 14, 1998 Name: Gary E. Haroian
Title: Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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<PAGE> 20
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, JUNE 30, 1998
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.01 1997 Stock Plan of the Company as amended on March 12, 1998
10.02 1997 Non-Employee Director Stock Option Plan of the Company, as
amended on March 12, 1998
27.01 Financial Data Schedule
20
<PAGE> 1
CONCORD COMMUNICATIONS, INC.
1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE. This Non-Qualified Stock Option Plan, to be known as the 1997
Non-Employee Director Stock Option Plan (hereinafter, this "Plan") is intended
to promote the interests of CONCORD COMMUNICATIONS, INC. (hereinafter, the
"Company") by providing an inducement to obtain and retain the services of
qualified persons who are not employees or officers of the Company to serve as
members of its Board of Directors (the "Board").
2. AVAILABLE SHARES. The total number of shares of Common Stock, par value
$.01 per share, of the Company (the "Common Stock") for which options may be
granted under this Plan shall not exceed ninety-five thousand (95,000) shares,
subject to adjustment in accordance with Section 10 of this Plan; provided,
however, that such number of shares shall not be subject to adjustment by reason
of the stock split in the form of a stock dividend declared by the Board of the
Directors of the Company on August 7, 1997. Shares subject to this Plan are
authorized but unissued shares or shares that were once issued and subsequently
reacquired by the Company. If any options granted under this Plan are
surrendered before exercise or lapse without exercise, in whole or in part, the
shares reserved therefor shall continue to be available under this Plan.
3. ADMINISTRATION. This Plan shall be administered by the Board or by a
committee appointed by the Board (the "Committee"). In the event the Board fails
to appoint or refrains from appointing a Committee, the Board shall have all
power and authority to administer this Plan. In such event, the word "Committee"
wherever used herein shall be deemed to mean the Board. The Committee shall,
subject to the provisions of the Plan, have the power to construe this Plan, to
determine all questions hereunder, and to adopt and amend such rules and
regulations for the administration of this Plan as it may deem desirable. No
member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to this Plan or any option granted
under it.
4. AUTOMATIC GRANT OF OPTIONS. Subject to the availability of shares under
this Plan, (a) each person who becomes a member of the Board on or after October
16, 1997 and who is not an employee or officer of the Company during the term of
the Plan (a "Non-Employee Director"), shall be automatically granted on the date
such person is first elected to the Board, without further action by the Board,
an option to purchase 20,000 shares of the Common Stock, and (b) starting with
the 1998 Annual Meeting of Stockholders of the Company, each person who is a
Non-Employee Director immediately following the final adjournment of each Annual
Meeting of Stockholders of the Company during the term of this Plan shall be
automatically granted on each such date an option to purchase 5,000 shares of
the Common Stock. The options to be granted under this Section 4 shall be the
only options ever to be granted at any time to such member under this Plan. The
number of shares covered by options granted under this Section 4 shall be
subject to adjustment in accordance with the provisions of Section 10 of this
Plan.
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5. OPTION PRICE. The purchase price of the stock covered by an option
granted pursuant to this Plan shall be 100% of the fair market value of such
shares on the day the option is granted. The option price will be subject to
adjustment in accordance with the provisions of Section 10 of this Plan. For
purposes of this Plan, if, at the time an option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes discussed
in this sentence are available prior to the date such option is granted and
shall mean (i) the average (on that date) of the high and low prices of the
Common Stock on the principal national securities exchange on which the Common
Stock is traded, if the Common Stock is then traded on a national securities
exchange; or (ii) the last reported sale price (on that date) of the Common
Stock on the Nasdaq National Market, if the Common Stock is not then traded on a
national securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the Nasdaq
National Market List. However, if the Common Stock is not publicly traded at the
time an option is granted under the Plan, "fair market value" shall be deemed to
be the fair value of the Common Stock as determined by the Committee after
taking into consideration all factors which it deems appropriate, including,
without limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
6. PERIOD OF OPTION. Unless sooner terminated in accordance with the
provisions of Section 8 of this Plan, an option granted hereunder shall expire
on the date which is ten (10) years after the date of grant of the option.
7. (a) VESTING OF SHARES AND NON-TRANSFERABILITY OF OPTIONS. Options
granted under this Plan shall not be exercisable until they become vested.
Options granted under this Plan shall vest in the optionee and thus become
exercisable, in accordance with the following schedule, provided that the
optionee has continuously served as a member of the Board through such vesting
date:
Percentage of Option
Shares for which
Option Will be Exercisable Date of Vesting
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25% one year from the date of grant
6.25% per quarter on the last day of the quarter
beginning the quarter ending immediately
following the date to occur which is one
year from the date of grant
The number of shares as to which options may be exercised shall be
cumulative, so that once the option shall become exercisable as to any shares it
shall continue to be exercisable as to said shares, until expiration or
termination of the option as provided in this Plan.
