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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-23067
CONCORD COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 04-2710876
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
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33 BOSTON POST ROAD, WEST
MARLBORO, MASSACHUSETTS 01752
(508) 460-4646
(ADDRESS AND TELEPHONE OF PRINCIPAL EXECUTIVE OFFICES)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 per share
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price of the Company's common stock on
March 1, 1998, as reported on the Nasdaq National Market was approximately
$339,862,720.
The number of shares outstanding of Common Stock as of March 1, 1998 was
12,391,028.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT FORM 10-K REFERENCE
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Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to
be held on April 30, 1998. Part III
Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1997. Part II, Items 6-8
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Concord develops, markets and supports a family of turnkey, automated,
scalable, software-based performance analysis and reporting solutions for the
management of computer networks. By providing a global view of network
performance, the Company's products enable the effective and efficient
management of large and medium-size multi-vendor networks, both by end users and
network service providers, including telecommunications carriers, Internet
Service Providers (ISPs), systems integrators and outsourcers. The Company's
Network Health product family retrieves and compiles vital network statistics,
performs extensive analyses of those statistics and provides intuitive,
informative, user-friendly graphical reports. The Company's software-only
solutions provide IT executives, managers and technicians with the information
necessary to assess and correct costly network inefficiencies, make
cost-effective network purchasing decisions, predict network failures and set
and monitor service levels.
The Company's initial target market has been organizations with large and
medium-size networks of 150 or more network elements. The Company markets to
these potential customers through its own sales force, sales agents, value added
resellers, network service providers, including telecommunication carriers, and
OEMs. As of December 31, 1997, the Company had over 500 customers operating in
and serving a variety of industries. Representative customers include America
Online, Inc., Ameritech Corporation, AT&T Corporation, The Bear Stearns
Companies, Inc., British Telecommunications plc, Burlington Northern Santa Fe
Corporation, Department of Commerce, Dow Jones & Company, Inc., Ernst & Young
LLP, MCI Communications Corporation, Morgan Stanley Group Inc., Motorola Inc.,
New York Stock Exchange, Inc., Pfizer Inc., Prudential Service Company, The
Procter & Gamble Company, Sprint Corporation, Viacom International Inc., Visa
International and U S WEST, Inc.
INDUSTRY BACKGROUND
The pervasiveness and sophistication of business process applications, such
as email, electronic commerce and enterprise resource planning systems, have
significantly increased the amount of data traffic across networks. As these
applications have become an integral part of managing information within an
enterprise, businesses have developed and expanded their computer networks to
connect remote operations, branch offices, telecommuters, customers and
suppliers, among others. These increases in data traffic, coupled with the
emergence of widely distributed computing across heterogeneous platforms, have
increased the demands placed on both LANs and WANs. The sophisticated and
complex technologies that have been developed to meet these demands, such as LAN
switching, frame relay and ATM, must not only enhance bandwidth and
connectivity, but must also interface with existing legacy environments in order
to build an effective integrated business infrastructure.
Increased network complexities, combined with inadequate centralized
network analysis and planning functions, have led to network congestion and the
inefficient use of both LAN and WAN resources and unnecessary purchases of
additional networking hardware, leased lines and digital carrier WAN bandwidth.
Because the consequences of network congestion and failure can range from a
temporary reduction in productivity to significant financial loss, the
reliability and performance of networks have assumed critical importance. To
ensure the reliability and performance of these networks, organizations are
increasingly relying on network management software.
The technical complexity of providing for high levels of automation,
aggregation and scalability over thousands of network elements has made
comprehensive network management applications difficult to develop. Solutions
originally developed for network management were centralized, mainframe-based
systems that offered a platform from which the network manager could monitor the
network. These systems were expensive, provided limited functionality and were
generally closed and proprietary. With the emergence of distributed computing
environments, independent tool vendors began developing solutions that solved
specific technical network problems. The emergence of MIBs along with a
standardized protocol (SNMP) provided
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not only a mechanism to measure all networking elements but also the required
enabling technology for technical network management. SNMP facilitated the
development of technical tools, such as network element management solutions and
RMON and RMON2 probe-based solutions. Network element management solutions allow
technical personnel to diagnose problems, but are usually limited to a
particular vendor's equipment. Probe-based solutions provide technical
information on a specific network segment only and may provide monitoring and
reporting capabilities that are usually dependent on data accumulated from the
particular probes.
Although these tools have enhanced the technical management of networks and
are particularly useful in isolating and correcting problems in networks after
such problems have already occurred, the dependency of organizations on their
networks has necessitated new, broad-based network management solutions. These
solutions enable organizations to optimize the performance and minimize the
costs of their existing network infrastructure, identify developing network
problems and support decisions relating to future network infrastructure growth.
IT executives and managers of both large and small networks are coming to
recognize that in order to optimize network resources and effectively plan for
future demand, performance analysis and reporting solutions must reside at the
core of the network as a means of aggregating relevant network data into a
comprehensive picture of network health.
THE CONCORD SOLUTION
Concord develops, markets and supports a family of turnkey, automated,
scaleable, software-based performance analysis and reporting solutions for the
management of computer networks. The Company's Network Health product family
retrieves and compiles vital network statistics, performs extensive analyses of
those statistics and provides intuitive, informative, user-friendly graphical
reports. The Company's products are capable of simultaneously polling, analyzing
and reporting on between 10,000 and 20,000 elements per workstation.
The Company's Network Health product family provides organizations with the
following benefits: (i) capacity planning -- providing information to support
business decisions relating to network utilization and future capacity
requirements; (ii) reduction in data communications expenses -- identifying
excess capacity on each WAN, leased line or frame relay circuit; (iii) effective
allocation of resources -- allowing management to effectively deploy networking
resources and personnel; and (iv) service level monitoring -- assisting managers
in making network resource allocation decisions within an organization and
assisting both network service providers and end users in monitoring the
availability of negotiated service level agreements.
In providing these benefits, the Company's Network Health product family
incorporates the following features:
Fully Automated, Turnkey Implementation. The Company's products provide
turnkey solutions for fully automated network performance analysis and
reporting. Installation can be accomplished in a few hours without the use of
additional network hardware. Once installed, the Company's software immediately
generates standardized reports on a variety of topics, such as: (i) situations
to watch for potential trouble spots; (ii) exceptions analysis for identifying
deviations from specified performance levels; and (iii) bandwidth utilization
for managing and allocating limited network resources. These standardized
reports can be accessed via the Web, directly at the network monitoring console,
or through printed reports.
Scaleable, Software-Only Solution. The Network Health product family is
designed to collect data from heterogeneous networking environments without the
use of additional probes and network monitoring tools. The Company's products
are easily scaled to meet the demands for network performance analysis and
reporting as an organization's network infrastructure expands. Network Health
provides managers with the ability to purchase add-on software licenses as
needed.
Multi-Level Reporting. The Company's Network Health product family
generates a comprehensive package of graphical reports that provide information
and analyses on a wide variety of pre-programmed parameters. Information is
provided for use at multiple levels of management, from a general overview of
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network performance for chief information officers to a port-by-port analysis of
specific network hardware for managers or technicians.
Technology and Vendor Independence. The Company's Network Health product
family provides performance analysis and reporting of elements within an
organization's heterogeneous LAN and WAN infrastructure, independent of network
technology and hardware vendor. The Company's products are easily extendible to
new technologies and network architectures.
PRODUCTS AND TECHNOLOGY
The Company's Network Health product family automatically provides
enterprise-wide performance analysis and reporting for the large number of
elements typically found within networks. The technical complexity of providing
for high levels of automation, aggregation and scalability over thousands of
network elements has made comprehensive network management applications
difficult to develop. The Network Health platform automatically locates devices
on the network, identifies MIB variables, polls devices, and stores data in a
relational database. After the data has been analyzed, Network Health
automatically generates multiple reports which can be retrieved from the network
console or via the Web. Network Health software operates continuously to provide
full-time data gathering and on demand reporting. Network Health reports show
the effects of usage and serve as a basis for agreeing to and understanding
service levels, proactively addressing potential network failures, managing
bandwidth and capacity, identifying security violations and understanding the
usage patterns of the network and the network's various elements.
The critical technology components in the Network Health architecture are
the polling engine, the MIB translation file, the database and group filter, and
the reporting engine. Each of these components is device independent, and thus
can function on any type of network device or segment irrespective of the
network equipment vendor or technology. These components automate the functions
of locating the appropriate devices for polling, gathering only the appropriate
variables and data from those devices, and converting the data into canonical
format which facilitates analysis. The distributed nature of the product allows
for the product components and the user to be located at any location within the
organization. Through the use of sophisticated algorithms and heuristics, the
gathered data can be analyzed to make predictions of upcoming problems
throughout the network. The report viewing components within the reporting
engine allow the rendering and display of multiple views and reports in a
graphical fashion for Web output, print output or integration level output to
other products.
By focusing on the issues of capacity, errors, service levels and
utilization, Network Health's manner of reporting provides a common model which
covers a broad spectrum of network elements and technologies. Pricing for
Network Health applications includes a fixed license fee per application and a
variable fee based on the number of network elements managed by that
application. During 1996 and 1997, initial orders with new customers for the
Company's Network Health products ranged from approximately $10,000 to $350,000.
The following are the Company's products:
Network Health 4.0 increased the number of network elements that can be
managed from a single server, provided enterprise and service provider customers
with an ability to customize Network Health and provided new and existing
customers with an NT version of Network Health.
Network Health -- LAN/WAN introduced scaleable performance analysis and
reporting for LANs as well as WANs by providing reports that allow users to
solve business problems. This application provides information on capacity,
errors, trends, over-utilization, under-utilization, and service levels through
intuitive charts and graphs. These charts and graphs minimize technology
differences to allow a single report format to cover a broad set of
technologies, including Ethernet, Token Ring, and fiber distributed data
interface (FDDI) to 56Kbps, T1, T3 and switched multimegabit data service
(SMDS).
Network Health -- Frame Relay is used to manage the unique aspects of frame
relay Permanent Virtual Circuits (PVCs). This application indicates poor carrier
service by: (i) identifying carrier network congestion;
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(ii) end user over-usage of the Committed Information Rate (CIR); and (iii)
timing for upgrades to higher capacities or downgrades to less expensive lower
capacities. Network Health -- Frame Relay is often used by network service
providers for quality of service discussion.
Network Health -- Router/Switch expands Network Health reports to cover the
increased complexity of managing the behavior of the network's routers and
switches. This application gathers information on and analyzes CPUs, memory
usage, buffer utilization, buffer misses and other such detail to provide the
first level of insight into the operation and capacities of the routers and
switches themselves. For example, with the Situations to Watch panel in the
Network Health -- Router/Switch report, needed memory upgrades can be forecasted
to allow for an orderly upgrade of the router's memory. When a router has been
identified as needing attention, the At-A-Glance Reports provide an historical
snapshot of a router's recent performance, enabling network managers to
determine a course of action.
Network Health -- Traffic Accountant is a software application that
provides information on nodes, access patterns and applications used. This
application scales to enterprise networks, providing an array of reports
covering cost allocation, security audit trails, security exception reports,
reconfiguration reports, application usage, Internet usage and department
utilization. The percentage of the entire network used by particular departments
or divisions in an organization can be reported in a single chart.
Network Health -- Server analyzes and reports on servers in a scaleable
manner allowing a network manager to understand the trends, capacities and
service levels of the server's CPUs, memory, disks, partitions, virtual memory,
swapping, paging and performance and operational characteristics. The diversity
of server vendors coupled with the increased complexity of servers necessitates
a unique application. The product's analysis and prediction capability, for
example, can be used to identify the disks in need of upgrade before they become
capacity constrained.
Network Health -- Service Level Reporting provides a one to two page report
on an entire corporate enterprise's network that summarizes network and server
availability, response time and capacity. These reports give IT executives
including the CIO a picture of the critical parameters being used by endusers of
the IT infrastructure. Service Level Reporting is useful in providing a report
against pre-determined goals for levels of capacity, availability and response
time that can be used by Service Providers with their enduser customers. This
product was introduced during December of 1997.
CUSTOMER SERVICE
The post-sales support organization is responsible for providing ongoing
technical support and training for the Company's customers. For an annual fee, a
customer will receive telephone and email support, as well as new releases of
the Company's products. The Company offers a toll-free customer support line to
customers. Support personnel answer the technical support calls and generally
provide same-day responses to questions that cannot be resolved during the
initial call. All calls are logged, opened, tracked, and closed with daily
updates to the customer, Concord's sales teams and Concord's executive
management team. Concord will deploy any one of its 14 field pre-sales technical
support representatives in the event that an on-site visit is necessary. At
December 31, 1997, the Company employed 10 technical post-sales support
personnel as well as two product trainers.
SALES AND MARKETING
The Company markets its products in the United States to organizations with
large and medium-size networks, as well as network service providers which
include telecommunications carriers, ISPs, systems integrators and outsourcers
primarily through a direct sales force, sales agents and through value added
resellers (VARs). Internationally, the Company markets exclusively through
distributors. Additionally, the Company has entered into joint marketing and
joint development arrangements with a number of companies.
At December 31, 1997, the Company had 11 domestic sales teams each
comprised of one direct sales person and one or two technical support people
targeting the following 11 different geographic regions: Atlanta and the
Southeast; Dallas; Detroit; Denver; New England and East Canada; New York; the
Carolinas;
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Northern California and West Canada; Philadelphia; Southern California; and
Washington, D.C. In addition, the Company employs six sales personnel to support
the 11 domestic sales teams. Internationally, the Company has a sales office in
London, England with one sales person and one technical support person. At
December 31, 1997 the Company utilized 11 international distributors in nine
geographic regions, including: the United Kingdom, Germany, France, Sweden,
Korea, the Benelux region, Australia, South America and South Africa. It is the
responsibility of each sales team to manage all sales within its geographic
territory by signing up, training, and managing a small number of sales agents,
VARs, network service providers and outsourcers, as well as selling directly to
customers. The Company generates sales through seminars, trade shows, Internet
postings, press articles, referrals, mass mailings and cold calling as well as
through relationships with sales agents, VARs, network service providers and
outsourcers.
The Company distributes its products through a network of more than 15
VARs, and at December 31, 1997, the Company had relationships with over 20
network service providers. The network service providers offer the Company's
products as part of their service offerings. At December 31, 1997, the Company
also had eight joint marketing and development partners, including Ascend
Communications, Inc., Bay Networks, Inc., Cabletron Systems, Inc., FORE Systems,
Inc., NetScout Systems, Inc. and Newbridge Networks Corporation that work with
the Company's direct sales force. The Company recently introduced a professional
services referral program aimed at its key network consulting partners. Under
this program, the Company will provide professional services through these
partners directly to its customers.
At December 31, 1997, the Company employed seven marketing personnel who
position, promote and market the Company's products. These individuals are
engaged in a variety of activities, including direct marketing, public
relations, tradeshows, advertising, Internet postings, and seminars. At December
31, 1997, the Company employed 37 sales personnel, consisting of five management
personnel, 12 sales persons, 16 technical support persons and four inside sales
persons.
PRODUCT DEVELOPMENT
Management believes that the Company's future success depends in large part
on its ability to continue to enhance existing products and develop new products
that maintain technological competitiveness and deliver value to existing and
new customers. The Company has made and intends to continue to make substantial
investments in product development. Extensive product development input is
obtained through customers and the Company's monitoring of end user needs and
changes in the marketplace.
The Company introduced the initial version of Network Health focused at the
LAN and WAN environments in the first quarter of 1995. During 1996, the Company
introduced three additional versions of Network Health -- Frame Relay,
Router/Switch and Traffic Accountant. During 1997, the Company introduced two
additional versions of Network Health -- Server and Service Level Reporting. The
Company is currently developing an enhanced version of Network Health aimed at
performance analysis and reporting for other networking and computing
environments.
The Company's total expenses for research and development for the years
1995, 1996 and 1997 were $2.4 million, $3.9 million and $4.6 million,
respectively. The Company anticipates that it will continue to commit
substantial resources to research and development in the future and that product
development expenses may increase in absolute dollars in future periods. To
date, the Company's development efforts have not resulted in any capitalized
software development costs. As of December 31, 1997, the Company's product
development organization consisted of 40 people.
COMPETITION
The market for the Company's products is highly competitive and subject to
rapid technological change. Although the Company has experienced limited
competition to date from products with comparable capabilities, the Company
expects competition to increase in the future. The Company currently competes
principally on the basis of: (i) the breadth of its products' features; (ii) the
automated, scaleable, and cost effective nature of its products; and (iii) the
Company's knowledge, expertise and service ability gained from years of close
interaction
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with customers. While the Company believes that it currently competes favorably
overall with respect to these factors, there can be no assurance that the
Company will be able to continue to do so.
The Company competes or may compete directly or indirectly with the
following categories of companies: (i) other developers of network performance
analysis and reporting solutions, such as Kaspia Systems, Inc., and report
toolset vendors, such as Desktalk Systems, Inc.; (ii) large, well established
networking OEMs such as International Business Machines Corporation,
Hewlett-Packard Company, and Cabletron Systems, Inc. that have developed network
management platforms; (iii) developers of network element management solutions
such as Cisco Systems, Inc., 3Com Corporation and Bay Networks, Inc.; (iv)
companies offering network performance reporting services such as International
Network Services (INS); and (v) to a lesser degree, probe vendors such as
NetScout Systems, Inc. and Visual Networks, Inc. Additional competitors,
including large networking or telecommunications equipment manufactures,
telecommunications service providers, and computer hardware and software
companies, may enter this market, thereby further intensifying competition.
Additionally, there can be no assurance that one or more of the Company's
customers may not attempt to develop competing products internally or that one
or more of the companies Concord has developed relationships with, such as the
network management platform developers and probe vendors, will not try to
develop a product that competes more directly with Network Health.
Many of the Company's current and prospective competitors have
significantly greater financial, selling and marketing, technical and other
resources than the Company. As a result, these competitors may be able to devote
greater resources to the development, promotion, sale and support of their
products than the Company. Moreover, these companies may introduce additional
products that are competitive with or better than those of the Company or may
enter into strategic relationships to offer better products than those currently
offered by the Company. There can be no assurance that the Company's products
would effectively compete with such new products.
To remain competitive, the Company must continue to invest in research and
development, selling and marketing, and customer service and support. In
addition, as the Company enters new markets and utilizes different distribution
channels, the technical requirements and levels and bases of competition may be
different than those experienced in the Company's current market. There can be
no assurance that the Company will be able to successfully compete against
either current or potential competitors in the future.
PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other contractual provisions to
establish, maintain and protect its proprietary rights in its products. The
Company has four issued U.S. patents, three pending U.S. patent applications and
various foreign counterparts. There can be no assurance that patents which have
been or may be issued will not be challenged, invalidated or circumvented, or
any rights thereunder will provide protection of the Company's intellectual
property rights. The Company believes that, because of the rapid pace of
technological change in the software and data communications industries, the
legal intellectual property protection for its products is a less significant
factor in the Company's success than the knowledge, abilities and experience of
the Company's employees, the frequency of its product enhancements, the
effectiveness of its marketing activities and the timeliness and quality of its
support services. See "Risk Factors -- Uncertain Protection of Intellectual
Property Rights." Certain technologies used in the Company's products are
licensed from third parties, including the database technology employed in the
Company's Network Health product family. Such third-party licenses are generally
non-exclusive, royalty based licenses. With respect to the database technology,
the Company is obligated to make minimum fixed price payments to the extent that
the royalty under such license does not exceed a certain minimum threshold. The
termination of any such licenses, or the failure of the third-party licensors to
adequately maintain or update their products, could result in delay in the
Company's ability to ship certain of its products while it seeks to implement
technology offered by alternative sources, and any required replacement licenses
could prove costly. While it may be necessary or desirable in the future to
obtain other licenses relating to one or more of the Company's products or
relating to current or future technologies, there can be no assurance that the
Company will be able to do so on commercially reasonable terms or at all.
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EMPLOYEES
As of December 31, 1997, the Company had a total of 111 employees, all but
two of whom were based in the United States. Of the total, 40 were in research
and development, 12 were in customer support, 37 were in sales, seven were in
marketing, and 15 were in finance, administration and operations. The Company's
future performance depends in significant part upon the continued service of its
key engineering, technical support and sales personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in attracting or retaining such personnel in the future. None of the
Company's employees are represented by a labor union or are subject to a
collective bargaining agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of December 31,
1997 are as follows:
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John A. Blaeser......... 56 Chief Executive Officer, President and Director
Kevin J. Conklin........ 44 Vice President, Marketing
Ferdinand Engel......... 49 Vice President, Engineering
Gary E. Haroian......... 46 Vice President, Finance and Administration,
Chief Financial Officer, Clerk and Treasurer
Daniel D. Phillips, Jr.. 43 Vice President, Worldwide Sales
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Set forth below is certain information relating to each executive officer's
business experience:
John A. Blaeser has been Chief Executive Officer and President of the
Company since January 1, 1996 and a Director of the Company since 1985. Prior to
joining the Company, from 1991 until 1996, Mr. Blaeser was Managing General
Partner of EG&G Venture Management, a venture capital firm.
Kevin J. Conklin has been Vice President, Marketing, of the Company since
March 1994. Prior to joining Concord, Mr. Conklin was Vice President of Product
Marketing and Development at Artel Communications from June 1993 until joining
Concord in March 1994, and from July 1991 to June 1993 Mr. Conklin served as
Director of Marketing at Artel Communications.
Ferdinand Engel has been the Vice President, Engineering of the Company
since 1989. Prior to joining Concord, Mr. Engel was Vice President, Engineering
for Technology Concepts at Bell Atlantic.
Gary E. Haroian has been the Vice President, Finance and Administration and
Chief Financial Officer of the Company since February 1997, and also serves as
Clerk and Treasurer of the Company. Prior to joining the Company, Mr. Haroian
was President and Chief Executive Officer of Stratus Computer. At Stratus, Mr.
Haroian held the positions of Controller from 1983 until 1985, Vice President
and Chief Financial Officer from 1985 until 1991, Vice President, Corporate
Operations, from 1991 until 1993, Executive Vice President from 1993 until 1994,
and President and Chief Operating Officer from 1994 until 1996.
Daniel D. Phillips, Jr. has been Vice President, Worldwide Sales, of the
Company since May 1994. Prior to joining Concord, Mr. Phillips was Vice
President, Worldwide Sales, of Epoch Systems. While at Epoch Systems from
September 1989 until May 1994, Mr. Phillips also held the positions of Vice
President, International and OEM Operations, and Director of International
Operations.
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RISK FACTORS
Information provided by the Company from time to time including statements
in this Form 10-K which are not historical facts, are so-called "forward-looking
statements" that involve risks and uncertainties, made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. In
particular, statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical facts
(including, but not limited to, statements concerning the plans and objectives
of management; increases in sales and marketing, research and development and
general and administrative expenses; and the Company's expected liquidity and
capital resources) may constitute forward-looking statements. The Company's
actual future results may differ significantly from those stated in any
forward-looking statements. Factors that may cause such differences include, but
are not limited to, the factors discussed below.
LIMITED OPERATING HISTORY; UNCERTAINTY OF FUTURE OPERATING RESULTS
The Company changed its focus to network management software in 1991 and
commercially introduced its first Network Health product in 1995. Accordingly,
the Company has only a limited operating history in the network performance
analysis and reporting market upon which an evaluation of its business and
prospects can be based. The Company has incurred significant net losses in each
of the five fiscal years prior to earning a small profit in 1997. As of December
31, 1997, the Company had accumulated net losses of $31.0 million. The limited
operating history of the Company and its dependence on a single product family
in an emerging market makes the prediction of future results of operations
difficult or impossible, and the Company and its prospects must be considered in
light of the risks, costs and difficulties frequently encountered by emerging
companies, particularly companies in the competitive software industry. Although
the Company has achieved recent revenue growth, and profitability for the
three-months ended September 30, 1997 and the three months ended December 31,
1997, there can be no assurance that the Company can generate substantial
additional revenue growth on a quarterly or annual basis, or that any revenue
growth that is achieved can be sustained. Revenue growth that the Company has
achieved or may achieve may not be indicative of future operating results. In
addition, the Company has increased, and plans to increase further, its
operating expenses in order to fund higher levels of research and development,
increase its sales and marketing efforts, develop new distribution channels,
broaden its customer support capabilities and expand its administrative
resources in anticipation of future growth. To the extent that increases in such
expenses precede or are not subsequently followed by increased revenues, the
Company's business, results of operations and financial condition would be
materially adversely affected. There can be no assurance that the Company will
sustain profitability on a quarterly or annual basis. The Company must achieve
substantial revenue growth in order to sustain profitability. In addition, in
view of recent revenue growth, the rapidly evolving nature of its business and
markets and its limited operating history in its current market, the Company
believes that period-to-period comparisons of financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance. Management believes that it is more likely than not that the
Company will not generate sufficient income to utilize available net operating
loss carryforwards of approximately $23.0 million and federal research and
development credit carryforwards of approximately $1.5 million as of December
31, 1997. In addition, there are limitations on the Company's use of net
operating loss carryforwards. Accordingly, the Company has recorded a full
valuation allowance for these assets.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company is likely to experience significant fluctuations in quarterly
operating results caused by many factors, including, but not limited to: (i)
changes in the demand for the Company's products; (ii) the timing, composition
and size of orders from the Company's customers, including the tendency for
significant bookings to occur in the last month of each fiscal quarter; (iii)
spending patterns and budgetary resources of its customers on network management
software solutions; (iv) the success of the Company's new customer generation
activities; (v) introductions or enhancements of products, or delays in the
introductions or enhancements of products, by the Company or its competitors;
(vi) changes in the Company's pricing policies or those of its competitors;
(vii) changes in the distribution channels through which products are sold;
8
<PAGE> 10
(viii) the Company's ability to anticipate and effectively adapt to developing
markets and rapidly changing technologies; (ix) changes in networking or
communications technologies; (x) the Company's ability to attract, retain and
motivate qualified personnel; (xi) changes in the mix of products sold; (xii)
the publication of opinions about the Company and its products, or its
competitors and their products, by industry analysts or others; and (xiii)
changes in general economic conditions. Unlike other software companies with a
longer history of operations, the Company does not derive a significant portion
of its revenues from maintenance contracts, and therefore does not have a
significant ongoing revenue stream that may tend to mitigate quarterly
fluctuations in operating results. Furthermore, the Company is attempting to
expand its channels of distribution, and increases in the Company's revenues
will be dependent on its ability to implement successfully its distribution
strategy. Due to the buying patterns of certain of the Company's customers and
also to the Company's own sales incentive programs focused on annual sales
goals, revenues in the Company's fourth quarter could be higher than revenues in
the first quarter of the succeeding year. There also may be other factors that
significantly affect the Company's quarterly results which are difficult to
predict given the Company's limited operating history, such as seasonality and
the timing of receipt and delivery of orders within a fiscal quarter.
Consistent with software industry practice, the Company expects to operate
with a limited amount of backlog. As a result, quarterly sales and operating
results depend generally on the volume and timing of orders within the quarter,
the tendency of sales to occur late in fiscal quarters and the ability of the
Company to fill orders received within the quarter, all of which are difficult
to forecast and manage. The Company's expense levels are based in part on its
expectations of future orders and sales, which, given the Company's limited
operating history, are extremely difficult to predict. A substantial portion of
the Company's operating expenses are related to personnel, facilities, and sales
and marketing programs. This level of spending for such expenses cannot be
adjusted quickly and is, therefore, relatively fixed in the short term.
Accordingly, any significant shortfall in demand for the Company's products in
relation to the Company's expectations would have an immediate and material
adverse effect on the Company's business, results of operations and financial
condition.
Due to all of the foregoing factors, the Company believes that its
quarterly operating results are likely to vary significantly in the future.
Therefore, in some future quarter the Company's results of operations may fall
below the expectations of securities analysts and investors. In such event, the
trading price of the Company's Common Stock would likely be materially adversely
affected.
EMERGING NETWORK MANAGEMENT SOFTWARE MARKET
The market for the Company's products is in an early stage of development.
Although the rapid expansion and increasing complexity of computer networks in
recent years has increased the demand for network management software products,
the awareness of and the need for such products is a recent development. Because
the market for these products is only beginning to develop, it is difficult to
assess the size of this market, the appropriate features and prices for products
to address this market, the optimal distribution strategy and the competitive
environment that will develop. The development of this market and the Company's
growth will be significantly dependent on the willingness of network service
providers, including telecommunications carriers, ISPs, systems integrators and
outsourcers, to integrate network performance analysis and reporting software
into their product and service offerings. Failure of the network performance
analysis and reporting market to grow or failure of the Company to properly
assess and address such market would have a material adverse effect on the
Company's business, results of operations and financial condition.
DEPENDENCE ON TELECOMMUNICATIONS CARRIERS
A significant portion of the Company's revenues are, and are expected to
continue to be, attributable to sales of products to telecommunications
carriers. The Company's future performance is significantly dependent upon
telecommunications carriers' increased incorporation of the Company's solutions
as part of their package of product and service offerings to end users. The
failure of the Company's products to perform favorably in and become an accepted
component of the telecommunications carriers' product and service
9
<PAGE> 11
offerings, or a slower than expected increase or a decrease in the volume of
sales of the Company's products and services to telecommunications carriers,
could have a material adverse effect on the Company's business, results of
operations and financial condition.
CONCENTRATED PRODUCT FAMILY
The Company currently derives substantially all of its revenues from its
Network Health product family, and the Company expects that revenues from these
products will continue to account for substantially all of the Company's
revenues for the foreseeable future. Broad market acceptance of these products
is, therefore, critical to the Company's future success, and any factor
adversely affecting sales or pricing levels of these products could have a
material adverse effect on the Company's business, results of operations and
financial condition. There can be no assurance that market acceptance of Network
Health will increase or even remain at current levels. Factors that may affect
the market acceptance of the Company's products include the availability and
price of competing products and technologies and the success of the sales
efforts of the Company and its marketing partners. Moreover, the Company
anticipates that its competitors will introduce additional competitive products,
particularly if demand for network management software products increases, which
may reduce future market acceptance of the Company's products. In addition, new
competitors could enter the Company's market and offer alternative products
which may impact the market acceptance of the Company's products. The Company's
future performance will also depend in part on the successful development,
introduction and market acceptance of new and enhanced products. There can be no
assurance that any such new or enhanced products will be successfully developed,
introduced and marketed, and failure to do so would have a material adverse
effect on the Company's business, results of operations and financial condition.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON STANDARD PROTOCOLS
The software industry is characterized by rapid technological change,
frequent introductions of new products, changes in customer demands and evolving
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards can render existing products obsolete
and unmarketable. Network Health's ability to analyze and generate reports, as
well as the quality of the reports, is dependent on Network Health's utilization
of the industry-standard SNMP protocol and the data resident in conventional
MIBs. Any change in these industry standards, the development of vendor-
specific proprietary MIB technology, or the emergence of new network
technologies could affect the compatibility of Network Health with these devices
which, in turn, could affect Network Health's ability to analyze and generate
comprehensive reports or the quality of the reports. Furthermore, although the
Company's products currently run on industry-standard UNIX operating systems and
Windows NT, any significant change in industry-standard operating systems could
affect the demand for, or the pricing of, the Company's products. Any of the
foregoing developments could have a material adverse effect on the Company's
business, results of operations and financial condition.
PRODUCT ENHANCEMENTS AND NEW PRODUCTS
Because of rapid technological change in the software industry and
potential changes in the network management software market and industry
standards, the life cycle of versions of Network Health is difficult to
estimate. The Company's future success will depend upon its ability to address
the increasingly sophisticated needs of its customers by developing and
introducing enhancements to Network Health on a timely basis that keep pace with
technological developments, emerging industry standards and customer
requirements. There can be no assurance that the Company will be successful in
developing and marketing enhancements to Network Health or in developing new
products that respond to technological changes, evolving industry standards or
customer requirements, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and sale of such
enhancements or new products, or that such enhancements or new products will
adequately address the requirements of the marketplace and achieve any
significant degree of market acceptance.
10
<PAGE> 12
COMPETITION; NEW ENTRANTS
The market for the Company's products is new, intensely competitive,
rapidly evolving and subject to technological change. Competitive and
alternative offerings are available from the major product categories of remote
monitoring (RMON) probe vendors, element management software, and other
performance analysis and reporting offerings. Another area of competition comes
from a number of companies offering network performance reporting services;
including International Network Services (INS). In addition, the Company expects
the large network management platform vendors to begin to offer products
directly competitive with the Company's products. These companies may bundle
their products with other hardware and software in a manner that may discourage
users from purchasing products offered by the Company. This strategy may be
particularly effective for companies with leading market shares in the network
hardware and software market, including Hewlett-Packard Company, International
Business Machines Corporation and Cabletron Systems, Inc. Developers of network
element management solutions such as Cisco Systems, Inc., 3Com Corporation and
Bay Networks, Inc. may also compete with the Company in the future. The Company
expects competition to persist, increase and intensify in the future with
possible price competition developing in the Company's markets. Many of the
Company's current and potential competitors have longer operating histories and
significantly greater financial, technical and marketing resources and name
recognition than the Company. The Company does not believe its market will
support a large number of competitors and their products. In the past, a number
of software markets have become dominated by one or a small number of suppliers,
and a small number of suppliers or even a single supplier may dominate the
Company's market. If the Company does not provide products that achieve success
in its market in the short term, the Company could suffer an insurmountable loss
in market share and brand name acceptance, which would result in a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that the Company will be able to compete
effectively with current and future competitors.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company's success depends significantly upon its proprietary
technology. The Company relies on a combination of patent, copyright, trademark
and trade secret laws, non-disclosure agreements and other contractual
provisions to establish, maintain and protect its proprietary rights, all of
which afford only limited protection. The Company has four issued U.S. patents,
three pending U.S. patent applications, and various foreign counterparts. There
can be no assurance that patents will issue from these pending applications or
from any future applications or that, if issued, any claims allowed will be
sufficiently broad to protect the Company's technology. In addition, there can
be no assurance that any patents that have been or may be issued will not be
challenged, invalidated or circumvented, or that any rights granted thereunder
would provide protection of the Company's proprietary rights. Failure of any
patents to protect the Company's technology may make it easier for the Company's
competitors to offer equivalent or superior technology. The Company has
registered or applied for registration for certain trademarks, and will continue
to evaluate the registration of additional trademarks as appropriate. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or services or to obtain
and use information that the Company regards as proprietary. Third parties may
also independently develop similar technology without breach of the Company's
proprietary rights. In addition, the laws of some foreign countries do not
protect proprietary rights to as great an extent as do the laws of the United
States. In addition, the Company's products are licensed under shrink wrap
license agreements that are not signed by licensees and therefore may not be
binding under the laws of certain jurisdictions.
Certain technologies used by the Company's products are licensed from third
parties, generally on a non-exclusive basis. The termination of any such
licenses, or the failure of the third-party licensors to adequately maintain or
update their products, could result in delay in the Company's ability to ship
certain of its products while it seeks to implement technology offered by
alternative sources, and any required replacement licenses could prove costly.
While it may be necessary or desirable in the future to obtain other licenses
relating to one or more of the Company's products or relating to current or
future technologies, there can be no assurance that the Company will be able to
do so on commercially reasonable terms or at all.
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<PAGE> 13
Although the Company does not believe that it is infringing the
intellectual property rights of others, claims of infringement are becoming
increasingly common as the software industry develops and legal protections,
including patents, are applied to software products.
Litigation may be necessary to protect the Company's proprietary
technology, and third parties may assert infringement claims against the Company
with respect to their proprietary rights. Any claims or litigation can be
time-consuming and expensive regardless of their merit. Infringement claims
against the Company can cause product release delays, require the Company to
redesign its products or require the Company to enter into royalty or license
agreements, which agreements may not be available on terms acceptable to the
Company or at all.
RISK OF PRODUCT DEFECTS; PRODUCT LIABILITY
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and testing and use by
current and potential customers, errors will not be found in new products after
commencement of commercial shipments or, if discovered, that the Company will be
able to successfully correct such errors in a timely manner or at all. The
occurrence of errors and failures in the Company's products could result in loss
of or delay in market acceptance of the Company's products, and alleviating such
errors and failures could require significant expenditure of capital and other
resources by the Company. The consequences of such errors and failures could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Since the Company's products are used by its customers to predict future
network problems and avoid failures of the network to support critical business
functions, design defects, software errors, misuse of the Company's products,
incorrect data from network elements or other potential problems within or out
of the Company's control that may arise from the use of the Company's products
could result in financial or other damages to the Company's customers. The
Company does not maintain product liability insurance. Although the Company's
license agreements with its customers typically contain provisions designed to
limit the Company's exposure to potential claims as well as any liabilities
arising from such claims, such provisions may not effectively protect the
Company against such claims and the liability and costs associated therewith.
Accordingly, any such claim could have a material adverse effect upon the
Company's business, results of operations and financial condition. The Company
provides warranties for its products for a period of time (currently three
months) after the software is purchased. The Company's license agreements
generally do not permit product returns by the customer, and product returns and
warranty expense for fiscal 1995, 1996 and 1997 represented less than 1.0% of
total revenues during each of such periods. However, no assurance can be given
that product returns will not increase as a percentage of total revenues in
future periods.
RELIANCE ON STRATEGIC PARTNERS AND OTHER EVOLVING DISTRIBUTION CHANNELS
The Company's distribution strategy is to develop multiple distribution
channels, including sales through strategic marketing partners and value added
resellers, such as Newbridge Networks Corporation; telecommunications carriers,
such as MCI Communications Corporation; OEMs, such as Cabletron Systems, Inc.;
and independent software vendors, as well as international distributors
(collectively "channel partners"). The Company has developed a number of these
relationships and intends to continue to develop new channel partner
relationships. Accordingly, the success of the Company will be dependent in
large part on its ability to develop these additional distribution relationships
and on the performance and success of these third parties, particularly
telecommunications carriers and other network service providers. The Company's
channel partner relationships have been established recently, and the Company
cannot predict the extent to which its channel partners will be successful in
marketing the Company's products. The Company generally expects that its
agreements with its channel partners will be terminable by either party without
cause. None of the Company's channel partners are required to purchase minimum
quantities of the Company's products and none of these agreements contain
exclusive distribution arrangements. The Company's inability to attract
important and effective channel partners, or their inability to penetrate their
respective market segments, or the loss of any of the Company's channel
partners, as a result of competitive products offered by other companies or
products
12
<PAGE> 14
developed internally by these channel partners or otherwise, could materially
adversely affect the Company's business, results of operations and financial
condition.