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(b) Non-transferability. Any option granted pursuant to this Plan
shall not be assignable or transferable other than by will or the laws of
descent and distribution or pursuant to a domestic relations order and shall be
exercisable during the optionee's lifetime only by him or her.
8. TERMINATION OF OPTION RIGHTS.
(a) In the event an optionee ceases to be a member of the Board for
any reason other than death or permanent disability, any then unexercised
portion of options granted to such optionee shall, to the extent not then
vested, immediately terminate and become void; any portion of an option which is
then vested but has not been exercised at the time the optionee so ceases to be
a member of the Board may be exercised, to the extent it is then vested, by the
optionee within 60 days of the date the optionee ceased to be a member of the
Board; and all options shall terminate after such 60 days have expired.
(b) In the event that an optionee ceases to be a member of the Board
by reason of his or her death or permanent disability, any option granted to
such optionee may be exercised, to the extent of the number of shares with
respect to which he or she could have exercised it on the date of death or
permanent disability, by the optionee (or by the optionee's personal
representative, heir or legatee, in the event of death) until the scheduled
expiration date of the option.
9. EXERCISE OF OPTIONS AND RESALE RESTRICTIONS.
(a) EXERCISE OF OPTION. Subject to the terms and conditions of this
Plan and the option agreements, an option granted hereunder shall, to the extent
then exercisable, be exercisable in whole or in part by giving written notice to
the Company by mail or in person addressed to the Chief Financial Officer at 33
Boston Post Road West, Marlboro, Massachusetts 01752, its principal executive
offices, stating the number of shares with respect to which the option is being
exercised, accompanied by payment in full for such shares. Payment may be (a) in
United States dollars in cash or by check, (b) in whole or in part in shares of
the Common Stock of the Company already owned by the person or persons
exercising the option or shares subject to the option being exercised (subject
to such restrictions and guidelines as the Board may adopt from time to time),
valued at fair market value determined in accordance with the provisions of
Section 5 or (c) consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the option and an authorization to
the broker or selling agent to pay that amount to the Company, which sale shall
be at the participant's direction at the time of exercise; provided, however,
that there shall be no such exercise at any one time as to fewer than one
hundred (100) shares or all of the remaining shares then purchasable by the
person or persons exercising the option, if fewer than one hundred (100) shares.
The Company's transfer agent shall, on behalf of the Company, prepare a
certificate or certificates representing such shares acquired pursuant to
exercise of the option, shall register the optionee as the owner of such shares
on the books of the Company and shall cause the fully executed certificate(s)
representing such shares to be delivered to the optionee as soon as practicable
after payment of the option price in full. The holder of an option shall not
have any rights of a stockholder with respect to the shares covered by the
option, except to the extent that one or more certificates for such shares shall
be delivered to him or her upon the due exercise of the option.
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(b) RESALE RESTRICTIONS. Under no circumstances may shares acquired
pursuant to the exercise of options granted pursuant to this Plan be disposed of
on or prior to the date that is six months after the date such options were
granted.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION AND OTHER EVENTS. Upon the
occurrence of any of the following events, an optionee's rights with respect to
options granted to him or her hereunder shall be adjusted as hereinafter
provided:
(a) STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares or if
the Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of options shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock dividend.
(b) RECAPITALIZATION ADJUSTMENTS. In the event of a reorganization,
recapitalization, merger, consolidation, or any other change in the corporate
structure or shares of the Company, to the extent permitted by Rule 16b-3 under
the Securities Exchange Act of 1934, adjustments in the number and kind of
shares authorized by this Plan and in the number and kind of shares covered by,
and in the option price of outstanding options under this Plan necessary to
maintain the proportionate interest of the optionee and preserve, without
exceeding, the value of such option, shall be made. Notwithstanding the
foregoing, no such adjustment shall be made which would, within the meaning of
any applicable provisions of the Internal Revenue Code of 1986, as amended,
constitute a modification, extension or renewal of any Option or a grant of
additional benefits to the holder of an Option.
(c) ISSUANCES OF SECURITIES. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
subject to options. No adjustments shall be made for dividends paid in cash or
in property other than securities of the Company.
(d) ADJUSTMENTS. Upon the happening of any of the foregoing events,
the class and aggregate number of shares set forth in Sections 2 and 4 of this
Plan that are subject to options which previously have been or subsequently may
be granted under this Plan shall also be appropriately adjusted to reflect such
events. The Board shall determine the specific adjustments to be made under this
Section 10 and its determination shall be conclusive.
(e) CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated
with or acquired by another entity in a merger or other reorganization in which
the holders of the outstanding voting stock of the Company immediately preceding
the consummation of such
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event, shall, immediately following such event, hold, as a group, less than a
majority of the voting securities of the surviving or successor entity, or in
the event of a sale of all or substantially all of the Company's assets or
otherwise (each, an "Acquisition"), the vesting of all outstanding options
issued pursuant hereto will be accelerated so that all outstanding options are
vested and exercisable in full prior to the consummation of any such
Acquisition. If such options are not exercised prior to the consummation of such
Acquisition, and are not assumed or replaced by the successor entity, such
options will terminate.