MANAGEMENT OF POTENTIAL GROWTH
The Company recently has experienced significant growth in its sales and
operations and in the complexity of its products and product distribution
channels. The Company has recently increased and is continuing to increase the
size of its sales force and coverage territories. Furthermore, the Company has
recently established and is continuing to establish additional distribution
channels through third party relationships. The Company's growth, coupled with
the rapid evolution of the Company's markets, has placed, and is likely to
continue to place, significant strains on its administrative, operational and
financial resources and increase demands on its internal systems, procedures and
controls. If the Company is unable to manage future growth effectively, the
Company's business, results of operations and financial condition could be
materially adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its key technical and senior management personnel, none of whom is bound by an
employment agreement. The loss of the services of any of such personnel could
have a material adverse effect on the business, results of operations and
financial condition of the Company. The Company does not maintain key person
life insurance policies on any of its employees other than John A. Blaeser. The
Company's success is highly dependent on its continuing ability to identify,
hire, train, motivate and retain highly qualified management, technical, and
sales and marketing personnel, including recently hired officers and other
employees. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to attract, assimilate or retain highly
qualified technical and managerial personnel in the future. The inability to
attract and retain the necessary management, technical, and sales and marketing
personnel could have a material adverse effect on the Company's business,
results of operations and financial condition.
EXPANSION INTO INTERNATIONAL MARKETS
The Company intends to expand its operations outside of the United States
and enter additional international markets, primarily through the establishment
of additional reseller arrangements. The Company expects to commit additional
time and development resources to customizing its products and services for
selected international markets and to developing international sales and support
channels. There can be no assurance that such efforts will be successful.
In addition to the uncertainty as to the Company's ability to establish an
international presence, there are certain difficulties and risks inherent in
doing business internationally, including, but not limited to: (i) costs of
customizing products and services for international markets; (ii) dependence on
independent resellers; (iii) multiple and conflicting regulations; (iv) exchange
controls; (v) longer payment cycles; (vi) unexpected changes in regulatory
requirements; (vii) import and export restrictions and tariffs; (viii)
difficulties in staffing and managing international operations; (ix) greater
difficulty or delay in accounts receivable collection; (x) potentially adverse
tax consequences; (xi) the burden of complying with a variety of laws outside
the United States; (xii) the impact of possible recessionary environments in
economies outside the United States; and (xiii) political and economic
instability. In addition, the Company's ability to expand its business in
certain countries will require modification of its products, particularly
national language support. The Company's current export sales are denominated in
United States dollars and the Company currently expects to continue this
practice as it expands its international operations. To the extent that
international sales continue to be denominated in U.S. dollars, an increase in
the value of the United States dollar relative to other currencies could make
the Company's products and services more expensive and, therefore, potentially
less competitive in international markets. To the extent that future
international sales are denominated in foreign currency, the Company's operating
results will be subject to risks associated with foreign currency fluctuation
and the Company would consider entering into forward exchange contracts or
otherwise engaging in hedging activities. To date, as all export sales are
denominated in U.S. dollars, the Company has not entered
13
<PAGE> 15
into any such contracts or engaged in any such activities. As the Company
increases its international sales, its total revenue may also be affected to a
greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe and other parts of the world.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computers systems and software products as the millennium (Year 2000)
approaches. In 1997, the Company initiated the necessary development to ensure
Year 2000 compliance in all the Network Health family of applications. In 1998,
the Company will commence a Year 2000 date conversion project to address all
internal existing computer systems and applications. Management has not yet
assessed the Year 2000 compliance expense, but based on a preliminary review to
date, does not expect the amounts required to be expensed over the next two
years to have a material effect on its financial position or results of
operations. There can be no assurance, however, that further assessment of the
Company's products and internal systems and applications will not indicate that
additional Company efforts to assure Year 2000 compliance are necessary, and
that such efforts may be costly. Further, there can be no assurance that the
systems operated by other companies upon which the Company relies will be Year
2000 compliant on a timely basis. The Company's business, financial condition or
results of operations could be materially adversely affected by the failure of
the Company's products and its internal systems and applications to properly
operate or manage data beyond 1999.
POSSIBLE VOLATILITY OF STOCK PRICE
The Company completed an initial public offering of its common stock during
October of 1997. The market price of the shares of Common Stock may be highly
volatile and could be subject to wide fluctuations in response to variations in
results of operations, announcements of technological innovations or new
products by the Company or its competitors, changes in financial estimates by
securities analysts or other events or factors. In addition, the financial
markets have experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many high
technology companies and that often have been unrelated to the operating
performance of such companies or have resulted from the failure of the operating
results of such companies to meet market expectations in a particular quarter.
Broad market fluctuations or any failure of the Company's operating results in a
particular quarter to meet market expectations may adversely affect the market
price of the shares of Common Stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business, results of operations and financial condition.
FUTURE CAPITAL FUNDING
The Company plans to continue to expend substantial funds on the continued
development, sales and marketing of the Network Health product family. There can
be no assurance that the Company's existing capital resources, the proceeds from
the Company's initial public offering during October of 1997 and any funds that
may be generated from future operations together will be sufficient to finance
the Company's future operations or that other sources of funding will be
available on terms acceptable to the Company, if at all. In addition, future
sales of substantial amounts of the Company's securities in the public market
could adversely affect prevailing market prices and could impair the Company's
future ability to raise capital through the sale of its securities. The failure
to obtain such funding, if required, could have a material adverse effect on the
Company's business, results of operations and financial condition.
ITEM 2. PROPERTIES
The Company's corporate office and principal facility is located in
Marlboro, Massachusetts. Under an amendment signed in March of 1997, the Company
increased space under the lease in this facility from 20,000 to 30,000 square
feet. The amended lease expires in June of 2002. The Company is also currently
negotiating an amendment to increase the space in this facility to 34,000 square
feet. This facility accommodates finance,
14
<PAGE> 16
administration and operations, research and development, customer support and
marketing. The Company also leases, on a short-term basis, sales office space in
Tustin, California, Dallas, Texas and London, England. The Company believes that
its current facilities will meet its needs through at least the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on the business, results of operations and financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company completed its initial public offering on October 24, 1997 at a
price of $14.00 per share. The Company's Common Stock trades on the Nasdaq
National Market under the symbol CCRD. The following table sets forth, for the
period indicated, the high and low closing sales prices for the Common Stock,
all as reported by the Nasdaq National Market.
PERIOD HIGH LOW
- ------ ------ ------
October 16, 1997 -- December 31, 1997....................... $23.25 $15.75
As of March 01, 1998, there were approximately 273 stockholders of record
of the Company's Common Stock.
DIVIDEND POLICY
The Company currently anticipates that it will retain all future earnings
for use in its business and does not anticipate that it will pay any cash
dividends in the foreseeable future. The payment of any future dividends will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements and the
general financial condition of the Company, general business conditions and
contractual restrictions on payment of dividends, if any. In addition, the
Company's lines of credit prohibit the payment of dividends without prior lender
approval.
USE OF PROCEEDS
On October 16, 1997, the Company commenced an initial public offering
("IPO") of 2,900,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company pursuant to the Company's final prospectus dated
October 15, 1997 (the "Prospectus"). The Prospectus was contained in the
Company's Registration Statement on Form S-1, which was declared effective by
the Securities and Exchange Commission (SEC File No. 333-33227) on October 15,
1997. Of the 2,900,000 shares of Common Stock offered, 2,300,000 shares were
offered and sold by the Company and 600,000 shares were offered and sold by
certain stockholders of the Company. As part of the IPO, the Company granted the
several underwriters an overallotment option to purchase up to an additional
435,000 shares of Common Stock (the "Underwriters' Option"). The IPO closed on
October 21, 1997 upon the sale of 2,900,000 shares of Common Stock to the
underwriters. On October 24, 1997, the Representatives, on behalf of the several
underwriters, exercised the Underwriters' Option, purchasing 435,000 additional
shares of Common Stock from the Company. The aggregate offering price of the IPO
to the public was $40,600,000 (exclusive of the Underwriters' Option), with
proceeds to the Company and selling shareholders, after deduction of the
underwriting discount, of $29,946,000 (before deducting offering expenses
payable by the Company) and $7,812,000 respectively. The
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<PAGE> 17
aggregate offering price of the Underwriters' Option exercised was $6,090,000,
with proceeds to the Company, after deduction of the underwriting discount, of
$5,663,700 (before deducting offering expenses payable by the Company). Through
December 31, 1997 the aggregate amount of expenses incurred by the Company in
connection with the issuance and distribution of the shares of Common Stock
offered and sold in the IPO were approximately $3.6 million, including $2.7
million in underwriting discounts and commissions and $950,000 in other offering
expenses.
None of the expenses paid by the Company in connection with the IPO or the
exercise of the Underwriters' Option were paid, directly or indirectly, to
directors, officers, persons owning ten percent or more of the Company's equity
securities, or affiliates of the Company.
The net proceeds to the Company from the IPO, after deducting underwriting
discounts and commissions and other offering expenses were approximately $34.7
million.
To date, the Company has not utilized any of the net proceeds from the IPO.
The Company has invested all such net proceeds primarily in US treasury
obligations and other interest bearing investment grade securities.
None of the net proceeds from the IPO were used to pay, directly or
indirectly, directors, officers, persons owning ten percent or more of the
Company's equity securities, or affiliates of the Company.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------
JAN. 1, DEC. 31, DEC. 30, DEC. 28, DEC. 31,
1994 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License revenues.............................. $ 3,232 $ 3,416 $ 3,443 $ 7,845 $17,345
Service revenues.............................. 261 649 912 1,162 2,225
------- ------- ------- -------- -------
Total revenues........................ 3,493 4,065 4,355 9,007 19,570
Cost of revenues................................ 1,966 1,941 1,164 1,957 2,874
------- ------- ------- -------- -------
Gross profit............................... 1,527 2,124 3,191 7,050 16,696
------- ------- ------- -------- -------
Operating Expenses:
Research and development...................... 1,514 2,374 2,361 3,933 4,631
Sales and marketing........................... 2,300 3,391 3,694 7,040 10,173
General and administrative.................... 754 751 1,000 1,177 2,058
------- ------- ------- -------- -------
Total operating expenses.............. 4,568 6,516 7,055 12,150 16,862
------- ------- ------- -------- -------
Operating loss............................. (3,041) (4,392) (3,864) (5,100) (166)
Other income (expense), net..................... 37 (2) 80 45 297
------- ------- ------- -------- -------
Income (loss) from continuing operations...... (3,004) (4,394) (3,784) (5,055) 131
Income (loss) from discontinued operations...... (68) 117 -- -- --
------- ------- ------- -------- -------
Net income (loss)............................. $(3,072) $(4,277) $(3,784) $ (5,055) $ 131
======= ======= ======= ======== =======
Net income (loss) per common and potential
common share:
Basic......................................... $ (4.63) $ (6.34) $ (5.07) $ (6.64) $ 0.04
Diluted....................................... (4.63) (6.34) (5.07) (6.64) 0.01
Pro forma diluted............................. (3.06) (1.42) (0.84) (0.57) 0.01
Weighted average common and potential common
shares outstanding:
Basic......................................... 664 675 746 761 3,070
Diluted....................................... 664 675 746 761 11,319
Pro forma diluted............................. 1,003 3,007 4,507 8,869 11,319
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------
JAN. 1, DEC. 31, DEC. 30, DEC. 28, DEC. 31,
1994 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 4,202 $ 1,619 $ 4,397 $ 1,664 $36,539
Working capital (deficit)....................... 4,329 1,907 3,316 (1,387) 32,431
Total assets.................................... 6,288 3,989 6,729 5,584 41,914
Long-term debt, net of current portion.......... -- -- -- 668 --
Redeemable convertible preferred stock.......... 5,161 7,527 13,616 14,478 --
Total stockholders' equity (deficit)............ (54) (4,716) (9,126) (15,035) 34,483
</TABLE>
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing under the caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1997
Annual Report to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements together with the related notes and the
report of Arthur Andersen LLP, independent accountants, are set forth beginning
on page F-1 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information under the captions "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" as set forth in the Company's
proxy statement for its annual stockholders' meeting to be held April 30, 1998
is incorporated herein by reference.
The information concerning officers is included in Part I, Item 1 under the
caption "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" as set forth in
the Company's proxy statement for its annual stockholders' meeting to be held
April 30, 1998 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Securities Ownership of Certain
Beneficial Owners and Management" as set forth in the Company's proxy statement
for its annual stockholders' meeting to be held April 30, 1998 is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
18
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
PAGE NUMBER
-----------
1. Financial Statements:
Report of Independent Public Accountants................ F-1
Balance Sheets:
December 28, 1996 and December 31, 1997.............. F-2
Statements of Operations:
Years ended December 30, 1995, December 28, 1996 and
December 31, 1997................................... F-3
Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit):
Years ended December 30, 1995, December 28, 1996 and
December 31, 1997................................... F-4
Statements of Cash Flows:
Years ended December 30, 1995, December 28, 1996 and
December 31, 1997................................... F-5
Notes to the Financial Statements....................... F-6
2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
Included in Item 12 of Notes to the Financial
Statements
3. Exhibits:
See Index to Exhibits. The Exhibits listed in the
accompanying Index to Exhibits are filed or
incorporated by reference as part of this report.
(b) Reports on Form 8-K:
None
19
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Concord Communications, Inc.:
We have audited the accompanying balance sheets of Concord Communications,
Inc. (a Massachusetts corporation) as of December 28, 1996 and December 31,
1997, and the related statements of operations, redeemable convertible preferred
stock and stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Concord Communications, Inc.
as of December 28, 1996 and December 31, 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 19, 1998
F-1
<PAGE> 22
CONCORD COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash, cash equivalents and marketable securities.......... $ 1,663,896 $ 36,539,303
Accounts receivable, net of allowance of approximately
$210,000 and $280,000, respectively.................... 2,273,255 3,040,850
Prepaid expenses and other current assets................. 148,934 282,311
------------ ------------
Total current assets.............................. 4,086,085 39,862,464
------------ ------------
Equipment and Improvements, at cost:
Equipment................................................. 5,376,966 6,473,305
Leasehold improvements.................................... 78,759 85,957
------------ ------------
5,455,725 6,559,262
Less -- Accumulated depreciation and amortization......... 3,957,519 4,507,737
------------ ------------
1,498,206 2,051,525
------------ ------------
$ 5,584,291 $ 41,913,989
============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ 1,560,312 $ 1,764,580
Accrued expenses.......................................... 2,324,927 3,368,585
Deferred revenue.......................................... 1,331,291 2,298,092
Current portion of long-term debt......................... 257,000 --
------------ ------------
Total current liabilities......................... 5,473,530 7,431,257
------------ ------------
Long-Term Debt.............................................. 667,502 --
------------ ------------
Commitments and Contingencies (Note 8)
Redeemable Convertible Preferred Stock (none at December
31,1997):
Series A, $.01 par value --
Authorized -- 1,965,373 shares
Issued and outstanding -- 1,940,863 shares recorded at
redemption value...................................... 9,427,506 --
Series A-1, $.01 par value --
Authorized -- 212,044 shares
Issued and outstanding -- 36,070 shares recorded at
redemption value...................................... 179,106 --
Series B, $.01 par value --
Authorized -- 4,479,613 shares
Issued and outstanding -- 4,460,789 shares recorded at
redemption value...................................... 4,871,117 --
------------ ------------
Total redeemable convertible preferred stock...... 14,477,729 --
------------ ------------
Stockholders' Equity (Deficit)
Preferred Stock, $.01 par value --
Authorized -- 1,000,000 shares (none 1996); no shares
issued and outstanding................................ -- --
Common stock, $.01 par value --
Authorized -- 50,000,000 shares
Issued and outstanding -- 844,482 and 12,019,188
shares, respectively.................................. 8,445 120,193
Additional paid-in capital................................ 18,097,045 67,942,708
Deferred compensation..................................... -- (149,157)
Unrealized gains on marketable securities................. -- 19,750
Accumulated deficit....................................... (33,139,960) (33,450,762)
------------ ------------
Total stockholders' equity (deficit).............. (15,034,470) 34,482,732
------------ ------------
$ 5,584,291 $ 41,913,989
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 23
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
License revenues.................................. $ 3,443,040 $ 7,844,523 $17,344,307
Service revenues.................................. 911,964 1,162,242 2,225,287
----------- ----------- -----------
Total revenues............................ 4,355,004 9,006,765 19,569,594
Cost of Revenues.................................... 1,163,863 1,956,889 2,873,840
----------- ----------- -----------
Gross profit.............................. 3,191,141 7,049,876 16,695,754
----------- ----------- -----------
Operating Expenses:
Research and development.......................... 2,360,287 3,933,483 4,630,560
Sales and marketing............................... 3,694,198 7,039,662 10,173,182
General and administrative........................ 1,000,228 1,176,938 2,058,402
----------- ----------- -----------
Total operating expenses.................. 7,054,713 12,150,083 16,862,144
----------- ----------- -----------
Operating loss............................ (3,863,572) (5,100,207) (166,390)
----------- ----------- -----------
Other Income (Expense):
Interest income................................... 48,015 79,832 419,733
Interest expense.................................. -- (48,564) (126,836)
Other............................................. 31,877 14,076 4,248
----------- ----------- -----------
Total other income (expense).............. 79,892 45,344 297,145
----------- ----------- -----------
Net income (loss)......................... $(3,783,680) $(5,054,863) $ 130,755
=========== =========== ===========
Net income (loss) per common and potential
common share:
Basic............................................. $ (5.07) $ (6.64) $ 0.04
=========== =========== ===========
Diluted........................................... $ (5.07) $ (6.64) $ 0.01
=========== =========== ===========
Pro forma diluted................................. $ (0.84) $ (0.57) $ 0.01
=========== =========== ===========
Weighted average common and potential common
shares outstanding:
Basic............................................. 746,152 760,971 3,069,667
=========== =========== ===========
Diluted........................................... 746,152 760,971 11,319,479
=========== =========== ===========
Pro forma diluted................................. 4,506,723 8,869,229 11,319,479
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 24
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
----------------------------------------------------------------------------
SERIES A SERIES A-1 SERIES B
------------------------ ---------------------- ------------------------
NUMBER REDEMPTION NUMBER REDEMPTION NUMBER REDEMPTION
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
---------- ----------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994........................... 1,706,232 $7,365,540 36,070 $ 161,057 -- $ --
Issuance of preferred stock and common stock, net of
issuance costs of $98,813......................... 234,631 957,292 -- -- 4,460,789 4,550,000
Accretion of dividends on preferred stock........... -- 570,807 -- 8,342 -- 2,617
Exercise of stock options........................... -- -- -- -- -- --
Net loss............................................ -- -- -- -- -- --
---------- ----------- ------- --------- ---------- -----------
BALANCE, DECEMBER 30, 1995........................... 1,940,863 8,893,639 36,070 169,399 4,460,789 4,552,617
Accretion of dividends on preferred stock........... -- 533,867 -- 9,707 -- 318,500
Exercise of stock options........................... -- -- -- -- -- --
Net loss............................................ -- -- -- -- -- --
---------- ----------- ------- --------- ---------- -----------
BALANCE, DECEMBER 28, 1996........................... 1,940,863 9,427,506 36,070 179,106 4,460,789 4,871,117
Issuance of common stock,
net of Issuance costs of $955,359................. -- -- -- -- -- --
Accretion of dividends on preferred stock........... -- 277,156 -- 5,151 -- 159,250
Conversion of redeemable convertible preferred stock
to common stock................................... (1,940,863) (9,704,662) (36,070) (184,257) (4,460,789) (5,303,367)
Exercise of stock options............................ -- -- -- -- -- --
Deferred compensation related to grants of stock
options............................................. -- -- -- -- -- --
Amortization of deferred compensation related to
grants of stock options............................. -- -- -- -- -- --
Unrealized gains on available-for-sale securities.... -- -- -- -- -- --
Net income........................................... -- -- -- -- -- --
---------- ----------- ------- --------- ---------- -----------
BALANCE, DECEMBER 31, 1997........................... -- $ -- -- $ -- -- $ --
========== =========== ======= ========= ========== ===========
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------- ------------------------------
SERIES B COMMON STOCK
------------ ----------------------
NUMBER $.01
TOTAL OF SHARES PAR VALUE
------------ ---------- ---------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994........................... $ 7,526,597 682,487 $ 6,824
Issuance of preferred stock and common stock, net of
issuance costs of $98,813......................... 5,507,292 71,180 712
Accretion of dividends on preferred stock........... 581,766 -- --
Exercise of stock options........................... -- 6,678 67
Net loss............................................ -- -- --
------------ ---------- --------
BALANCE, DECEMBER 30, 1995........................... 13,615,655 760,345 7,603
Accretion of dividends on preferred stock........... 862,074 -- --
Exercise of stock options........................... -- 84,137 842
Net loss............................................ -- -- --
------------ ---------- --------
BALANCE, DECEMBER 28, 1996........................... 14,477,729 844,482 8,445
Issuance of common stock,
net of Issuance costs of $955,359................. -- 2,735,000 27,350
Accretion of dividends on preferred stock........... 441,557 -- --
Conversion of redeemable convertible preferred stock
to common stock................................... (14,919,286) 8,108,258 81,083
Exercise of stock options............................ -- 331,448 3,315
Deferred compensation related to grants of stock
options............................................. -- -- --
Amortization of deferred compensation related to
grants of stock options............................. -- -- --
Unrealized gains on available-for-sale securities.... -- -- --
Net income........................................... -- -- --
------------ ---------- --------
BALANCE, DECEMBER 31, 1997........................... $ -- 12,019,188 $120,193
============ ========== ========
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------
UNREALIZED
ADDITIONAL GAIN ON
PAID-IN DEFERRED MARKETABLE ACCUMULATED
CAPITAL COMPENSATION SECURITIES DEFICIT TOTAL
----------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994........................... $18,134,985 $ -- $ -- $(22,857,577) $ (4,715,768)
Issuance of preferred stock and common stock, net of
issuance costs of $98,813......................... (50,451) -- -- -- (49,739)
Accretion of dividends on preferred stock........... -- -- -- (581,766) (581,766)
Exercise of stock options........................... 4,798 -- -- -- 4,865
Net loss............................................ -- -- -- (3,783,680) (3,783,680)
----------- --------- ------- ------------ ------------
BALANCE, DECEMBER 30, 1995........................... 18,089,332 -- -- (27,223,023) (9,126,088)
Accretion of dividends on preferred stock........... -- -- -- (862,074) (862,074)
Exercise of stock options........................... 7,713 -- -- -- 8,555
Net loss............................................ -- -- -- (5,054,863) (5,054,863)
----------- --------- ------- ------------ ------------
BALANCE, DECEMBER 28, 1996........................... 18,097,045 -- -- (33,139,960) (15,034,470)
Issuance of common stock,
net of Issuance costs of $955,359................. 34,626,991 -- -- -- 34,654,341
Accretion of dividends on preferred stock........... -- -- -- (441,557) (441,557)
Conversion of redeemable convertible preferred stock
to common stock................................... 14,838,203 -- -- -- 14,919,286
Exercise of stock options............................ 188,594 -- -- -- 191,909
Deferred compensation related to grants of stock
options............................................. 191,875 (191,875) -- -- --
Amortization of deferred compensation related to
grants of stock options............................. -- 42,718 -- -- 42,718
Unrealized gains on available-for-sale securities.... -- -- 19,750 -- 19,750
Net income........................................... -- -- -- 130,755 130,755
----------- --------- ------- ------------ ------------
BALANCE, DECEMBER 31, 1997........................... $67,942,708 $(149,157) $19,750 $(33,450,762) $ 34,482,732
=========== ========= ======= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 25
CONCORD COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)................................ $(3,783,680) $(5,054,863) $ 130,755
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating
activities --
Depreciation and amortization................. 335,837 409,484 592,936
Changes in current assets and liabilities --
Accounts receivable......................... 147,562 (1,254,453) (767,595)
Prepaid expenses and other current assets... 159,387 (8,472) (133,377)
Accounts payable............................ 598,989 373,464 204,268
Accrued expenses............................ 369,333 1,646,087 1,043,658
Deferred revenue............................ 92,648 957,625 966,801
----------- ----------- ------------
Net cash (used in) provided by operating
activities............................. (2,079,924) (2,931,128) 2,037,446
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchases of equipment and improvements.......... (604,838) (734,571) (1,103,537)
Investments in marketable securities............. -- -- (28,661,367)
----------- ----------- ------------
Net cash used in investing activities............ (604,838) (734,571) (29,764,904)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from bank borrowings.................... -- 924,502 583,707
Repayments of bank borrowings.................... -- -- (1,508,209)
Proceeds from issuance of preferred and common
stock......................................... 5,457,553 -- 34,654,341
Proceeds from exercise of stock options.......... 4,865 8,555 191,909
----------- ----------- ------------
Net cash provided by financing
activities............................. 5,462,418 933,057 33,921,748
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... 2,777,656 (2,732,642) 6,194,290
Cash and Cash Equivalents, beginning of year....... 1,618,882 4,396,538 1,663,896
----------- ----------- ------------
Cash and Cash Equivalents, end of year............. $ 4,396,538 $ 1,663,896 $ 7,858,186
=========== =========== ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest........................... $ -- $ 48,564 $ 126,836
=========== =========== ============
Supplemental Disclosure of Noncash Transactions:
Accretion of dividends on preferred stock........ $ 581,766 $ 862,074 $ 441,557
=========== =========== ============
Deferred compensation related to grants of stock
options....................................... $ -- $ -- $ 191,875
=========== =========== ============
Conversion of redeemable convertible preferred
stock to common stock......................... $ -- $ -- $ 14,919,286
=========== =========== ============
Unrealized gain on available-for-sale
securities.................................. $ -- $ -- $ 19,750
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 26
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Concord Communications, Inc. (the Company) is primarily engaged in the
development and sale of automated network reporting software to companies
principally in the United States and Europe.
The Company is subject to the risks associated with emerging,
technology-oriented companies. Primary among these risks are competition from
substitute products and the ability to successfully develop and market its
current and future products.
(a) Fiscal Year-End
Through fiscal 1996, the Company's fiscal year was the 52- or 53-week
period ended on the Saturday closest to December 31. References to 1995 and 1996
are for the 52-week periods ended December 30, 1995 and December 28, 1996,
respectively. Beginning in 1997, the Company has changed to a calendar year-end.
(b) Cash, Cash Equivalents and Marketable Securities
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company has classified its cash equivalents and marketable
securities as available-for-sale and recorded them at fair value, with the
unrealized gains and losses reported as a separate component of stockholders'
equity. The Company considers cash and highly liquid investments, purchased with
an original maturity of 90 days or less, to be cash and cash equivalents. Cash
and cash equivalents are $1,663,896 and $7,858,186 at December 28, 1996 and
December 31, 1997.
(c) Revenue Recognition
Revenue from software product sales is recognized upon shipment of the
product to customers. In cases where significant unfulfilled vendor obligations
remain upon shipment, the related revenue is deferred until such obligations are
fulfilled. Revenue from postcontract customer support and other related services
is recognized ratably as the obligations are fulfilled or when the related
services are performed. The deferred revenue balance at December 28, 1996 and
December 31, 1997 consists of prepayments on software maintenance contracts and
shipments to customers of software products for which certain significant vendor
obligations remain.
(d) Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation is provided
for on a straight-line basis over the useful lives of the assets, which are
estimated to be three to five years for all assets except leasehold
improvements, which are amortized over the life of the lease.
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(f) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-
F-6
<PAGE> 27
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
sheet and credit risk concentrations. The Company has no significant
off-balance-sheet concentration of credit risk such as foreign exchange
contracts, option contracts or other foreign hedging arrangements. The Company
maintains its cash, cash equivalent and marketable securities with established
financial institutions. The Company does not believe it has accounts receivable
collection risk in excess of existing reserves. For the years ended December 30,
1995, December 28, 1996 and December 31, 1997, no individual customer accounted
for more than 10% of revenue.
(g) Software Development Costs
SFAS No. 86, Accounting for the Costs of Computer Software To Be Sold,
Leased or Otherwise Marketed, requires the capitalization of certain computer
software development costs incurred after technological feasibility is
established. The Company believes that once technological feasibility of a
software product has been established, the additional development costs incurred
to bring the product to a commercially acceptable level are not significant.
There were no capitalized software development costs at December 28, 1996 and
December 31, 1997.
(h) Net Income (Loss) per Share
In 1997, the Company adopted SFAS No. 128, Earnings Per Share, effective
December 15, 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. The Company has applied the provisions of SFAS
No. 128 retroactively to all periods presented. In accordance with Staff
Accounting Bulletin (SAB) No. 98, the Company has determined that there were no
nominal issuances of common stock or potential common stock in the period prior
to the Company's initial public offering (IPO). The dilutive effect of potential
common shares in 1997, consisting of outstanding stock options and redeemable
convertible preferred stock, is determined using the treasury method and the
if-converted method, respectively, in accordance with SFAS No. 128. Diluted
weighted average shares outstanding for 1995 and 1996 excludes the potential
common shares from stock options and redeemable convertible preferred stock
outstanding because to do so would have been antidilutive for the years
presented. Pro forma diluted net income (loss) per common and potential common
share assumes that all series of redeemable convertible preferred stock had been
converted to common stock as of the original issuance dates. Calculations of
basic, diluted and pro forma diluted net income (loss) per common share and
potential common share are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss)................................... $(3,783,680) $(5,054,863) $ 130,755
----------- ----------- -----------
Weighted average common shares outstanding.......... 746,152 760,971 3,069,667
Potential common shares pursuant to stock options... -- -- 1,830,774
Potential common shares pursuant to conversion of
redeemable convertible preferred stock............ -- -- 6,419,038
----------- ----------- -----------
Diluted weighted average shares..................... 746,152 760,971 11,319,479
Pro forma conversion of redeemable convertible
preferred stock................................... 3,760,571 8,108,258 --
----------- ----------- -----------
Pro forma diluted weighted average shares
outstanding....................................... 4,506,723 8,869,229 11,319,479
----------- ----------- -----------
Basic net income (loss) per common share............ $ (5.07) $ (6.64) $ .04
=========== =========== ===========
Diluted net income (loss) per common and potential
common share...................................... $ (5.07) $ (6.64) $ .01
=========== =========== ===========
Pro forma diluted net income (loss) per common and
potential common share............................ $ (0.84) $ (0.57) $ .01
=========== =========== ===========
</TABLE>
F-7
<PAGE> 28
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) MARKETABLE SECURITIES
It is the Company's intent to maintain a liquid investment portfolio to
support current operations and to take advantage of investment opportunities;
therefore, all marketable securities are considered to be available-for-sale and
are classified as current assets. The amortized cost, unrealized gains (losses)
and fair value of marketable securities available-for-sale as of December 31,
1997 with maturity dates from January 1, 1998 through December 1, 2000, are as
follows:
<TABLE>
<CAPTION>
UNREALIZED GAINS
AMORTIZED COST (LOSSES) FAIR VALUE
-------------- ---------------- -----------
<S> <C> <C> <C>
US government obligations........................ $ 7,450,812 $ (924) $ 7,449,888
Corporate bonds and notes........................ 22,317,923 22,455 22,340,378
Asset-backed securities.......................... 5,402,979 (1,781) 5,401,198
----------- ------- -----------
35,171,714 19,750 35,191,464
Less: Amounts classified as cash-equivalents..... 6,510,435 (88) 6,510,347
----------- ------- -----------
Available-for-sale marketable securities......... $28,661,279 $19,838 $28,681,117
=========== ======= ===========
</TABLE>
(3) LINE OF CREDIT AND LONG-TERM DEBT
During 1996, the Company entered into an agreement for an equipment line of
credit in the amount of $1,000,000 (the Equipment Line) with a bank. The
Equipment Line, as amended, carries interest at the bank's prime rate plus 2%
and was collateralized by substantially all of the Company's assets. As of
December 28, 1996, the outstanding borrowings under the Equipment Line were
$924,502. In 1997, the Company received additional advances of $74,185 through
March 25, 1997, at which time the total amount of $998,687 due was converted to
a term loan payable in 36 even monthly payments of principal plus interest
through March 25, 2000. In December 1997, the Company paid off all outstanding
principal and interest due on this term loan.
On April 3, 1997, the Company entered into an agreement for a revolving
working capital line of credit (the Working Capital Line) with the bank that
also held the Company's term loan payable. Under the agreement, the Company can
borrow up to the lesser of $2,500,000 or 90% of eligible accounts receivable, as
defined, minus the principal amount outstanding under the term loan payable.
Interest on outstanding borrowings is payable monthly and accrues at a rate of
prime plus 2%. The Working Capital Line is collateralized by substantially all
assets of the Company and requires compliance with certain financial covenants,
including the maintenance of minimum levels of tangible net worth, profitability
and revenues, as defined. The Working Capital Line expires on April 2, 1998. As
of December 31, 1997, no borrowings have been made by the Company under the
Working Capital Line.
On June 9, 1997, the Company entered into an agreement with another bank to
allow the Company to draw one or more loans (the Equipment Term Loans), up to
$1,000,000, for the purchases of qualifying equipment and financing of
qualifying software/engineering costs, as defined. Interest on the Equipment
Term Loans was due and payable monthly in arrears at the prime rate plus 0.75%.
Borrowings under the Equipment Term Loans were permitted through December 31,
1997, at which time the outstanding principal would have been due and payable in
36 even, consecutive monthly installments beginning January 30, 1998 through
December 29, 2000. The Equipment Term Loans were secured by the equipment
acquired. In addition, the Company was required to comply with certain financial
covenants, which include, among other items, minimum levels of capital base,
liquidity and profitability. The Company had borrowed $509,522 under this
agreement during 1997. In December, 1997, the Company paid off all outstanding
principal and interest under the Equipment Term Loans.
F-8
<PAGE> 29
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) STOCKHOLDERS' EQUITY (DEFICIT)
In December 1995, the Company's Board of Directors approved a one-for-three
reverse stock split of its common and redeemable convertible preferred stock. On
October 9, 1997, the Company amended its certificate of incorporation to
authorize a 1-for-2 reverse stock split of the Company's common stock and
increase the number of authorized shares of common stock to 50,000,000. The
stock splits have been retroactively reflected in the accompanying financial
statements and notes for all periods presented.
In October 1997, the Company completed an initial public offering (the IPO)
of 2,735,000 shares of its common stock, inclusive of 435,000 shares exercised
to cover over-allotments. The sale of common stock resulted in net proceeds to
the Company of approximately $34,650,000, after deducting all expenses related
to the IPO.
(5) PREFERRED STOCK
In connection with the IPO, the Company's redeemable convertible preferred
stock was converted into 8,108,258 shares of common stock. Thereafter, the
Company's certificate of incorporation was amended to authorize 1,000,000 shares
of preferred stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend rights and rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or
designation of such series. At December 31, 1997, the Company has no issued or
outstanding shares of preferred stock.
(6) STOCK OPTION PLANS
In 1995, the Company's Board of Directors (the Board) approved the 1995
Stock Plan, which provides for the granting of incentive stock options (ISOs)
and nonqualified stock options. Prior to the adoption of the 1995 Stock Plan,
the Board granted options under the 1982 Employee Incentive Stock Option Plan,
the 1986 Nonqualified Stock Option Plan and the 1986 Stock Plan. Following the
completion of the IPO, the Company adopted the 1997 Stock Plan, the 1997
Employee Stock Purchase Plan and the 1997 Nonemployee Director Stock Option
Plan, for which the Company reserved 750,000, 375,000 and 95,000 shares of
common stock, respectively, for future issuance.
Under the 1995 and 1997 Stock Plans (the Plans), the Company may issue
options to purchase up to 2,687,300 shares of common stock, of which 556,200
options are available for grant as of December 31, 1997. ISOs may be granted at
an exercise price not less than the fair market value per share of common stock
on the date of grant, as determined by the Board. The price per share relating
to each nonqualified option granted under the Plans shall not be less than the
lesser of (i) the book value per share of common stock as of the end of the
Company's fiscal year immediately preceding the date of grant or (ii) 50% of the
fair market value per share of common stock on the date of grant. Vesting of the
options is determined by the Board, and the options expire 8 years from the date
of grant. An employee may convert his or her unexercised ISOs into nonqualified
options at any time prior to the expiration of such ISOs.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which requires the measurement of
the fair value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to the financial statements. As permitted
by SFAS No. 123, the Company will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
has elected the disclosure-only alternative under SFAS No. 123 for options
granted using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The
F-9
<PAGE> 30
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
weighted average fair value per share of options granted during 1995, 1996 and
1997 was $0.46, $0.17 and $5.64, respectively. The weighted average assumptions
are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- ----------
<S> <C> <C> <C>
Risk-free interest rate...................... 6.5% 6.3% 5.1 - 6.0%
Expected dividend yield...................... -- -- --
Expected lives............................... 7 years 7 years 7 years
Expected volatility.......................... 80% 80% 80%
</TABLE>
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income (loss) and basic, diluted and pro forma
diluted net income (loss) per common and potential common share would have been
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ---------
<S> <C> <C> <C>
Net income (loss), as reported....................... $(3,783,680) $(5,054,863) $ 130,755
=========== =========== =========
Net income (loss), pro forma......................... $(3,812,217) $(5,105,339) $(320,629)
=========== =========== =========
Net income (loss) per share, as reported
Basic.............................................. $ (5.07) $ (6.64) $ 0.04
=========== =========== =========
Diluted............................................ $ (5.07) $ (6.64) $ 0.01
=========== =========== =========
Pro forma diluted.................................. $ (0.84) $ (0.57) $ 0.01
=========== =========== =========
Net income (loss) per share, pro forma
Basic.............................................. $ (5.11) $ (6.71) $ (0.10)
=========== =========== =========
Diluted............................................ $ (5.11) $ (6.71) $ (0.03)
=========== =========== =========
Pro forma diluted.................................. $ (0.85) $ (0.58) $ (0.03)
=========== =========== =========
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
may not be representative of that to be expected in future years.
The following table summarizes information about options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING EXERCISE PRICE NUMBER EXERCISE PRICE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PER SHARE OUTSTANDING PER SHARE
- -------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .10 - 1.90 1,642,550 6.27 $ .44 516,879 $.19
4.10 -- 10.00 294,750 7.36 4.67 -- --
18.88 -- 21.88 193,800 7.80 19.38 -- --
---------
2,131,100
=========
</TABLE>
F-10
<PAGE> 31
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following schedule summarizes the activity under the stock option plans
for the three-year period ended December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER WEIGHTED AVERAGE
SHARES SHARE PRICE PER SHARE
--------- ------------ ----------------
<S> <C> <C> <C>
Outstanding at December 31, 1994............... 220,329 $ 1.20 $1.20
Granted...................................... 540,399 .60 .60
Exercised.................................... (6,678) .60 - 1.20 .73
Terminated................................... (328,028) .60 - 1.20 1.00
--------- ------------ -----
Outstanding at December 30, 1995............... 426,022 .60 .60
Granted...................................... 1,881,259 .10 - 1.90 .22
Exercised.................................... (84,137) .10 - .60 .10
Terminated................................... (518,802) .10 - .60 .51
--------- ------------ -----
Outstanding at December 28, 1996............... 1,704,342 .10 - 1.90 .23
Granted...................................... 784,700 1.90 - 21.88 7.29
Exercised.................................... (331,448) .10 - 1.90 .58
Terminated................................... (26,494) .10 - 8.50 2.56
--------- ------------ -----
Outstanding at December 31, 1997............... 2,131,100 $.10 - 21.88 $2.76
========= ============ =====
Exercisable at December 31, 1997............... 517,816 $.10 - 1.90 $0.19
========= ============ =====
</TABLE>
In 1997, the Company granted one officer and one director options to
purchase in total 143,750 shares of common stock at an exercise price of $1.90
per share. At the date of grant, the estimated fair value per share of the
Company's common stock exceeded the exercise price of the options, and
accordingly, the Company has recorded deferred compensation of $191,875 related
to this difference at the date of grant. For the year ended December 31, 1997,
the Company has recorded compensation expense of $42,718 related to these
options grants.