11. RESTRICTIONS ON ISSUANCE OF SHARES. Notwithstanding the provisions of
Sections 4 and 9 of this Plan, the Company shall have no obligation to deliver
any certificate or certificates upon exercise of an option until one of the
following conditions shall be satisfied:
(i) The issuance of shares with respect to which the option has been
exercised is at the time of the issue of such shares effectively registered
under applicable Federal and state securities laws as now in force or hereafter
amended; or
(ii) Counsel for the Company shall have given an opinion that the
issuance of such shares is exempt from registration under Federal and state
securities laws as now in force or hereafter amended; and the Company has
complied with all applicable laws and regulations with respect thereto,
including without limitation all regulations required by any stock exchange upon
which the Company's outstanding Common Stock is then listed.
12. LEGEND ON CERTIFICATES. The certificates representing shares issued
pursuant to the exercise of an option granted hereunder shall carry such
appropriate legend, and such written instructions shall be given to the
Company's transfer agent, as may be deemed necessary or advisable by counsel to
the Company in order to comply with the requirements of the Securities Act of
1933 or any state securities laws.
13. REPRESENTATION OF OPTIONEE. If requested by the Company, the optionee
shall deliver to the Company written representations and warranties upon
exercise of the option that are necessary to show compliance with Federal and
state securities laws, including representations and warranties to the effect
that a purchase of shares under the option is made for investment and not with a
view to their distribution (as that term is used in the Securities Act of 1933).
14. OPTION AGREEMENT. Each option granted under the provisions of this Plan
shall be evidenced by an option agreement, which agreement shall be duly
executed and delivered on behalf of the Company and by the optionee to whom such
option is granted. The option agreement shall contain such terms, provisions and
conditions not inconsistent with this Plan as may be determined by the officer
executing it.
15. TERMINATION AND AMENDMENT OF PLAN. Options may no longer be granted
under this Plan ten (10) years after the Approval Date, and this Plan shall
terminate when all options granted or to be granted hereunder are no longer
outstanding. The Board may at any time terminate this Plan or make such
modification or amendment thereof as it deems advisable;
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provided, however, that the Board may not, without approval of the stockholders,
modify or amend this Plan, without approval of the stockholders, if such
approval is required by the Federal securities laws or applicable regulatory
authorities (at the time of any such modification or amendment). Termination or
any modification or amendment of this Plan shall not, without consent of a
participant, affect his or her rights under an option previously granted to him
or her.
16. WITHHOLDING OF INCOME TAXES. Upon the exercise of an option, the
Company, in accordance with Section 3402(a) of the Internal Revenue Code, may
require the optionee to pay withholding taxes in respect of amounts considered
to be compensation includible in the optionee's gross income.
17. COMPLIANCE WITH REGULATIONS. It is the Company's intent that the Plan
comply in all respects with Rule 16b-3 under the Securities Exchange Act of 1934
(or any successor or amended provision thereof) and any applicable Securities
and Exchange Commission interpretations thereof. If any provision of this Plan
is deemed not to be in compliance with Rule 16b-3, the provision shall be null
and void.
18. GOVERNING LAW. The validity and construction of this Plan and the
instruments evidencing options shall be governed by the laws of the Commonwealth
of Massachusetts, without giving effect to the principles of conflicts of law
thereof.
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CONCORD COMMUNICATIONS, INC.
1997 STOCK PLAN
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(AS AMENDED ON MARCH 12, 1998)
1. PURPOSE; TERMINATION OF PRIOR PLAN. The purpose of the 1997 Stock Plan
(the "Plan") is to encourage key employees of Concord Communications, Inc. (the
"Company") and of any present or future parent or subsidiary of the Company
(collectively, "Related Corporations") and other individuals who render services
to the Company or a Related Corporation, by providing opportunities to
participate in the ownership of the Company and its future growth through (a)
the grant of options which qualify as "incentive stock options" ("ISOs") under
Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code");
(b) the grant of options which do not qualify as ISOs ("Non-Qualified Options");