The exercise price of all other options outstanding represents the fair
market value per share of common stock as of the date of grant.
(7) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This standard requires, among other things,
recognition of future tax effects, measured by enacted tax rates, attributable
to deductible temporary differences between the financial statement and income
tax bases of assets and liabilities.
The approximate income tax effects of these temporary differences are as
follows:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Net operating loss and federal tax credit
carryforwards............................... $ 12,291,000 $ 10,689,000
Reserves not yet deductible for tax
purposes.................................... 282,000 344,000
Depreciation.................................. 145,000 101,000
Deferred revenue.............................. 43,000 174,000
Capitalized research and development
expenses.................................... 1,276,000 2,284,000
Valuation allowance........................... (14,037,000) (13,592,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
F-11
<PAGE> 32
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has available net operating loss carryforwards of approximately
$23,000,000 and federal research and development tax credit carryforwards of
approximately $1,500,000 as of December 31, 1997 to reduce future income tax
liabilities. These carryforwards are subject to review and possible adjustment
by the appropriate taxing authorities and expire from 1999 through 2011 as
follows:
<TABLE>
<CAPTION>
RESEARCH AND
NET OPERATING LOSS DEVELOPMENT TAX
FISCAL YEAR CARRYFORWARDS CREDIT CARRYFORWARDS
----------- ------------------ --------------------
<S> <C> <C>
1999.................................. $ 3,358,000 $ --
2000.................................. 3,659,000 --
2001.................................. 2,870,000 1,252,000
2002-2006............................. 1,369,000 150,000
2007-2011............................. 11,744,000 98,000
----------- ----------
$23,000,000 $1,500,000
=========== ==========
</TABLE>
The Company has recorded a 100% valuation allowance against the net
deferred tax asset as of December 28, 1996 and December 31, 1997, as the Company
believes that it is more likely than not that it will not be able to realize
this asset. The decrease in the valuation allowance in 1997 primarily relates to
the Company's operating results.
Pursuant to the Tax Reform Act of 1986, the utilization of net operating
loss carryforwards for tax purposes may be subject to an annual limitation if a
cumulative change of ownership of more than 50% occurs over a three-year period.
As a result of the Company's preferred stock financings, such a change in
ownership occurred. As a result of this ownership change, the utilization of
$17,000,000 of the Company's net operating loss carryforwards will be limited to
approximately $325,000 per year. The Company is currently determining whether
the IPO resulted in another ownership change. If so, the utilization of
additional net operating loss carryforwards may be limited.
(8) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases facilities under an operating lease that expires in June
2002. The approximate future minimum rental payments under this lease, as
amended, are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
1998........................................................ $ 444,000
1999........................................................ 504,000
2000........................................................ 564,000
2001........................................................ 575,000
2002........................................................ 293,000
----------
$2,380,000
==========
</TABLE>
Rent expense was approximately $234,000, $244,000 and $346,000 for the
years ended December 30, 1995, December 28, 1996 and December 31, 1997,
respectively.
(b) Royalties
The Company has entered into several software license agreements that
provide the Company with exclusive worldwide licenses to distribute or utilize
certain patented computer software. The Company is required to pay royalties on
all related sales. Under one software license agreement, as amended, the Company
is obligated to make minimum quarterly royalty payments from 1995 through 1999.
The minimum payments
F-12
<PAGE> 33
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are noncancelable and nonrefundable, but any minimum payments in excess of
amounts due for actual license sales in any quarter may be used as a credit
against future royalty fees in excess of the specified minimum payments. The
minimum royalty payments under this agreement are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
1998........................................................ $490,000
1999........................................................ 450,000
--------
$940,000
========
</TABLE>
Royalty expense under royalty agreements was $101,000, $735,000 and
$902,892 for fiscal 1995, 1996 and 1997, respectively.
(c) Legal Proceedings
From time to time, the Company may be exposed to litigation relating to its
products and operations. The Company is not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company's financial conditions or results of operations.
(9) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Payroll and payroll-related........................ $ 537,959 $ 681,923
Royalties.......................................... 213,360 372,853
Outside commissions................................ 255,519 143,543
Customer deposits.................................. 382,075 1,085,521
Other.............................................. 936,014 1,084,745
---------- ----------
$2,324,927 $3,368,585
========== ==========
</TABLE>
(10) EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code covering all eligible employees, as defined. The Plan
allows for employees to defer a portion of their salary up to 15% of pretax
compensation. While the Company has the discretion to make contributions to the
plan, no such contributions were made in 1995, 1996 or 1997.
F-13
<PAGE> 34
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Revenues by geographic destination and as a percentage of total revenues
are as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC AREA BY DESTINATION 1995 1996 1997
------------------------------ ---------- ---------- -----------
<S> <C> <C> <C>
North America......................... $3,965,078 $8,042,984 $17,159,771
Europe................................ 218,559 914,314 2,009,926
Asia.................................. 156,144 49,467 83,249
Other................................. 15,223 -- 316,648
---------- ---------- -----------
$4,355,004 $9,006,765 $19,569,594
========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC AREA BY DESTINATION 1995 1996 1997
------------------------------ ---- ---- ----
<S> <C> <C> <C>
North America....................................... 91% 89% 88%
Europe.............................................. 5 10 10
Asia................................................ 4 1 1
Other............................................... -- -- 1
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>
(12) VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts
receivable reserve account:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGES TO END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995............................ $ 20,000 $110,000 $ -- $130,000
1996............................ 130,000 135,000 (54,884) 210,116
1997............................ $210,116 $ 70,000 $ -- $280,116
</TABLE>
F-14
<PAGE> 35
CONCORD COMMUNICATIONS, INC.
FORM 10-K, DECEMBER 31, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized this 20th day of March, 1998.
Concord Communications, Inc.
/s/ GARY E. HAROIAN
--------------------------------------
Name: Gary E. Haroian
Title: Vice President of Finance
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN A. BLAESER Chief Executive Officer, March 20, 1998
- --------------------------------------------------- President and Director
John A. Blaeser (Principal Executive Officer)
/s/ GARY E. HAROIAN Chief Financial Officer,Vice March 20, 1998
- --------------------------------------------------- President of Finance,
Gary E. Haroian Treasurer and Clerk
(Principal Financial and
Accounting Officer)
/s/ FREDERICK W.W. BOLANDER Director March 20, 1998
- ---------------------------------------------------
Frederick W.W. Bolander
/s/ RICHARD M. BURNES, JR. Director March 20, 1998
- ---------------------------------------------------
Richard M. Burnes, Jr.
/s/ ROBERT C. HAWK Director March 20, 1998
- ---------------------------------------------------
Robert C. Hawk
/s/ JOHN ROBERT HELD Director March 20, 1998
- ---------------------------------------------------
John Robert Held
/s/ DEEPAK KAMRA Director March 20, 1998
- ---------------------------------------------------
Deepak Kamra
/s/ ROBERT M. WADSWORTH Director March 20, 1998
- ---------------------------------------------------
Robert M. Wadsworth
</TABLE>
<PAGE> 36
EXHIBIT INDEX
The following designated exhibits are either filed herewith or, where
information is provided under the SEC Document Reference heading corresponding
to such exhibit, incorporated by reference to such filing.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION SEC DOCUMENT REFERENCE
- ------- ----------- ----------------------
<S> <C> <C>
3.01 Restated Articles of Organization of the
Company
3.02 Restated By-laws of the Company
10.01 Working Capital Loan Agreement between the Exhibit No. 10.01 to Registration
Company and Silicon Valley Bank dated Statement on Form S-1 (No. 333-33227)
April 3, 1997
10.02 Revolving Promissory Note made by the Exhibit No. 10.02 to Registration
Company in favor of Silicon Valley Bank Statement on Form S-1 (No. 333-33227)
10.03 Equipment Line of Credit Letter Agreement Exhibit No. 10.03 to Registration
between the Company and Fleet Bank dated Statement on Form S-1 (No. 333-33227)
as of June 9, 1997
10.04 1995 Stock Plan of the Company Exhibit No. 10.04 to Registration
Statement on Form S-1 (No. 333-33227)
10.05 1997 Stock Plan of the Company Exhibit No. 10.05 to Registration
Statement on Form S-1 (No. 333-33227)
10.06 1997 Employee Stock Purchase Plan of the Exhibit No. 10.06 to Registration
Company Statement on Form S-1 (No. 333-33227)
10.07 1997 Non-Employee Director Stock Option Exhibit No. 10.07 to Registration
Plan of the Company Statement on Form S-1 (No. 333-33227)
10.08 The Profit Sharing/401(K) Plan of the Exhibit No. 10.08 to Registration
Company Statement on Form S-1 (No. 333-33227)
10.09 Lease Agreement between the Company and Exhibit No. 10.09 to Registration
John Hancock Mutual Life Insurance Company Statement on Form S-1 (No. 333-33227)
dated March 17, 1994, as amended on March
25,1997
10.10 First Amendment to Lease Agreement between Exhibit No. 10.10 to Registration
the Company and John Hancock Mutual Life Statement on Form S-1 (No. 333-33227)
Insurance Company dated March 25, 1997
10.11 Form of Indemnification Agreement for Exhibit No. 10.11 to Registration
directors and officers of the Company Statement on Form S-1 (No. 333-33227)
10.12 Restated Common Stock Registration Rights Exhibit No. 10.12 to Registration
Agreement between the Company and certain Statement on Form S-1 (No. 333-33227)
investors dated August 7, 1986
10.13 Amended and Restated Registration Rights Exhibit No. 10.13 to Registration
Agreement between the Company and certain Statement on Form S-1(No. 333-33227)
investors dated December 28, 1995
10.14 Management Change in Control Agreement Exhibit No. 10.14 to Registration
between the Company and John A. Blaeser Statement on Form S-1 (No. 333-33227)
dated as of August 7, 1997
10.15 Management Change in Control Agreement Exhibit No. 10.15 to Registration
between the Company and Kevin J. Conklin Statement on Form S-1 (No. 333-33227)
dated as of July 23, 1997
10.16 Management Change in Control Agreement Exhibit No. 10.16 to Registration
between the Company and Ferdinand Engel Statement on Form S-1 (No. 333-33227)
dated as of July 23, 1997
10.17 Management Change in Control Agreement Exhibit No. 10.17 to Registration
between the Company and Gary E. Haroian Statement on Form S-1 (No. 333-33227)
dated as of July 23, 1997
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION SEC DOCUMENT REFERENCE
- ------- ----------- ----------------------
<S> <C> <C>
10.18 Management Change in Control Agreement Exhibit No. 10.18 to Registration
between the Company and Daniel D. Statement on Form S-1 (No. 333-33227)
Phillips, Jr. dated as of July 23, 1997
10.19 Stock Option Agreement dated January 1, Exhibit No. 10.19 to Registration
1996 between the Company and John A. Statement on Form S-1 (No. 333-33227)
Blaeser
10.20 Stock Option Agreement dated January 1, Exhibit No. 10.20 to Registration
1996 between the Company and John A. Statement on Form S-1 (No. 333-33227)
Blaeser
10.21 Letter Agreement between the Company and Exhibit No. 10.21 to Registration
Silicon Valley Bank dated March 25, 1996 Statement on Form S-1 (No. 333-33227)
together with the Loan Modification
Agreement dated November 14, 1996
10.22 Form of Shrink-Wrap License Exhibit No. 10.22 to Registration
Statement on Form S-1 (No. 333-33227)
13.01 Pages 12-28 of the Registrant's 1997
Annual Report to Stockholders
21.01 Subsidiaries of the Company
23.01 Consent of Arthur Andersen LLP
27.01 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.01
FEDERAL IDENTIFICATION
NO. 04-2710876
THE COMMONWEALTH OF MASSACHUSETTS
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
RESTATED ARTICLES OF ORGANIZATION
(GENERAL LAWS, CHAPTER 156B, SECTION 74)
We, John A. Blaeser , *President,
---------------------------------------------------------------
and Gary E. Haroian , *Clerk,
------------------------------------------------------------------
of Concord Communications, Inc. ,
----------------------------------------------------------------------------
(Exact name of corporation)
located at 33 Boston Post Road West, Marlboro, MA 01752 ,
---------------------------------------------------------------------
(Street address of corporation in Massachusetts)
do hereby certify that the following Restatement of the Articles of Organization
was duly adopted at a meeting held on September 9, 1997 by a vote of the
directors/or:
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Equivalent Stock and shares outstanding,
17,760,443 shares of Common Stock of 18,287,564 +
- --------------- ------------------------------ -----------------
(type, class & series, if any)
Series A Convertible shares outstanding
7,222,804 shares of Preferred of 7,222,804 +
- --------------- ------------------------------ -----------------
(type, class & series, if any)
Series A-1 Convertible shares outstanding, and
72,140 shares of Preferred of 72,140 +
- --------------- ------------------------------ -----------------
(type, class & series, if any)
Series B Convertible shares outstanding,
8,921,578 shares of Preferred of 8,921,578 +
- --------------- ------------------------------ -----------------
(type, class & series, if any)
</TABLE>
+Does not give effect to a Reverse Stock Split effected on 10/9/97, but does
indicate actual number of votes cast by each such series of stock
**being at least a majority of each type, class or series outstanding and
entitled to vote thereon:
ARTICLE I
The name of the corporation is:
Concord Communications, Inc.
ARTICLE II
The purpose of the corporation is to engage in the following
business activities:
To develop, market and support automated, software - based performance analysis
and reporting solutions for management of computer networks and in general to
carry on any and all purposes permitted to a corporation organized under the
provisions of Massachusetts General Laws, Chapter 156B.
*Delete the inapplicable words. **Delete the inapplicable clause.
<PAGE> 2
NOTE: IF THE SPACE PROVIDED UNDER ANY ARTICLE OR ITEM ON THIS FORM IS
INSUFFICIENT, ADDITIONS SHALL BE SET FORTH ON OF SEPARATE 8 1/2 X 11 SHEETS OF
PAPER WITH A LEFT MARGIN OF AT LEAST 1 INCH. ADDITIONS TO MORE THAN ONE ARTICLE
MAY BE MADE ON A SINGLE SHEET SO LONG AS EACH ARTICLE REQUIRING EACH ADDITION IS
CLEARLY INDICATED.
<PAGE> 3
ARTICLE III
State the total number of shares and par value, if any, of each class of stock
which the corporation is authorized to issue.
<TABLE>
<CAPTION>
- ------------------------------------------------ --------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- ------------------ ----------------------------- ---------------- ------------------------------- -------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ------------------ ----------------------------- ---------------- ------------------------------- -------------------
<S> <C> <C> <C> <C>
Common: Common: 50,000,000 $.01
- ------------------ ----------------------------- ---------------- ------------------------------- -------------------
- ------------------ ----------------------------- ---------------- ------------------------------- -------------------
Preferred: Preferred: 1,000,000 $.01
- ------------------ ----------------------------- ---------------- ------------------------------- -------------------
- ------------------ ----------------------------- ---------------- ------------------------------- -------------------
</TABLE>
ARTICLE IV
If more than one class of stock is authorized, state a distinguishing
designation for each class. Prior to the issuance of any shares of a class, if
shares of another class are outstanding, the corporation must provide a
description of the preferences, voting powers, qualifications, and special or
relative rights or privileges of that class and of each other class of which
shares are outstanding and of each series then established within any class.
See Continuation Sheets 4.1 and 4.2 which are attached hereto and incorporated
herein by reference.
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are:
None.
ARTICLE VI
**Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or for
limiting, defining, or regulating the powers of the corporation, or of its
directors or stockholders, or of any class of stockholders:
See Continuation Sheets 6.1 through 6.7 which are attached hereto and
incorporated herein by reference.
**If there are no provisions state "None".
NOTE: THE PRECEDING SIX (6) ARTICLES ARE CONSIDERED TO BE PERMANENT AND MAY ONLY
BE CHANGED BY FILING APPROPRIATE ARTICLES OF AMENDMENT.
<PAGE> 4
ARTICLE VII
The effective date of the restated Articles of Organization of the corporation
shall be the date approved and filed by the Secretary of the Commonwealth. If a
later effective date is desired, specify such date which shall not be more than
thirty days after the date of filing.
ARTICLE VIII
THE INFORMATION CONTAINED IN ARTICLE VIII IS NOT A PERMANENT PART OF THE
ARTICLES OF ORGANIZATION.
a. The street address (post office boxes are not acceptable) of the principal
office of the corporation in Massachusetts is: 33 Boston Post Road West,
Marlboro, MA 01752
b. The name, residential address and post office address of each director and
officer of the corporation is as follows:
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
President:
Treasurer:
Clerk: SEE CONTINUATION SHEET 8.1
Directors:
c. The fiscal year (i.e., tax year) of the corporation shall end on the last
day of the month of: December
d. The name and business address of the resident agent, if any, of the
corporation is: N/A
**We further certify that the foregoing Restated Articles of Organization affect
no amendments to the Articles of Organization of the corporation as heretofore
amended, except amendments to the following articles. Briefly describe
amendments below:
Articles III, IV and VI are hereby amended. See Continuation Sheet 8.2 for
further description of such amendments.
SIGNED UNDER THE PENALTIES OF PERJURY, this 20th day of October, 1997,
/s/ John A. Blaeser , *President,
- -------------------------------------------------------------------
/s/ Gary E. Haroian , *Clerk.
- -------------------------------------------------------------------
*Delete the inapplicable words. **If there are no amendments, state 'None'.
<PAGE> 5
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(GENERAL LAWS, CHAPTER 156B, SECTION 74)
====================================================
I hereby approve the within Restated Articles of
Organization and, the filing fee in the amount of
$ having been paid, said articles are deemed to
have been filed with me this day of 19 .
Effective date:
------------------------------
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF DOCUMENT TO BE SENT TO:
Louis J. Marett, Esq.
---------------------------------------------------------
Testa, Hurwitz & Thibeault, LLP
---------------------------------------------------------
High Street Tower
---------------------------------------------------------
125 High Street
---------------------------------------------------------
Boston, MA 02110
---------------------------------------------------------
Telephone: (617) 248-7000
---------------------------------------------------------
<PAGE> 6
CONTINUATION SHEET 4.2
CONCORD COMMUNICATIONS, INC.
Restated Articles of Organization
ARTICLE IV
The following is a statement of the designations, preferences, voting
powers, qualifications, and special or relative rights and privileges in respect
of the authorized capital stock of the Corporation.
The shares of Common Stock, par value $.01 per share, authorized under
these Restated Articles of Organization shall be designated the "Common Stock."
The shares of Preferred Stock authorized under these Restated Articles of
Organization shall be designated the "Preferred Stock."
A. Issuance of Preferred Stock in Series.
The Preferred Stock may be issued in one or more series at such time or
times and for such consideration or considerations as the Board of Directors may
determine. Each series shall be so designated as to distinguish the shares
thereof from the shares of all other series and classes. Except as to the
relative preferences, powers, qualifications, rights and privileges referred to
in paragraph B below, in respect of any or all of which there may be variations
between different series, all shares of Preferred Stock shall be identical.
Different series of Preferred Stock shall not be construed to constitute
different classes of shares for the purpose of voting by classes.
B. Authority to Establish Variations Between Series of Preferred
Stock.
The Board of Directors is expressly authorized, subject to the
limitations prescribed by law and the provisions of these Restated Articles of
Organization, to provide by adopting a vote or votes, a certificate of which
shall be filed in accordance with the Business Corporation Law of the
Commonwealth of Massachusetts, for the issue of the Preferred Stock in one or
more series, each with such designations, preferences, voting powers,
qualifications, special or relative rights and privileges as shall be stated in
the vote or votes creating such series. The authority of the Board of Directors
with respect to each such series shall include without limitation of the
foregoing the right to determine and fix:
(1) the distinctive designation of such series and the number of shares
to constitute such series;
(2) the rate at which dividends on the shares of such series shall be
declared and paid, or set aside for payment, whether dividends at the rate so
determined shall be cumulative, and whether the shares of such series shall be
entitled to any participating or other dividends in addition to dividends at the
rate so determined, and if so on what terms;
(3) the right, if any, of the corporation to redeem shares of the
particular series and, if redeemable, the price, terms and manner of such
redemption;
(4) the special and relative rights and preferences, if any, and the
amount or amounts per share, which the shares of such series shall be entitled
to receive upon any voluntary or involuntary liquidation, dissolution or winding
up of the corporation;
<PAGE> 7
CONTINUATION SHEET 4.2
(5) the terms and conditions, if any, upon which shares of such series
shall be convertible into, or exchangeable for, shares of stock of any other
class or classes, including the price or prices or the rate or rates of
conversion or exchange and the terms of adjustment, if any;
(6) the obligation, if any, of the corporation to retire or purchase
shares of such series pursuant to a sinking fund or fund of a similar nature or
otherwise, and the terms and conditions of such obligation;
(7) voting rights, if any;
(8) limitations, if any, on the issuance of additional shares of such
series or any shares of any other series of Preferred Stock; and
(9) such other preferences, powers, qualifications, special or relative
rights and privileges thereof as the Board of Directors may deem advisable and
are not inconsistent with law and the provisions of these Articles.
C. Statement of Voting Powers, Qualifications, Special or Relative
Rights and Privileges in Respect of Shares of Common Stock.
After the requirements with respect to preferential dividends on the
Preferred Stock (fixed in accordance with the provisions of paragraph B above)
shall have been met and after the corporation shall have complied with all the
requirements, if any, with respect to the setting aside of sums as sinking funds
or redemption or purchase accounts (fixed in accordance with the provisions of
said paragraph B), then and not otherwise the holders of Common Stock shall be
entitled to receive such dividends as may be declared from time to time by the
Board of Directors.
After distribution in full of the preferential amount (fixed in
accordance with the provisions of said paragraph B) to be distributed to the
holders of Preferred Stock in the event of voluntary or involuntary liquidation,
distribution or sale of assets, dissolution or winding up of the corporation,
the holders of the Common Stock shall be entitled to receive all the remaining
assets of the corporation, tangible and intangible, of whatever kind available
for distribution to the stockholders ratably in proportion to the number of
shares of Common Stock held by them respectively.
Except as may otherwise be required by law or the provision of these
Restated Articles of Organization, or by the Board of Directors pursuant to
authority granted in these Restated Articles of Organization, each holder of
Common Stock shall have one vote in respect of each share of stock held by him
in all matters voted upon by the stockholders.
<PAGE> 8
CONTINUATION SHEET 6.1
CONCORD COMMUNICATIONS, INC.
Restated Articles of Organization
ARTICLE VI
Other provisions for the conduct and regulation of the business and
affairs of the corporation, for its voluntary dissolution, or for limiting,
defining, or regulating the powers of the corporation, or of its directors or
stockholders, or of any class of stockholders, are as follows:
A. Board of Directors.
1. Number, Election and Qualification. The number of directors
shall be fixed only by vote of the Board of Directors.
The directors of the corporation shall be classified with respect to
the time for which they severally hold office, into three classes, as nearly
equal in number as possible; the term of office of those of the first class
("Class I Directors") to continue until the first annual meeting following the
date the corporation first had a class of equity securities registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and until their successors
are duly elected and qualified; the term of office of those of the second class
("Class II Directors") to continue until the second annual meeting following the
date the corporation first had a class of equity securities registered under the
Exchange Act and until their successors are duly elected and qualified; and the
term of office of those of the third class ("Class III Directors") to continue
until the third annual meeting following the date the corporation first had a
class of equity securities registered under the Exchange Act and until their
successors are duly elected and qualified. At each annual meeting of the
corporation, the successors to the class of directors whose term expires at that
meeting shall be elected to hold office for a term continuing until the annual
meeting held in the third year following the year of their election and until
their successors are duly elected and qualified. If the authorized number of
directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as nearly equal
as possible. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of an incumbent director.
2. Vacancies. Vacancies and newly-created directorships,
whether resulting from an increase in the size of the Board of Directors, from
the death resignation, disqualification or removal of a director or otherwise,
shall be filled solely by the affirmative vote a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors. Any director elected in accordance with the immediately preceding
sentence shall hold office for the remainder of the full term of the class of
directors in which the vacancy occurred or the new directorship was created and
until such director's successor shall have been elected and qualified.
3. Enlargement of the Board. The Board of Directors may only
be enlarged by the vote of a majority of the directors then in office.
<PAGE> 9
CONTINUATION SHEET 6.2
4. Tenure. Except as otherwise provided by law, these Restated
Articles of Organization or the By-laws, directors shall hold office until the
third year following the year of their election and until their successors are
duly elected and qualified. Any director may resign by delivering his written
resignation to the corporation at its principal office or to the President,
Clerk or Secretary. Such resignation shall be effective upon receipt unless it
is specified to be effective at some other time or upon the happening of some
other event.
5. Removal. Any director elected by the stockholders, or by
the Board of Directors to fill a vacancy, may be removed only for cause by a
vote of a majority of directors then in office or by the stockholders, after
reasonable notice and opportunity to be heard before the annual meeting of
stockholders at which his or her removal is considered and by the affirmative
vote of the holders of at least eighty percent (80%) of the combined voting
power of the shares of capital stock of the Corporation outstanding and entitled
to vote for the election of directors.
For purposes of the foregoing paragraph, "cause", with respect
to the removal of any director, shall mean only (1) conviction of a felony, (2)
declaration of unsound mind by order of court, (3) gross dereliction of duty,
(4) commission of an action involving moral turpitude, or (5) commission of an
action which constitutes intentional misconduct or a knowing violation of law if
such action in either event results in improper substantial personal benefit and
a material injury to the Corporation.
6. Amendment. Notwithstanding any other provision of these
Restated Articles of Organization, or any provision of law which might otherwise
permit a lesser vote or no vote, the affirmative vote of the holders of at least
eighty percent (80%) of the combined voting power of the shares of capital stock
of the corporation outstanding and entitled to vote for the election of
directors shall be required to alter, amend or repeal this Article VI, Part A.
B. Liability of Directors.
The corporation eliminates the personal liability of each director to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director notwithstanding any provision of law imposing such liability;
provided, however, that, to the extent provided by applicable law, this
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 61 or 62 or
successor provisions of the Massachusetts Business Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
This provision shall not eliminate or limit the liability of a director of the
corporation for any act or omission occurring prior to the date on which this
provision becomes effective. No amendment to or repeal of this provision shall
apply to or have any effect on the liability or alleged liability of any
director for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal.
C. Indemnification.
<PAGE> 10
CONTINUATION SHEET 6.3
1. Actions, Suits and Proceedings. The corporation shall
indemnify each person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was, or has agreed to become, a director or officer of the corporation, or
is or was serving, or has agreed to serve, at the request of the corporation, as
a director or officer of, or in a similar capacity with, another organization or
in any capacity with respect to any employee benefit plan of the corporation
(all such persons being referred to hereafter as an "Indemnitee"), or by reason
of any action alleged to have been taken or omitted in such capacity, against
all expenses (including attorneys' fees), judgments and fines incurred by him or
on his behalf in connection with such action, suit or proceeding and any appeal
therefrom, unless such indemnification is prohibited by the Business Corporation
Law of the Commonwealth of Massachusetts. Notwithstanding anything to the
contrary in this Article, except as set forth in Section 5 below, the
corporation shall not indemnify an Indemnitee seeking indemnification in
connection with a proceeding (or part thereof) initiated by the Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
corporation.
2. Settlements. The right to indemnification conferred in this
Article shall include the right to be paid by the corporation for amounts paid
in settlement of any such action, suit or proceeding and any appeal therefrom,
and all expenses (including attorneys' fees) incurred in connection with such
settlement, pursuant to a consent decree or otherwise, unless and to the extent
it is determined pursuant to Section 5 below that the Indemnitee did not act in
good faith in the reasonable belief that his action was in the best interests of
the corporation or, to the extent such matter relates to service with respect to
an employee benefit plan, in the best interests of the participants or
beneficiaries of such employee benefit plan.
3. Notification and Defense of Claim. As a condition precedent
to his right to be indemnified, the Indemnitee must notify the corporation in
writing as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the corporation is so
notified, the corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
corporation to the Indemnitee of its election so to assume such defense, the
corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with the such
claim, other than as provided below in this Section 3. The Indemnitee shall have
the right to employ his own counsel in connection with such claim, but the fees
and expenses of such counsel incurred after notice from the corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the corporation, except
as otherwise expressly provided by this Article. The corporation shall not be
entitled, without the consent of
<PAGE> 11
CONTINUATION SHEET 6.4
the Indemnitee, to assume the defense of any claim brought by or in the right of
the corporation or as to which counsel for the Indemnitee shall have reasonably
made the conclusion provided for in clause (ii) above.
4. Advance of Expenses. Subject to the provisions of Section 5
below, in the event that the corporation does not assume the defense pursuant to
Section 3 of this Article of any action, suit, proceeding or investigation of
which the corporation receives notice under this Article, any expenses
(including attorneys' fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal therefrom shall
be paid by the corporation in advance of the final disposition of such matter,
provided, however, that the payment of such expenses incurred by an Indemnitee
in advance of the final disposition of such matter shall be made only upon
receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts
so advanced in the event that it shall ultimately be determined that the
Indemnitee is not entitled to be indemnified by the corporation as authorized in
this Article. Such undertaking may be accepted without reference to the
financial ability of the Indemnitee to make such repayment.
5. Procedure for Indemnification. In order to obtain
indemnification or advancement of expenses pursuant to Section 1, 2 or 4 of this
Article, the Indemnitee shall submit to the corporation a written request,
including in such request such documentation and information as is reasonably
available to the Indemnitee and is reasonably necessary to determine whether and
to what extent the Indemnitee is entitled to indemnification or advancement of
expenses. Any such indemnification or advancement of expenses shall be made
promptly, and in any event within sixty days after receipt by the corporation of
the written request of the Indemnitee, unless the corporation determines, by
clear and convincing evidence, within such sixty-day period that the Indemnitee
did not meet the applicable standard of conduct set forth in Section 1 or 2, as
the case may be. Such determination shall be made in each instance by (a) a
majority vote of a quorum of the directors of the corporation, (b) a majority
vote of a quorum of the outstanding shares of stock of all classes entitled to
vote for directors, voting as a single class, which quorum shall consist of
stockholders who are not at that time parties to the action, suit or proceeding
in question, (c) independent legal counsel (who may be regular legal counsel to
the corporation), or (d) a court of competent jurisdiction.
6. Remedies. The right to indemnification or advances as
granted by this Article shall be enforceable by the Indemnitee in any court of
competent jurisdiction if the corporation denies such request, in whole or in
part, or if no disposition thereof is made within the sixty-day period referred
to above in Section 5. Unless otherwise provided by law, the burden of proving
that the Indemnitee is not entitled to indemnification or advancement of
expenses under this Article shall be on the corporation. Neither the failure of
the corporation to have made a determination prior to the commencement of such
action that indemnification is proper in the circumstances because the
Indemnitee has met the applicable standard of conduct, nor an actual
determination by the corporation pursuant to Section 5 that the Indemnitee has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the Indemnitee has not met such applicable standard of
conduct. The Indemnitee's expenses (including attorneys' fees) incurred in
connection with successfully establishing his right to
<PAGE> 12
CONTINUATION SHEET 6.5
indemnification, in whole or in part, in any such proceeding shall also be
indemnified by the corporation.
7. Subsequent Amendment. No amendment, termination or repeal
of this Article or of the relevant provisions of Chapter 156B of the
Massachusetts General Laws or any other applicable laws shall affect or diminish
in any way the rights of any Indemnitee to indemnification under the provisions
hereof with respect to any action, suit, proceeding or investigation arising out
of or relating to any actions, transactions or facts occurring prior to the
final adoption of such amendment, termination or repeal.
8. Other Rights. The indemnification and advancement of
expenses provided by this Article shall not be deemed exclusive of any other
rights to which an Indemnitee seeking indemnification or advancement of expenses
may be entitled under any law (common or statutory), agreement or vote of
stockholders or directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
corporation, and shall continue as to an Indemnitee who has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Article shall be deemed to prohibit, and the corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article. In addition, the corporation may, to the extent authorized from time to
time by its Board of Directors, grant indemnification rights to other employees
or agents of the corporation or other persons serving the corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Article.
9. Partial Indemnification. If an Indemnitee is entitled under
any provision of this Article to indemnification by the corporation for some or
a portion of the expenses (including attorneys' fees), judgments, fines or
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with any action, suit, proceeding or investigation and any
appeal therefrom but not, however, for the total amount thereof, the corporation
shall nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
10. Insurance. The corporation may purchase and maintain
insurance, at its expense, to protect itself and any director, officer, employee
or agent of the corporation or another organization or employee benefit plan
against any expense, liability or loss incurred by him in any such capacity, or
arising out of his status as such, whether or not the corporation would have the
power to indemnify such person against such expense, liability or loss under
Chapter 156B of the Massachusetts General Laws.
11. Merger or Consolidation. If the corporation is merged into
or consolidated with another corporation and the corporation is not the
surviving corporation, the surviving corporation shall assume the obligations of
the corporation under this Article with respect to any action, suit, proceeding
or investigation arising out of or relating to any actions, transactions or
facts occurring prior to the date of such merger or consolidation.
<PAGE> 13
CONTINUATION SHEET 6.6
12. Savings Clause. If this Article or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
13. Subsequent Legislation. If the Massachusetts General Laws
are amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the corporation shall indemnify such persons to
the fullest extent permitted by the Massachusetts General Laws, as so amended.
D. Location of Stockholders' Meetings.
Meetings of the stockholders of the corporation may be held anywhere in
the United States.
E. Amendment of By-laws.
The directors of the corporation may make, amend or repeal the By-laws
in whole or in part, except with respect to any provision thereof which by law
or the By-laws requires action by the stockholders.
F. Issuance of Shares.
The whole or any part of the authorized but unissued shares of capital
stock of the corporation may be issued at any time or from time to time by the
Board of Directors without further action by the stockholders.
G. Corporation As Partner.
The corporation may become a partner in any business.
H. Certain Actions by Majority Vote.
The corporation, by vote of a majority of the stock outstanding and
entitled to vote thereon (or if there are two or more classes of stock entitled
to vote as separate classes, then by vote of a majority of each such class of
stock outstanding) may (i) authorize any amendment to these Restated Articles of
Organization, (ii) authorize the sale, lease or exchange of all or substantially
all of the corporation's property and assets, including its goodwill and (iii)
approve a merger or consolidation of the corporation with or into any other
corporation, provided that such amendment, sale, lease, exchange, merger or
consolidation shall have been approved by the Board of Directors or by a vote of
two-thirds of the stock outstanding and entitled to vote thereon (or if
<PAGE> 14
CONTINUATION SHEET 6.7
there are two or more classes of stock entitled to vote as separate classes,
then by vote of a majority of each such class of stock outstanding).
<PAGE> 15
CONTINUATION SHEET 8.1
<TABLE>
<CAPTION>
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
<S> <C> <C> <C>
PRESIDENT: John Blaeser 21 Georgetown Road 33 Boston Post Road West
Boxford, MA 01921 Suite 400
Marlboro, MA 01752
TREASURER: Gary Haroian 31 Tammer Lane 33 Boston Post Road West
Hopkinton, MA 01742 Suite 400
Marlboro, MA 01752
CLERK: Gary Haroian 31 Tammer Lane 33 Boston Post Road West
Hopkinton, MA 01742 Suite 400
Marlboro, MA 01752
DIRECTORS: John Blaeser 21 Georgetown Road 33 Boston Post Road West
Boxford, MA 01921 Suite 400
Marlboro, MA 01752
Rick Burnes 17 Pinkey Street Charles River Ventures
Boston, MA 02114 Bay Colony Corporate Center
1000 Winter Street, Ste. 3300
Waltham, MA 02154
Rob Wadsworth 27 Bogostow Circle Hancock Venture Partners
Millis, MA 02054 One Financial Center
44th Floor
Boston, MA 02111
Rick Bolander 1910 North Burling #A Apex Investment Partners
Chicago, Il 60614 233 South Wacker Drive
Suite 9600
Chicago, IL 60606
Deepak Kamra 75 Redwood Way Canaan Partners
Atherton, CA 94027 2884 Sand Hill Road, Suite 115
Menlo Park, CA 94025
Rob Held 116 Bear Hill Road 116 Bear Hill Road
Bolton, MA 01740 Bolton, MA 01740
Robert Hawk 7585 S. Biscay U.S. West Multimedia Comm.
Aurora, CO 80016 9785 Maroon Circle, Ste. 400
Englewood, CO 80112
</TABLE>
<PAGE> 16
CONTINUATION SHEET 8.2
At a special meeting of stockholders on September 9, 1997, the
stockholders of the corporation adopted amendments to the corporation's articles
of organization to (i) eliminate the terms of the Series A Convertible Preferred
Stock, the Series A-1 Convertible Preferred Stock and the Series B Convertible
Preferred Stock; (ii) authorize 1,000,000 shares of undesignated Preferred
Stock, par value $.01 per share (the "Blank-Check Preferred"); and (iii)
authorize the Board of Directors to determine the preferences, voting powers,
qualifications and special or relative rights or privileges of the Blank-Check
Preferred in accordance with Section 26 of Chapter 156B of the Massachusetts
General Laws.
<PAGE> 1
EXHIBIT 3.02
CONCORD COMMUNICATIONS, INC.
RESTATED BY-LAWS
ARTICLE I
Stockholders
1. Annual Meeting. The annual meeting of stockholders shall be held on
the date and at the time fixed, from time to time, by the directors, provided
that the date so fixed is within six months of the end of the fiscal year of the
corporation. The purposes for which the annual meeting is to be held, in
addition to those prescribed by law, by the Articles of Organization or by these
By-Laws, may be specified by the Directors or the President. In the event an
annual meeting has not been held on the date fixed in these By-Laws, a special
meeting in lieu of the annual meeting may be held with all the force and effect
of an annual meeting.
2. Special Meetings. Special meetings of stockholders may be called by
the President or by the Directors. Upon written application of one or more
stockholders who hold at least 10% of the capital stock entitled to vote at a
meeting, a special meeting shall be called by the Clerk, or in case of the
death, absence, incapacity or refusal of the Clerk, by any other officer.
Notwithstanding the immediately preceding sentence, if the corporation has a
class of voting stock registered under the Securities Exchange Act of 1934, as
amended, upon written application of one or more stockholders who hold at least
40% in interest of the capital stock entitled to vote at a meeting, a special
meeting shall be called by the Clerk, or in case of the death, absence,
incapacity or refusal of the Clerk, by any other officer.