(c) awards of stock in the Company ("Awards"); and (d) opportunities to make
direct purchases of stock in the Company ("Purchases"). Both ISOs and
Non-Qualified Options are referred to hereafter individually as an "Option" and
collectively as "Options." Options, Awards and authorizations to make Purchases
are referred to hereafter collectively as "Stock Rights." As used herein, the
terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary
corporation," respectively, as those terms are defined in Section 424 of the
Code. The Company's 1995 Stock Plan (the "1995 Stock Plan") is terminated
effective as of October 16, 1997 and henceforth, the Company shall make no
grants under the 1995 Stock Plan. The 1995 Stock Plan shall, however, continue
to govern all options, awards and other grants granted and outstanding under the
1995 Stock Plan.
2. ADMINISTRATION OF THE PLAN.
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be
administered by the Board of Directors of the Company (the "Board")
or, subject to paragraph 2(D) (relating to compliance with Section
162(m) of the Code), by a committee appointed by the Board of two or
more of its members (the "Committee"). Hereinafter, all references in
this Plan to the "Committee" shall mean the Board if no Committee has
been appointed. Subject to ratification of the grant or authorization
of each Stock Right by the Board (if so required by applicable state
law), and subject to the terms of the Plan, the Committee shall have
the authority to (i) determine to whom (from among the class of
employees eligible under paragraph 3 to receive ISOs) ISOs shall be
granted, and to whom (from among the class of individuals and entities
eligible under paragraph 3 to receive Non-Qualified Options and Awards
and to make Purchases) Non-Qualified Options, Awards and
authorizations to make Purchases may be granted; (ii) determine the
time or times at which Options or Awards shall be granted or Purchases
made; (iii) determine the purchase price of shares subject to each
Option or Purchase, which prices shall not be less than the minimum
price specified in paragraph 6; (iv) determine whether each Option
granted shall be an ISO or a Non-Qualified Option; (v) determine
(subject to paragraph 7) the time or times when each Option shall
become exercisable and the duration of the exercise period; (vi)
determine whether restrictions such as repurchase options are to be
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imposed on shares subject to Options, Awards and Purchases and the
nature of such restrictions, if any; and (vii) interpret the Plan and
prescribe and rescind rules and regulations relating to it. If the
Committee determines to issue a Non-Qualified Option, it shall take
whatever actions it deems necessary, under Section 422 of the Code and
the regulations promulgated thereunder, to ensure that such Option is
not treated as an ISO. The interpretation and construction by the
Committee of any provisions of the Plan or of any Stock Right granted
under it shall be final unless otherwise determined by the Board. The
Committee may from time to time adopt such rules and regulations for
carrying out the Plan as it may deem best. No member of the Board or
of the Committee shall be liable for any action or determination made
in good faith with respect to the Plan or any Stock Right granted
under it.
B. COMMITTEE ACTIONS. The Committee may select one of its members
as its chairman, and shall hold meetings at such time and places as it
may determine. A majority of the Committee shall constitute a quorum
and acts of a majority of the members of the Committee at a meeting at
which a quorum is present, or acts reduced to or approved in writing
by all the members of the Committee (if consistent with applicable
state law), shall be the valid acts of the Committee. From time to
time the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies however
caused, or remove all members of the Committee and thereafter directly
administer the Plan.
C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Notwithstanding the
provisions of paragraph 2.A., no Stock Rights shall be granted to any
person who is, at the time of the proposed grant, a member of the
Board unless such grant is approved by a majority vote of the
disinterested members of the Board. All grants of Stock Rights to
members of the Board shall in all respects be made in accordance with
the provisions of this Plan applicable to other eligible persons.
Members of the Board who either (i) are eligible to receive grants of
Stock Rights pursuant to the Plan or (ii) have been granted Stock
Rights may vote on any matters affecting the administration of the
Plan or the grant of any Stock Rights pursuant to the Plan, except
that no such member shall act upon the granting to himself or herself
of Stock Rights, but any such member may be counted in determining the
existence of a quorum at any meeting of the Board during which action
is taken with respect to the granting to such member of Stock Rights.
Notwithstanding any other provision of this paragraph 2, in the event
the Company registers any class of any equity security pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), any grants to members of the Board of Options made at
any time from the effective date of such registration until six months
after the termination of such registration shall be made only by the
Board; provided, however, that if a majority of the Board is eligible
to participate in the Plan or in any other stock option or other stock
plan
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of the Company or any of its affiliates, or has been so eligible at
any time within the preceding year, any grant to directors of Options
must be made by, or only in accordance with the recommendation of, a
Committee consisting of three or more persons, who may but need not be
members of the Board or employees of the Company, appointed by the
Board but having full authority to act in the matter, none of whom is
eligible to participate in this Plan or any other stock option or
other stock plan of the Company or any of its affiliates, or has been
eligible at any time within the preceding year. The requirements
imposed by the preceding sentence shall also apply with respect to
grants to officers who are not also members of the Board. Once
appointed, the Committee shall continue to serve until otherwise
directed by the Board.