3. Place of Meetings. All meetings of stockholders shall be held at the
principal office of the corporation unless a different place (within or without
Massachusetts, but within the United States) is fixed by the Directors or the
President and stated in the notice of the meeting.
<PAGE> 2
-2-
4. Notice of Meetings. A written notice of the place, date and hour of
all meetings of stockholders stating the purpose of the meeting shall be given
by the Clerk or an Assistant Clerk or by the person calling the meeting at least
seven days before the meeting unless such longer period is required by law to
each stockholder entitled to vote thereat and to each stockholder who under the
law, under the Articles of Organization or under these By-Laws, is entitled to
such notice, by leaving such notice with him or at his residence or usual place
of business, or by mailing it, postage prepaid, and addressed to such
stockholder at his address as it appears in the records of the corporation.
Whenever notice of a meeting is required to be given a stockholder under any
provision of the Massachusetts Business Corporation Law or of the Articles of
Organization or these By-Laws, a written waiver thereof, executed before or
after the meeting by such stockholder or his attorney thereunto authorized and
filed with the records of the meeting, shall be deemed equivalent to such
notice.
5. Notice of Stockholder Business. The following provisions of this
Section 5 shall apply to the conduct of business at any meeting of the
stockholders (as used in this Section 5, the term annual meeting shall include a
special meeting in lieu of annual meeting).
(a) At any meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) pursuant to the
corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in paragraph (b) of this
Section 5, who shall be entitled to vote at such meeting and who complies with
the notice procedures set forth in paragraph (b) of this Section 5.
(b) For business to be properly brought before any meeting of the
stockholders by a stockholder pursuant to clause (iii) of paragraph (a) of this
By-law, the stockholder must have
<PAGE> 3
-3-
given timely notice thereof in writing to the Clerk of the corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation: (i) in the case of any
annual meeting, not less than 60 days nor more than 90 days prior to the date
specified in Section 1 above for such annual meeting, regardless of any
postponements, deferrals or adjournments of that meeting to a later date;
provided, however, that if a special meeting in lieu of annual meeting of
stockholders is to be held on a date prior to the date specified in Section 1
above, and if less than seventy days' notice or prior public disclosure of the
date of such special meeting in lieu of annual meeting is given or made, notice
by the stockholder to be timely must be so delivered or received not later than
the close of business on the tenth day following the earlier of the date on
which notice of the date of such special meeting in lieu of annual meeting was
mailed or the day on which public disclosure was made of the date of such
special meeting in lieu of annual meeting; and (ii) in the case of a special
meeting (other than a special meeting in lieu of an annual meeting), not later
than the tenth day following the earlier of the day on which notice of the date
of the scheduled meeting was mailed or the day on which public disclosure was
made of the date of the scheduled meeting. A stockholder's notice to the Clerk
shall set forth as to each matter the stockholder proposes to bring before the
meeting, (i) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting, (ii)
the name and address, as they appear on the corporation's books, of the
stockholder proposing such business, the name and address of the beneficial
owner, if any, on whose behalf the proposal is made, and the name and address of
any other stockholders or beneficial owners known by such stockholder to be
supporting such proposal, (iii) the class and number of shares of the
corporation which are owned beneficially
<PAGE> 4
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and of record by such stockholder of record, by the beneficial owner, if any, on
whose behalf the proposal is made and by any other stockholders or beneficial
owners known by such stockholder of record and/or of the beneficial owner, if
any, on whose behalf the proposal is made, in such proposed business and any
material interest of any other stockholders or beneficial owners known by such
stockholder to be supporting such proposal in such proposed business, to the
extent known by such stockholder.
(c) Notwithstanding anything in these By-Laws to the contrary, no
business shall be conducted at a meeting except in accordance with the
procedures set forth in these By-Laws. The person presiding at the meeting
shall, if the facts warrant, determine that business was not properly brought
before the meeting and in accordance with the procedures prescribed by these
By-laws, and if he should so determine, he shall so declare at the meeting and
any such business not properly brought before the meeting shall not be
transacted.
(d) This provision shall not prevent the consideration and approval or
disapproval at the meeting of reports of officers, Directors and committees of
the Board of Directors, but, in connection with such reports, no new business
shall be acted upon at such meeting unless properly brought before the meeting
as herein provided.
(e) Notwithstanding the foregoing provisions of this Section 5 to the
contrary, a stockholder shall comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended (or any successor provision), and
the rules and regulations thereunder with respect to the matters set forth in
this Section 5.
6. Quorum. The holders of a majority in interest of all stock issued,
outstanding and entitled to vote at a meeting shall constitute a quorum, but a
lesser number may adjourn any meeting from time to time without further notice;
except that, if two or more classes of stock are
<PAGE> 5
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outstanding and entitled to vote as separate classes, then in the case of each
such class, a quorum shall consist of the holders of a majority in interest of
the stock of that class issued, outstanding and entitled to vote.
7. Voting and Proxies. Each stockholder shall have one vote for each
share of stock entitled to vote owned by him and a proportionate vote for a
fractional share, unless otherwise provided by the Articles of Organization in
the case that the corporation has two or more classes or series of stock.
Capital stock shall not be voted if any installment of the subscription therefor
has been duly demanded in accordance with the law of the Commonwealth of
Massachusetts and is overdue and unpaid. Stockholders may vote either in person
or by written proxy dated not more than six months before the meeting named
therein. Proxies shall be filed with the clerk of the meeting, or of any
adjournment thereof, before being voted. Except as otherwise limited therein,
proxies shall entitle the persons named therein to vote at any adjournment of
such meeting but shall not be valid after final adjournment of such meeting. A
proxy with respect to stock held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the proxy
the corporation receives a specific written notice to the contrary from any one
of them. A proxy purporting to be executed by or on behalf of a stockholder
shall be deemed valid unless challenged at or prior to its exercise and the
burden of proving invalidity shall rest on the challenger.
8. Action at Meeting. When a quorum is present, the holders of a
majority of the stock present or represented and voting on a matter (or if there
are two or more classes of stock entitled to vote as separate classes, then in
the case of each such class, the holders of a majority of the stock of that
class present or represented and voting on a matter), except where a larger vote
is required by law, the Articles of Organization or these By-Laws, shall decide
any matter to
<PAGE> 6
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be voted on by the stockholders. Any election of directors or officers by the
stockholders shall be determined by a plurality of the votes cast by
stockholders entitled to vote at the election. Any such elections shall be by
ballot if so requested by any stockholder entitled to vote thereon. The
corporation shall not directly or indirectly vote any share of its own stock.
9. Action Without Meeting. Any action required or permitted to be taken
at any meeting of the stockholders may be taken without a meeting if all
stockholders entitled to vote on the matter consent to the action in writing and
the written consents are filed with the records of the meetings of stockholders.
Such consent shall be treated for all purposes as a vote at a meeting.
ARTICLE II
Directors
1. Powers. The business of the corporation shall be managed by a Board
of Directors who may exercise all the powers of the corporation except as
otherwise provided by law, by the Articles of Organization or by these By-Laws.
In the event of vacancy in the Board of Directors, the remaining Directors,
except as otherwise provided by law, may exercise the powers of the full Board
until the vacancy is filled.
2. Number, Election and Qualification; Vacancies, Enlargement of the
Board; Tenure; Removal. The number of Directors, and the provisions governing
their election and qualification, vacancies, enlargement of the Board of
Directors and their tenure and removal shall be as provided by law and as set
forth in the Articles of Organization.
3. Meetings. Regular meetings of the Directors may be held without call
or notice at such places and at such times as the Directors may from time to
time determine, provided that any Director who is absent when such determination
is made shall be given notice of the
<PAGE> 7
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determination. A regular meeting of the Directors may be held without a call or
notice at the same place as the annual meeting of stockholders.
Special meetings of the Directors may be held at any time and place
designated in a call by the President or two or more Directors.
4. Telephone Conference Meetings. Members of the Board of Directors may
participate in a meeting of the board by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting.
5. Notice of Meetings. Notice of all special meetings of the Directors
shall be given to each Director by the Secretary, or Assistant Secretary, or if
there be no Secretary or Assistant Secretary, by the Clerk, or Assistant Clerk,
or in case of the death, absence, incapacity or refusal of such persons, by the
officer or one of the Directors calling the meeting. Notice shall be given to
each Director in person or by telephone or by telegram sent to his business or
home address at least twenty-four hours in advance of the meeting, or by written
notice mailed to his business or home address at least forty-eight hours in
advance of the meeting. Notice of a meeting need not be given to any Director if
a written waiver of notice, executed by him before or after the meeting, is
filed with the records of the meeting, or to any Director who attends the
meeting without protesting prior thereto or at its commencement the lack of
notice to him. A notice or waiver of notice of a Directors' meeting need not
specify the purposes of the meeting.
6. Quorum. At any meeting of the Directors, a majority of the Directors
then in office shall constitute a quorum. Less than a quorum may adjourn any
meeting from time to time without further notice.
<PAGE> 8
-8-
7. Action at Meeting. At any meeting of the Directors at which a quorum
is present, a majority of the Directors present may take any action on behalf of
the Board except to the extent that a larger number is required by law or the
Articles of Organization or these By-Laws.
8. Action by Consent. Any action required or permitted to be taken at
any meeting of the Directors may be taken without a meeting, if all the
Directors consent to the action in writing and the written consents are filed
with the records of the meetings of Directors. Such consents shall be treated
for all purposes as a vote at a meeting.
9. Committees. The Directors may, by vote of a majority of the
Directors then in office, elect from their number an executive or other
committees and may by like vote delegate thereto some or all of their powers
except those which by law, the Articles of Organization or these By-Laws they
are prohibited from delegating to such committee. Except as the Directors may
otherwise determine, any such committee may make rules for the conduct of its
business, but unless otherwise provided by the Directors or in such rules, its
business shall be conducted as nearly as may be in the same manner as is
provided by these By-Laws for the Directors.
ARTICLE III
Officers
1. Enumeration. The officers of the corporation shall consist of a
President, a Treasurer, a Clerk, and such other officers, including a Chairman
of the Board of Directors, one or more Vice Presidents, Assistant Treasurers,
Assistant Clerks, Secretary and Assistant Secretaries as the Directors may
determine.
2. Election. The President, Treasurer and Clerk shall be elected
annually by the Directors at their first meeting following the annual meeting of
stockholders. Other officers may be chosen by the Directors at such meeting or
at any other meeting.
<PAGE> 9
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3. Qualification. The President may, but need not be, a Director. No
officer need be a stockholder. Any two or more offices may be held by the same
person, provided that the President and Clerk shall not be the same person. The
Clerk shall be a resident of Massachusetts unless the corporation has a resident
agent appointed for the purpose of service of process. Any officer may be
required by the Directors to give bond for the faithful performance of his
duties to the corporation in such amount and with such sureties as the Directors
may determine.
4. Tenure. Except as otherwise provided by law, by the Articles of
Organization or by these By-Laws, the President, Treasurer and Clerk shall hold
office until the first meeting of the Directors following the next annual
meeting of stockholders and until their successors are chosen and qualified; and
all other officers shall hold office until the first meeting of the Directors
following the next annual meeting of stockholders and until their successors are
chosen and qualified, unless a shorter term is specified in the vote choosing or
appointing them. Any officer may resign by delivering his written resignation to
the corporation at its principal office or to the President, Clerk or Secretary,
and such resignation shall be effective upon receipt unless it is specified to
be effective at some other time or upon the happening of some other event.
5. Removal. The Directors may remove any officer with or without cause
by vote of a majority of the Directors then in office; provided, that an officer
may be removed for cause only after a reasonable notice and opportunity to be
heard before the Board of Directors.
6. President, Chairman of the Board, and Vice-President. The President
shall, unless otherwise provided by the Directors, be the chief executive
officer of the corporation and shall, subject to the direction of the Directors,
have general supervision and control of its business. Unless otherwise provided
by the Directors he shall preside, when present, at all meetings of
<PAGE> 10
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stockholders and, unless a Chairman of the Board has been elected and is
present, of the Directors.
If a Chairman of the Board of Directors is elected he shall preside at
all meetings of the Board of Directors at which he is present. The Chairman
shall have such other powers as the Directors may from time to time designate.
Any Vice-President shall have such powers as the Directors may from
time to time designate.
7. Treasurer and Assistant Treasurer. The Treasurer shall, subject to
the direction of the Directors, have general charge of the financial affairs of
the corporation and shall cause accurate books of account to be kept. He shall
have custody of all funds, securities, and valuable documents of the
corporation, except as the Directors may otherwise provide.
Any Assistant Treasurer shall have such powers as the Directors may
from time to time designate.
8. Clerk and Assistant Clerks. The Clerk shall record all proceedings
of the stockholders in a book to be kept therefor. Unless a transfer agent is
appointed, the Clerk shall keep or cause to be kept in Massachusetts, at the
principal office of the corporation or at his office, the stock and transfer
records of the corporation, in which are contained the names of all stockholders
and the record address and the amount of stock held by each.
In case a Secretary is not elected, the Clerk shall record all
proceedings of the Directors in a book to be kept therefor.
In the absence of the Clerk from any meeting of the stockholders, an
Assistant Clerk, if one be elected, otherwise a Temporary Clerk designated by
the person presiding at the meeting,
<PAGE> 11
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shall perform the duties of the Clerk. Any Assistant Clerk shall have such
additional powers as the Directors may from time to time designate.
9. Secretary and Assistant Secretaries. If a Secretary is elected, he
shall keep a record of the meetings of the Directors and in his absence, an
Assistant Secretary, if one be elected, otherwise a Temporary Secretary
designated by the person presiding at the meeting, shall keep a record of the
meetings of the Directors.
Any Assistant Secretary shall have such additional powers as the
Directors may from time to time designate.
10. Other Powers and Duties. Each officer shall, subject to these
By-Laws, have in addition to the duties and powers specifically set forth in
these By-Laws, such duties and powers as are customarily incident to his office,
and such duties and powers as the Directors may from time to time designate.
<PAGE> 12
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ARTICLE IV
Capital Stock
1. Certificates of Stock. Subject to the provisions of Section 2 below,
each stockholder shall be entitled to a certificate of the capital stock of the
corporation in such form as may be prescribed from time to time by the
Directors. The certificate shall be signed by the President or a Vice-President,
and by the Treasurer or an Assistant Treasurer; provided, however, such
signatures may be facsimiles if the certificate is signed by a transfer agent,
or by a registrar, other than a Director, officer or employee of the
corporation. In case any officer who has signed or whose facsimile signature has
been placed on such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer at the time of its issue.
Every certificate issued for shares of stock at a time when such shares
are subject to any restriction on transfer pursuant to the Articles of
Organization, these By-Laws or any agreement to which the corporation is a party
shall have the restriction noted conspicuously on the certificate and shall also
set forth on the face or back of the certificate either the full text of the
restriction or a statement of the existence of such restriction and a statement
that the corporation will furnish a copy thereof to the holder of such
certificate upon written request and without charge. Every stock certificate
issued by the corporation at a time when it is authorized to issue more than one
class or series of stock shall set forth upon the face or back of the
certificate either the full text of the preferences, voting powers,
qualifications and special and relative rights of the shares of each class and
series, if any, authorized to be issued, as set forth in the Articles of
Organization, or a statement of the existence of such preferences, powers,
qualifications, and
<PAGE> 13
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rights, and a statement that the corporation will furnish a copy thereof to the
holder of such certificate upon written request and without charge.
2. Stockholder Open Accounts. The corporation may maintain or cause to
be maintained stockholder open accounts in which may be recorded all
stockholders' ownership of stock and all changes therein. Certificates need not
be issued for shares so recorded in a stockholder open account unless requested
by the stockholder.
3. Transfers. Subject to the restrictions, if any, stated or noted on
the stock certificates, shares of stock may be transferred in the records of the
corporation by the surrender to the corporation or its transfer agent of the
certificate therefor, properly endorsed or accompanied by a written assignment
and power of attorney properly executed, with necessary transfer stamps affixed,
and with such proof of the authenticity of signature as the corporation or its
transfer agent may reasonably require. When such stock certificates are thus
properly surrendered to the corporation or its transfer agent, the corporation
or transfer agent shall cause the records of the corporation to reflect the
transfer of the shares of stock. Except as may be otherwise required by law, by
the Articles of Organization or by these By-Laws, the corporation shall be
entitled to treat the record holder of stock as shown in its records as the
owner of such stock for all purposes, including the payment of dividends and the
right to vote with respect thereof, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the corporation in accordance with the requirements of these By-Laws.
It shall be the duty of each stockholder to notify the corporation of
his post office address.
4. Record Date. The Directors may fix in advance a time which shall be
not more than sixty (60) days before the date of any meeting of stockholders or
the date for the payment of
<PAGE> 14
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any dividend or the making of any distribution to stockholders or the last day
on which the consent or dissent of stockholders may be effectively expressed for
any purpose, as the record date for determining the stockholders having the
right to notice of and to vote at such meeting and any adjournment thereof or
the right to receive such dividend or distribution or the right to give such
consent or dissent. In such case only stockholders of record on such record date
shall have such right, notwithstanding any transfer of stock on the books of the
corporation after the record date. Without fixing such record date the Directors
may for any of such purposes close the transfer books for all or any part of
such period.
If no record date is fixed and the transfer books are not closed, the
record date for determining stockholders having the right to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors acts with respect thereto.
5. Replacement of Certificates. In case of the alleged loss, mutilation
or destruction of a certificate of stock, a duplicate certificate may be issued
in place thereof, upon such terms and conditions as the Directors may prescribe.
6. Issue of Capital Stock. The whole or any part of the then authorized
but unissued shares of each class of stock may be issued at any time or from
time to time by the Board of Directors without action by the stockholders.
7. Reacquisition of Stock. Shares of stock previously issued which have
been reacquired by the corporation, may be restored to the status of authorized
but unissued shares by vote of the Board of Directors, without amendment of the
Articles of Organization.
<PAGE> 15
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ARTICLE V
Provisions Relative to Directors,
Officers, Stockholders and Employees
1. Certain Contracts and Transactions. In the absence of fraud or bad
faith, no contract or transaction by this corporation shall be void, voidable or
in any way affected by reason of the fact that the contract or transaction is
(a) with one or more of its officers, Directors, stockholders or employees, (b)
with a person who is in any way interested in this corporation, or (c) with a
corporation, organization or other concern in which an officer, Director,
stockholder or employee of this corporation is an officer, director,
stockholder, employee or in any way interested. The provisions of this section
shall apply notwithstanding the fact that the presence of a Director or
stockholder, with whom a contract or transaction is made or entered into or who
is an officer, director, stockholder or employee of a corporation, organization
or other concern with which a contract or transaction is made or entered into or
who is in any way interested in such contract or transaction, was necessary to
constitute a quorum at the meeting of the Directors (or any authorized committee
thereof) or stockholders at which such contract or transaction was authorized
and/or that the vote of such Director or stockholder was necessary for the
adoption of such contract or transaction, provided that if said interest was
material, it shall have been known or disclosed to the Directors or stockholders
voting at said meeting on said contract or transaction. A general notice to any
person voting on said contract or transaction that an officer, Director,
stockholder or employee has a material interest in any corporation, organization
or other concern shall be sufficient disclosure as to such officer, Director,
stockholder or employee with respect to all contracts and transactions with such
corporation, organization or other concern. This section shall be subject to
amendment or repeal only by action of the stockholders.