D. PERFORMANCE-BASED COMPENSATION. The Board, in its discretion,
may take such action as may be necessary to ensure that Stock Rights
granted under the Plan qualify as "qualified performance-based
compensation" within the meaning of Section 162(m) of the Code and
applicable regulations promulgated thereunder ("Performance-Based
Compensation"). Such action may include, in the Board's discretion,
some or all of the following (i) if the Board determines that Stock
Rights granted under the Plan generally shall constitute
Performance-Based Compensation, the Plan shall be administered, to the
extent required for such Stock Rights to constitute Performance-Based
Compensation, by a Committee consisting solely of two or more "outside
directors" (as defined in applicable regulations promulgated under
Section 162(m) of the Code), (ii) if any Non-Qualified Options with an
exercise price less than the fair market value per share of Common
Stock are granted under the Plan and the Board determines that such
Options should constitute Performance-Based Compensation, such options
shall be made exercisable only upon the attainment of a
pre-established, objective performance goal established by the
Committee, and such grant shall be submitted for, and shall be
contingent upon shareholder approval and (iii) Stock Rights granted
under the Plan may be subject to such other terms and conditions as
are necessary for compensation recognized in connection with the
exercise or disposition of such Stock Right or the disposition of
Common Stock acquired pursuant to such Stock Right, to constitute
Performance-Based Compensation.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees of
the Company or any Related Corporation. Non-Qualified Options, Awards and
authorizations to make Purchases may be granted to any employee, officer or
director (whether or not also an employee) or consultant of the Company or any
Related Corporation. The Committee may take into consideration a recipient's
individual circumstances in determining whether to grant a Stock Right. The
granting of any Stock Right to any individual or entity shall neither entitle
that individual or entity to, nor disqualify such individual or entity from,
participation in any other grant of Stock Rights.
4. STOCK. The stock subject to Stock Rights shall be authorized but
unissued shares of Common Stock of the Company, par value $.01 per share (the
"Common Stock"), or shares of
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Common Stock reacquired by the Company in any manner. The aggregate number of
shares which may be issued pursuant to the Plan is 1,500,000, subject to
adjustment as provided in paragraph 13. If any Option granted under the Plan
shall expire or terminate for any reason without having been exercised in full
or shall cease for any reason to be exercisable in whole or in part or shall be
repurchased by the Company, the unpurchased shares of Common Stock subject to
such Option shall again be available for grants of Stock Rights under the Plan.
No employee of the Company or any Related Corporation may be granted
Options to acquire, in the aggregate, more than 70% of the aggregate number of
shares of Common Stock which may be issued pursuant to the Plan during any
fiscal year of the Company. If any Option granted under the Plan shall expire or
terminate for any reason without having been exercised in full or shall cease
for any reason to be exercisable in whole or in part or shall be repurchased by
the Company, the shares subject to such Option shall be included in the
determination of the aggregate number of shares of Common Stock deemed to have
been granted to such employee under the Plan.
5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan
at any time on or after October 16, 1997 and prior to October 15, 2007. The date
of grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant.
6. MINIMUM OPTION PRICE; ISO LIMITATIONS.
A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS AND PURCHASES. Subject
to paragraph 2(D) (relating to compliance with Section 162(m) of the
Code), the exercise price per share specified in the agreement
relating to each Non-Qualified Option granted, and the purchase price
per share of stock granted in any Award or authorized as a Purchase,
under the Plan may be less than the fair market value of the Common
Stock of the Company on the date of grant; provided that, in no event
shall such exercise price or such purchase price be less than the
lesser of (i) the book value per share of Common Stock as of the end
of the fiscal year of the Company immediately preceding the date of
such grant, or (ii) 50 percent of the fair market value per share of
Common Stock on the date of such grant.
B. PRICE FOR ISOS. The exercise price per share specified in the
agreement relating to each ISO granted under the Plan shall not be
less than the fair market value per share of Common Stock on the date
of such grant. In the case of an ISO to be granted to an employee
owning stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any
Related Corporation, the price per share specified in the agreement
relating to such ISO shall not be less than one hundred ten percent
(110%) of the fair market value per share of Common Stock on the date
of grant.
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For purposes of determining stock ownership under this paragraph, the
rules of Section 424(d) of the Code shall apply.
C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible
employee may be granted Options treated as ISOs only to the extent
that, in the aggregate under this Plan and all incentive stock option
plans of the Company and any Related Corporation, ISOs do not become
exercisable for the first time by such employee during any calendar
year with respect to stock having a fair market value (determined at
the time the ISOs were granted) in excess of $100,000. The Company
intends to designate any Options granted in excess of such limitation
as Non-Qualified Options, and the Company shall issue separate
certificates to the optionee with respect to Options that are
Non-Qualified Options and Options that are ISOs.
D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option
is granted under the Plan, the Company's Common Stock is publicly
traded, "fair market value" shall be determined as of the date of
grant or, if the prices or quotes discussed in this sentence are
unavailable for such date, the last business day for which such prices
or quotes are available prior to the date of grant and shall mean (i)
the average (on that date) of the high and low prices of the Common
Stock on the principal national securities exchange on which the
Common Stock is traded, if the Common Stock is then traded on a
national securities exchange; or (ii) the last reported sale price (on
that date) of the Common Stock on the Nasdaq National Market, if the
Common Stock is not then traded on a national securities exchange; or
(iii) the closing bid price (or average of bid prices) last quoted (on
that date) by an established quotation service for over-the-counter
securities, if the Common Stock is not reported on the Nasdaq National
Market. If the Common Stock is not publicly traded at the time an
Option is granted under the Plan, "fair market value" shall mean the
fair value of the Common Stock as determined by the Committee after
taking into consideration all factors which it deems appropriate,
including, without limitation, recent sale and offer prices of the
Common Stock in private transactions negotiated at arm's length.
7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee, but not more than (i) ten
years from the date of grant in the case of Options generally and (ii) five
years from the date of grant in the case of ISOs granted to an employee owning
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, as determined
under paragraph 6(B). Subject to earlier termination as provided in paragraphs 9
and 10, the term of each ISO shall be the term set forth in the original
instrument granting such ISO, except with respect to any part of such ISO that
is converted into a Non-Qualified Option pursuant to paragraph 16.
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8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through
12, each Option granted under the Plan shall be exercisable as follows:
A. VESTING. The Option shall either be fully exercisable on the
date of grant or shall become exercisable thereafter in such
installments as the Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable, it shall remain exercisable until expiration or
termination of the Option, unless otherwise specified by the
Committee.
C. PARTIAL EXERCISE. Each Option or installment may be exercised
at any time or from time to time, in whole or in part, for up to the
total number of shares with respect to which it is then exercisable.
D. ACCELERATION OF VESTING. The Committee shall have the right to
accelerate the date that any installment of any Option becomes
exercisable; provided that the Committee shall not, without the
consent of an optionee, accelerate the permitted exercise date of any
installment of any Option granted to any employee as an ISO (and not
previously converted into a Non-Qualified Option pursuant to paragraph
16) if such acceleration would violate the annual vesting limitation
contained in Section 422(d) of the Code, as described in paragraph
6(C).
9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the agreement
relating to such ISO, if an ISO optionee ceases to be employed by the Company
and all Related Corporations other than by reason of death or disability as
defined in paragraph 10, no further installments of his or her ISOs shall become
exercisable, and his or her ISOs shall terminate after the passage of 60 days
from the date of termination of his or her employment, but in no event later
than on the specified expiration dates of such ISOs, except to the extent that
such ISOs (or unexercised installments thereof) have been converted into
Non-Qualified Options pursuant to paragraph 16. For purposes of this paragraph
9, a leave of absence with the written approval of the Committee shall not be
considered an interruption of employment under the Plan, provided that such
written approval contractually obligates the Company or any Related Corporation
to continue the employment of the employee after the approved period of absence.
Employment shall also be considered as continuing uninterrupted during any other
bona fide leave of absence (such as those attributable to illness, military
obligations or governmental service) provided that the period of such leave does
not exceed 90 days or, if longer, any period during which such optionee's right
to reemployment is guaranteed by statute or by contract. A bona fide leave of
absence with the written approval of the Committee shall not be considered an
interruption of employment under this paragraph 9, provided that such written
approval contractually obligates the Company or any Related Corporation to
continue the employment of the optionee after the approved period of absence.
ISOs granted under the Plan shall not be affected by any change of employment
within or among the Company and Related Corporations, so long as the optionee
continues to be an employee of the Company or any Related Corporation. Nothing
in the Plan
<PAGE> 7
-7-
shall be deemed to give any grantee of any Stock Right the right to be retained
in employment or other service by the Company or any Related Corporation for any
period of time.
10. DEATH; DISABILITY.
A. DEATH. If an ISO optionee ceases to be employed by the Company
and all Related Corporations by reason of his or her death, any ISO
owned by such optionee may be exercised, to the extent otherwise
exercisable on the date of death, by the estate, personal
representative or beneficiary who has acquired the ISO by will or by
the laws of descent and distribution, at any time prior to the earlier
of (i) the specified expiration date of the ISO or (ii) 180 days from
the date of the optionee's death.
B. DISABILITY. If an ISO optionee ceases to be employed by the
Company and all Related Corporations by reason of his or her
disability, such optionee shall have the right to exercise any ISO
held by him or her on the date of termination of employment, for the
number of shares for which he or she could have exercised it on that
date, at any time prior to the earlier of (i) the specified expiration
date of the ISO or (ii) 180 days from the date of the termination of
the optionee's employment. For the purposes of the Plan, the term
"disability" shall mean "permanent and total disability" as defined in
Section 22(e)(3) of the Code or any successor statute.
11. ASSIGNABILITY. No ISO shall be assignable or transferable by the
optionee except by will or by the laws of descent and distribution, and during
the lifetime of the optionee shall be exercisable only by such optionee. Stock
Rights other than ISOs shall be transferable to the extent set forth in the
agreement relating to such Stock Right.
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any
Non-Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to time confer authority
and responsibility on one or more of its own members and/or one or more officers
of the Company to execute and deliver such instruments. The proper officers of
the Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option:
<PAGE> 8
-8-
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common
Stock shall be subdivided or combined into a greater or smaller number
of shares or if the Company shall issue any shares of Common Stock as
a stock dividend on its outstanding Common Stock, the number of shares
of Common Stock deliverable upon the exercise of Options shall be
appropriately increased or decreased proportionately, and appropriate
adjustments shall be made in the purchase price per share to reflect
such subdivision, combination or stock dividend.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be
consolidated with or acquired by another entity in a merger or other
reorganization in which the holders of the outstanding voting stock of
the Company immediately preceding the consummation of such event,
shall, immediately following such event, hold, as a group, less than a
majority of the voting securities of the surviving or successor
entity, or in the event of a sale of all or substantially all of the
Company's assets or otherwise (each, an "Acquisition"), the Committee
may take one or more of the following actions: (i) provide for the
acceleration and/or termination of any time period relating to the
exercise of the Options, (ii) provide for the purchase of the Options,
upon the optionee's request, for the amount in cash that could have
been received upon the exercise of the Options and sale of the shares
obtained thereby, (iii) adjust the terms of the Options in a manner
determined by the Committee, (iv) cause the Options to be assumed, or
new rights substituted therefor, by another entity or (v) make such
other provision as the Committee may consider equitable and in the
best interests of the Company.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a
transaction described in subparagraph B above) pursuant to which
securities of the Company or of another corporation are issued with
respect to the outstanding shares of Common Stock, an optionee upon
exercising an Option shall be entitled to receive for the purchase
price paid upon such exercise the securities he or she would have
received if he or she had exercised such Option prior to such
recapitalization or reorganization.
D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any
adjustments made pursuant to subparagraphs A, B or C with respect to
ISOs shall be made only after the Committee, after consulting with
counsel for the Company, determines whether such adjustments would
constitute a "modification" of such ISOs (as that term is defined in
Section 424 of the Code) or would cause any adverse tax consequences
for the holders of such ISOs. If the Committee determines that such
adjustments made with respect to ISOs would constitute a modification
of such ISOs or would cause adverse tax consequences to the holders,
it may refrain from making such adjustments.
<PAGE> 9
-9-
E. RESTRICTED SECURITIES. If any person or entity owning
restricted Common Stock obtained by exercise of an Option made
hereunder receives new or additional or different shares or securities
("New Securities") in connection with a transaction described in
subparagraphs A, B or C above, as a result of owning such restricted
Common Stock, such New Securities shall be subject to all of the
conditions and restrictions applicable to the restricted Common Stock
with respect to which such New Securities were issued.
F. ISSUANCES OF SECURITIES. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect
to, the number or price of shares subject to Options. No adjustments
shall be made for dividends paid in cash or in property other than
securities of the Company.
G. FRACTIONAL SHARES. No fractional shares shall be issued under
the Plan. Any fractional shares which, but for this subparagraph G,
would have been issued to an optionee pursuant to an Option, shall be
deemed to have been issued and immediately sold to the Company for
their fair market value, and the optionee shall receive from the
Company cash in lieu of such fractional shares.
H. ADJUSTMENTS. Upon the happening of any of the events described
in subparagraphs A, B or C above, the class and aggregate number of
shares set forth in paragraph 4 hereof that are subject to Stock
Rights which previously have been or subsequently may be granted under
the Plan shall also be appropriately adjusted to reflect the events
described in such subparagraphs. The Committee shall determine the
specific adjustments to be made under this paragraph 13 and, subject
to paragraph 2, its determination shall be conclusive.
14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment
thereof) shall be exercised by giving written notice to the Company at its
principal office address, or to such transfer agent as the Company shall
designate. Such notice shall identify the Option being exercised and specify the
number of shares as to which such Option is being exercised, accompanied by full
payment of the purchase price therefor either (a) in United States dollars in
cash or by check, (b) at the discretion of the Committee, through delivery of
shares of Common Stock having a fair market value equal as of the date of the
exercise to the cash exercise price of the Option, (c) at the discretion of the
Committee, by delivery of the optionee's personal recourse note bearing interest
payable not less than annually at no less than 100% of the lowest applicable
Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion
of the Committee and consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the Option and an authorization to
the broker or selling agent to pay that amount to the Company, which sale shall
be at the participant's direction at the time of exercise, or (e) at the
discretion of the Committee, by any combination of (a), (b), (c) and (d) above.
If the Committee exercises its discretion to permit payment of the exercise
price of an ISO by means of the
<PAGE> 10
-10-
methods set forth in clauses (b), (c), (d) or (e) of the preceding sentence,
such discretion shall be exercised in writing at the time of the grant of the
ISO in question. The holder of an Option shall not have the rights of a
shareholder with respect to the shares covered by such Option until the date of
issuance of a stock certificate to such holder for such shares. Except as
expressly provided above in paragraph 13 with respect to changes in
capitalization and stock dividends, no adjustment shall be made for dividends or
similar rights for which the record date is before the date such stock
certificate is issued.
15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board in July
1997 and by the stockholders of the Company on September 9, 1997. The Plan was
amended on March 12, 1998 to increase the number of shares authorized for
issuance under the Plan, subject to approval of the amendment of the Plan by the
stockholders of the Company at the next Meeting of Stockholders. If the approval
of the amendment by the stockholders is not obtained prior to March 12, 1999,
any grants of ISOs under the Plan which include shares from the additional
number of shares authorized by the amendment made prior to that date but
subsequent to the date of amendment will be rescinded. The Plan shall expire at
the end of the day on October 15, 2007 (except as to Options outstanding on that
date). Subject to the provisions of paragraph 5 above, Options may be granted
under the Plan prior to the date of stockholder approval of the Plan. The Board
may terminate or amend the Plan in any respect at any time, except that, without
the approval of the stockholders obtained within 12 months before or after the
Board adopts a resolution authorizing any of the following actions: (a) the
total number of shares that may be issued under the Plan may not be increased
(except by adjustment pursuant to paragraph 13); (b) the provisions of paragraph
3 regarding eligibility for grants of ISOs may not be modified; (c) the
provisions of paragraph 6(B) regarding the exercise price at which shares may be
offered pursuant to ISOs may not be modified (except by adjustment pursuant to
paragraph 13); and (d) the expiration date of the Plan may not be extended.
Except as otherwise provided in this paragraph 15, in no event may action of the
Board or stockholders alter or impair the rights of a grantee, without such
grantee's consent, under any Stock Right previously granted to such grantee.
16. MODIFICATIONS OF ISOS; CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS.
Subject to paragraph 13(D), without the prior written consent of the holder of
an ISO, the Committee shall not alter the terms of such ISO (including the means
of exercising such ISO) if such alteration would constitute a modification
(within the meaning of Section 424(h)(3) of the Code). The Committee, at the
written request or with the written consent of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee (with the consent of the
optionee) may impose such conditions on the exercise of the resulting
Non-Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan. Nothing in the
Plan shall be deemed to give any optionee the right to have such optionee's ISOs
<PAGE> 11
-11-
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Committee takes appropriate action. Upon the taking of such
action, the Company shall issue separate certificates to the optionee with
respect to Options that are Non-Qualified Options and Options that are ISOs. The
Committee, with the consent of the optionee, may also terminate any portion of
any ISO that has not been exercised at the time of such conversion.
17. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.
18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO
granted under the Plan, each optionee agrees to notify the Company in writing
immediately after such optionee makes a Disqualifying Disposition (as described
in Sections 421, 422 and 424 of the Code and regulations thereunder) of any
stock acquired pursuant to the exercise of ISOs granted under the Plan. A
Disqualifying Disposition is generally any disposition occurring on or before
the later of (a) the date two years following the date the ISO was granted or
(b) the date one year following the date the ISO was exercised.
19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option, the transfer of a Non-Qualified Stock Option pursuant to
an arm's-length transaction, the grant of an Award, the making of a Purchase of
Common Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 18), the vesting or transfer of restricted
stock or securities acquired on the exercise of an Option hereunder, or the
making of a distribution or other payment with respect to such stock or
securities, the Company may withhold, or may require the grantee to pay,
additional withholding taxes in respect of amounts that constitute compensation
includible in gross income. The Committee in its discretion may condition (i)
the exercise of an Option, (ii) the transfer of a Non-Qualified Stock Option,
(iii) the grant of an Award, (iv) the making of a Purchase of Common Stock for
less than its fair market value, or (v) the vesting or transferability of
restricted stock or securities acquired by exercising an Option, on the
grantee's making satisfactory arrangement for such withholding. Such arrangement
may include payment by the grantee in cash or by check of the amount of the
withholding taxes or, at the discretion of the Committee, by the grantee's
delivery of previously held shares of Common Stock or the withholding from the
shares of Common Stock otherwise deliverable upon exercise of a Option shares
having an aggregate fair market value equal to the amount of such withholding
taxes.
20. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares. Government regulations may impose reporting or other
obligations on the Company with respect to the Plan. For example, the Company
may be required to send tax information statements to employees and former
employees that exercise ISOs under the Plan, and the Company may be required to
file tax information returns reporting the income received by grantees of
Options in connection with the Plan.
<PAGE> 12
-12-
21. GOVERNING LAW. The validity and construction of the Plan and the
instruments evidencing Stock Rights shall be governed by the laws of the
Commonwealth of Massachusetts, or the laws of any jurisdiction in which the
Company or its successors in interest may be organized.
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