<PAGE> 16
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2. Indemnification. Each Director, officer, employee and other agent of
the corporation, and any person who, at the request of the corporation, serves
as a director, officer, employee or other agent of another organization in which
the corporation directly or indirectly owns shares or of which it is a creditor
shall be indemnified by the corporation against any cost, expense (including
attorneys' fees), judgment, liability and/or amount paid in settlement
reasonably incurred by or imposed upon him in connection with any action, suit
or proceeding (including any proceeding before any administrative or legislative
body or agency), to which he may be made a party or otherwise involved or with
which he shall be threatened, by reason of his being, or related to his status
as a director, officer, employee or other agent of the corporation or of any
other organization in which the corporation directly or indirectly owns shares
or of which the corporation is a creditor, which other organization he serves or
has served as director, officer, employee or other agent at the request of the
corporation (whether or not he continues to be an officer, Director, employee or
other agent of the corporation or such other organization at the time such
action, suit or proceeding is brought or threatened), unless such
indemnification is prohibited by the Business Corporation Law of the
Commonwealth of Massachusetts. The foregoing right of indemnification shall be
in addition to any rights to which any such person may otherwise be entitled and
shall inure to the benefit of the executors or administrators of each such
person. The corporation may pay the expenses incurred by any such person in
defending a civil or criminal action, suit or proceeding in advance of the final
disposition of such action, suit, or proceeding, upon receipt of an undertaking
by such person to repay such payment if it is determined that such person is not
entitled to indemnification hereunder. This section shall be subject to
amendment or repeal only by action of the stockholders, and any such amendment
or
<PAGE> 17
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repeal shall not affect the rights arising hereunder prior to the effective date
of the amendment or repeal.
ARTICLE VI
Miscellaneous Provisions
1. Fiscal Year. Except as from time to time otherwise determined by the
Directors, the fiscal year of the corporation shall end on December 31 in each
year. Following any change in the fiscal year previously adopted, a certificate
of such change, signed under the penalties of perjury by the Clerk or an
Assistant Clerk, shall be filed forthwith with the state secretary.
2. Seal. The seal of this corporation shall, subject to alteration by
the Directors, bear its name, the word "Massachusetts," and the year of its
incorporation.
3. Execution of Instruments. All deeds, leases, transfers, contracts,
bonds, notes and other obligations authorized to be executed by an officer of
the corporation in its behalf shall be signed by the President or the Treasurer
except as the Directors may generally or in particular cases otherwise
determine.
4. Voting of Securities. Except as the Directors may otherwise
designate, the President or Treasurer may waive notice of, and appoint any
person or persons to act as proxy or attorney-in-fact for this corporation (with
or without power of substitution) at any meeting of stockholders or shareholders
of any other corporation or organization, the securities of which may be held by
this corporation.
5. Corporate Records. The original, or attested copies, of the Articles
of Organization, By-Laws and records of all meetings of incorporators and
stockholders, and the stock and transfer records, which shall contain the names
of all stockholders and the record address and the amount of stock held by each,
shall be kept in Massachusetts at the principal
<PAGE> 18
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office of the corporation or at an office of its transfer agent or of the Clerk
or of its resident agent. Said copies and records need not all be kept in the
same office. They shall be available at all reasonable times to the inspection
of any stockholder for any proper purpose but not to secure a list of
stockholders or other information for the purpose of selling said list or
information or copies thereof or of using the same for a purpose other than in
the interest of the applicant, as a stockholder, relative to the affairs of the
corporation.
6. Articles of Organization. All references in these By-Laws to the
Articles of Organization shall be deemed to refer to the Articles of
Organization of the corporation, as amended and in effect from time to time.
7. Amendments. These By-Laws, to the extent provided in these By-Laws,
may be amended or repealed, in whole or in part, and new By-Laws adopted either
(a) by the stockholders at any meeting of the stockholders by the affirmative
vote of the holders of at least a majority in interest of the capital stock
present and entitled to vote, provided that notice of the proposed amendment or
repeal or of the proposed making of new By-Laws shall have been given in the
notice of such meeting, or (b) if so authorized by the Articles of Organization,
by the Board of Directors at any meeting of the Board by the affirmative vote of
a majority of the Directors then in office, but no amendment or repeal of a
By-law shall be voted by the Board of Directors and no new By-law shall be made
by the Board of Directors which alters the provisions of these By-Laws with
respect to removal of Directors, or the election of committees by Directors and
the delegation of powers thereto, nor shall the Board of Directors make, amend
or repeal any provision of the By-Laws which by law, the Articles of
Organization or the By-Laws requires action by the stockholders. Not later than
the time of giving notice of the meeting of stockholders next following the
making, amending, or repealing by the Directors of any By-law,
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notice thereof stating the substance of such change shall be given to all
stockholders entitled to vote on amending the By-Laws. Any By-law or amendment
of a By-law made by the Board of Directors may be amended or repealed by the
stockholders by affirmative vote as above provided in this Section 7.
8. 1987 Massachusetts Control Share Acquisition Act. The 1987
Massachusetts Control Share Acquisition Act, Chapter 110D of the Massachusetts
General Laws, as it may be amended from time to time, shall not apply to the
corporation.
<PAGE> 1
EXHIBIT 13.01
FINANCIAL TABLE OF CONTENTS
Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ thirteen
Balance Sheets ............................................... sixteen
Statements of Operations ..................................... seventeen
Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit) ........... eighteen
Statements of Cash Flows ..................................... twenty
Notes to Financial Statements ................................ twenty-one
Report of Independent Public Accountants ..................... twenty-eight
Directors, Executive Officers and Corporate Information ...... inside back cover
twelve
<PAGE> 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,
scalable, 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 Annual Report and the Company's form
10-K 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) may constitute forward-looking
statements subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
Investors are cautioned that all forward-looking statements involve risks and
uncertainties, including without limitation risks of continued operating losses,
intellectual property rights and litigation, risks in technology development and
commercialization, risks in product development and market acceptance of and
demand for the Company's products, risks of downturns in economic conditions
generally, and in the software, networking and telecommunications industries
specifically, risks associated with competition and competitive pricing
pressures, risks associated with international sales and other risks detailed in
the Company's filings with the Securities and Exchange Commission.
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>
Fiscal Year
-------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revenues:
License revenues 79.1% 87.1% 88.6%
Service revenues 20.9% 12.9% 11.4%
----- ----- -----
Total revenues 100.0% 100.0% 100.0%
Cost of revenues 26.7% 21.7% 14.7%
----- ----- -----
Gross Profit 73.3% 78.3% 85.3%
----- ----- -----
Operating expenses:
Research and development 54.2% 43.7% 23.7%
Sales and marketing 84.8% 78.2% 52.0%
General and administrative 23.0% 13.0% 10.5%
----- ----- -----
Operating (loss) (88.7%) (56.6%) (0.9%)
----- ----- -----
Other income (expense), net 1.8% 0.5% 1.6%
----- ----- -----
Net income (loss) (86.9%) (56.1%) 0.7%
----- ----- -----
</TABLE>
TOTAL REVENUES
Total revenues were $4.4 million, $9.0 million and $19.6 million in 1995, 1996
and 1997, respectively, representing increases of 106.8% from 1995 to 1996 and
117.3% from 1996 to 1997.
LICENSE REVENUES
The Company's license revenues are derived from the licensing of software
products. License revenues were $3.4 million, $7.8 million and $17.3 million, in
1995, 1996 and 1997, respectively, representing increases of 127.9% from 1995 to
1996 and 121.1% from 1996 to 1997. License revenues accounted for 79.1%, 87.1%
and 88.6% of total revenues in 1995, 1996 and 1997, respectively. 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. There were no price increases for products during 1997.
SERVICE REVENUES
The Company's service revenues consist of fees for maintenance and training
services. Service revenues were $912,000, $1.2 million and $2.2 million in 1995,
1996 and 1997, respectively, representing increases of 27.4% from 1995 to 1996
and 91.5% from 1996 to 1997. Service revenues accounted for 20.9%, 12.9% and
11.4% of total revenues in 1995, 1996 and 1997, respectively. The increase in
service revenues was primarily attributed to an increase in revenue from
maintenance contracts for new and existing customers.
thirteen
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 service
contracts. Royalty costs are comprised of third party software costs. Cost of
revenues were $1.2 million, $2.0 million and $2.9 million in 1995, 1996 and
1997, respectively, representing increases of 68.1% from 1995 to 1996 and 46.9%
from 1996 to 1997. Cost of revenues accounted for 26.7%, 21.7% and 14.7% of
total revenues in 1995, 1996 and 1997, respectively, resulting in gross margins
of 73.3%, 78.3% and 85.3% 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 growing customer needs. The improvement in the gross
margin percentages was attributable to lower royalty unit costs associated with
the higher sales volumes during 1997 and a one-time charge of $400,000 during
1996 for the write-off of inventories associated with the discontinuation of the
TRAKKER(R) product line.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of personnel costs
associated with software development. Research and development expenses were
$2.4 million, $3.9 million and $4.6 million in 1995, 1996 and 1997,
respectively, representing an increase of 66.7% from 1995 to 1996 and 17.7% from
1996 to 1997. Research and development expenses accounted for 54.2%, 43.7% and
23.7% of total revenues in 1995, 1996 and 1997, respectively. The increase in
absolute dollars was primarily due to increased headcount in research and
development from 20 to 34 people from 1995 to 1996 and 34 to 40 people from 1996
to 1997. 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 were $3.7 million, $7.0
million and $10.2 million in 1995, 1996 and 1997, respectively, representing an
increase of 90.6% from 1995 to 1996 and 44.5% from 1996 to 1997. Sales and
marketing expenses accounted for 84.8%, 78.2% and 52.0% of total revenues in
1995, 1996 and 1997, respectively. 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 at the end of 1995, 1996 and 1997 was 19, 31 and 44
people, respectively.
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 were $1.0
million, $1.2 million and $2.1 million in 1995, 1996 and 1997, respectively,
representing an increase of 17.7% from 1995 to 1996 and 74.9% from 1996 to 1997.
General and administrative expenses accounted for 23.0%, 13.0% and 10.5% of
total revenues in 1995, 1996 and 1997, respectively. The increase in absolute
dollars reflects personnel growth and associated costs in general support areas.
General and administrative expenses declined as a percentage of total revenues
due to a significant increase in revenues.
OTHER INCOME (EXPENSE), NET
Other income consists of interest earned on funds available for investment net
of interest paid in connection with the financing of capital equipment. The
Company realized net other income of $80,000, $45,000 and $297,000,
respectively, in 1995, 1996 and 1997. The increase in net other income during
1997 was attributed to an increase of funds available for investment due to the
Company's recent IPO.
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 $32.4 million at December 31, 1997.
Net cash provided by (used in) operating activities was $(2.1) million, $(2.9)
million and $2.0 million in 1995, 1996 and 1997, respectively. Cash, cash
equivalents and marketable securities were $4.4 million, $1.7 million and $36.5
million in 1995, 1996 and 1997, respectively. Deferred revenues increased for
the year ended December 31, 1997, by $967,000 due to an increase in overall
sales activity; $683,000 of this increase came from deferred maintenance
contracts and $284,000 was the result of service and software license sales with
remaining contingencies such as completion of services, product acceptance and
credit worthiness.
fourteen
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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. Financing activities consisted primarily of the sales of common and
preferred stock in 1995 and proceeds from and repayments of bank borrowings in
connection with equipment purchases during 1996 and 1997 and from the issuance
of common stock and exercise of options during 1997.
During 1996, the Company entered into an agreement for an equipment line of
credit in the amount of $1.0 million (the "Equipment Line") with Silicon Valley
Bank. The Equipment Line, as amended, bears interest at the bank's prime plus 2%
and is collateralized by substantially all of the Company's assets. As of
December 28, 1996, the outstanding borrowings under the Equipment Line amounted
to $925,000. In 1997, the Company received additional advances of $74,000
through March 25, 1997, at which time the total amount of $999,000 due under the
Equipment Line was converted into a term loan payable in 36 even monthly
payments of principal plus interest at the bank's prime rate plus 2% through
March 25, 2000. In December 1997, the Company paid off all outstanding principal
and interest due on this term loan.
The Company has a revolving working capital line of credit with Silicon Valley
Bank. Borrowings outstanding under the line are limited to the lesser of $2.5
million or 90% of eligible accounts receivable less the principal amount that
remains outstanding under an existing equipment line of credit. Interest on this
line is at the prime rate. The working capital line of credit contains covenants
which restrict the Company's ability to incur debt, pay dividends, sell assets
and engage in mergers, consolidations and other acquisitions. In addition, the
Company must comply with certain financial covenants, including maintaining (i)
an asset to liabilities ratio of at least 2:1 and (ii) a tangible net worth of
not less than $10.0 million. The Company's line of credit expires on April 2,
1998. As of December 31, 1997, no borrowings have been made by the Company under
the Working Capital line. The Company entered into a new equipment line of
credit with Fleet National Bank during June of 1997 for up to $1.0 million. In
December, 1997, the Company paid off all outstanding principal and interest
under this agreement.
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. Also, following the completion of its initial public offering, the
Company is evaluating whether another ownership change has occurred. As a result
of these ownership changes, the use of the net operating loss carryforwards will
be limited. The Company has deferred tax assets of approximately $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 December 31, 1997, the Company's principal sources of liquidity included
cash and marketable securities. The Company believes that its current cash and
marketable securities, cash provided by future operations and available
borrowings under its lines of credit, will be sufficient to meet its working
capital and anticipated capital expenditure requirements for 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. In 1998, the
Company will commence a Year 2000 date conversion project to address all
internal existing computer systems and applications. Management has not yet
assessed the Year 2000 compliance expense, but based on a preliminary review to
date, does not expect the amounts required to be expensed over the next two
years to have a material effect on its financial position or results of
operations. There can be no assurance, however, that further assessment of the
Company's products and internal systems and applications will not indicate that
additional Company efforts to assure Year 2000 compliance are necessary, and
that such efforts may be costly. Further, there can be no assurance that the
systems operated by other companies upon which the Company relies will be Year
2000 compliant on a timely basis. The Company's business, financial condition or
results of operations could be materially adversely affected by the failure of
the Company's products and its internal systems and applications to properly
operate or manage data beyond 1999.
fifteen
<PAGE> 5
BALANCE SHEETS
<TABLE>
<CAPTION>
December 28, December 31,
1996 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash, cash equivalents and marketable securities $ 1,663,896 $36,539,303
Accounts receivable, net of allowance of approximately
$210,000 and $280,000, respectively 2,273,255 3,040,850
Prepaid expenses and other current assets 148,934 282,311
------------ -----------
Total current assets 4,086,085 39,862,464
------------ -----------
Equipment and Improvements, at cost:
Equipment 5,376,966 6,473,305
Leasehold improvements 78,759 85,957
------------ -----------
5,455,725 6,559,262
Less--Accumulated depreciation and amortization 3,957,519 4,507,737
------------ -----------
1,498,206 2,051,525
$ 5,584,291 $41,913,989
============ ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 1,560,312 $ 1,764,580
Accrued expenses 2,324,927 3,368,585
Deferred revenue 1,331,291 2,298,092
Current portion of long-term debt 257,000 --
------------ -----------
Total current liabilities 5,473,530 7,431,257
------------ -----------
Long-Term Debt 667,502 --
------------ -----------
Commitments and Contingencies (Note 8)
Redeemable Convertible Preferred Stock (none at December 31,1997):
Series A, $.01 par value: Authorized--1,965,373 shares
Issued and outstanding--1,940,863 shares recorded at redemption value 9,427,506 --
Series A-1, $.01 par value: Authorized--212,044 shares
Issued and outstanding--36,070 shares recorded at redemption value 179,106 --
Series B, $.01 par value: Authorized--4,479,613 shares
Issued and outstanding--4,460,789 shares recorded at redemption value 4,871,117 --
------------ -----------
Total redeemable convertible preferred stock 14,477,729 --
------------ -----------
Stockholders' Equity (Deficit)
Preferred Stock, $.01 par value: Authorized--1,000,000 shares
(none 1996); no shares issued and outstanding -- --
Common stock, $.01 par value: Authorized--50,000,000 shares
Issued and outstanding--844,482 and 12,019,188 shares, respectively 8,445 120,193
Additional paid-in capital 18,097,045 67,942,708
Deferred compensation -- (149,157)
Unrealized gains on marketable securities -- 19,750
Accumulated deficit (33,139,960) (33,450,762)
------------ -----------
Total stockholders' equity (deficit) (15,034,470) 34,482,732
------------ -----------
$ 5,584,291 $41,913,989
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
sixteen
<PAGE> 6
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------
December 30, December 28, December 31,
1995 1996 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
License revenues $ 3,443,040 $ 7,844,523 $17,344,307
Service revenues 911,964 1,162,242 2,225,287
----------- ----------- -----------
Total revenues 4,355,004 9,006,765 19,569,594
Cost of Revenues 1,163,863 1,956,889 2,873,840
----------- ----------- -----------
Gross profit 3,191,141 7,049,876 16,695,754
----------- ----------- -----------
OPERATING EXPENSES:
Research and development 2,360,287 3,933,483 4,630,560
Sales and marketing 3,694,198 7,039,662 10,173,182
General and administrative 1,000,228 1,176,938 2,058,402
----------- ----------- -----------
Total operating expenses 7,054,713 12,150,083 16,862,144
----------- ----------- -----------
Operating loss (3,863,572) (5,100,207) (166,390)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 48,015 79,832 419,733
Interest expense -- (48,564) (126,836)
Other 31,877 14,076 4,248
----------- ----------- -----------
Total other income (expense) 79,892 45,344 297,145
----------- ----------- -----------
Net income (loss) $(3,783,680) $(5,054,863) $ 130,755
----------- ----------- -----------
Net income (loss) per common and
potential common share:
Basic $ (5.07) $ (6.64) $ 0.04
----------- ----------- -----------
Diluted $ (5.07) $ (6.64) $ 0.01
----------- ----------- -----------
Pro forma diluted $ (0.84) $ (0.57) $ 0.01
----------- ----------- -----------
Weighted average common and potential
common shares outstanding:
Basic 746,152 760,971 3,069,667
----------- ----------- -----------
Diluted 746,152 760,971 11,319,479
----------- ----------- -----------
Pro forma diluted 4,506,723 8,869,229 11,319,479
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
seventeen
<PAGE> 7
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Redeemable Convertible Preferred Stock
---------------------------------------------------------------------------------------
Series A Series A-1 Series B
----------------------- -------------------- -----------------------
Number Redemption Number Redemption Number Redemption
of Shares Value of Shares Value of Shares Value Total
- -------------------------------------------- ----------- --------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 1,706,232 $7,365,540 36,070 $161,057 -- $ -- $ 7,526,597
Issuance of preferred stock
and common stock, net of
issuance costs of $98,813 234,631 957,292 -- -- 4,460,789 4,550,000 5,507,292
Accretion of dividends on
preferred stock -- 570,807 -- 8,342 -- 2,617 581,766
Exercise of stock options -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
---------- ---------- ------- -------- ---------- ---------- -----------
BALANCE, DECEMBER 30, 1995 1,940,863 8,893,639 36,070 169,399 4,460,789 4,552,617 13,615,655
Accretion of dividends on
preferred stock -- 533,867 -- 9,707 -- 318,500 862,074
Exercise of stock options -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
---------- ---------- ------- -------- ---------- ---------- -----------
BALANCE, DECEMBER 28, 1996 1,940,863 9,427,506 36,070 179,106 4,460,789 4,871,117 14,477,729
Issuance of common stock,
net of issuance costs
of $ 955,359
Accretion of dividends on
preferred stock -- 277,156 -- 5,151 -- 159,250 441,557
Conversion of redeemable
convertible preferred
stock to common
stock (1,940,863) (9,704,662) (36,070) (184,257) (4,460,789) (5,303,367) (14,919,286)
Exercise of stock options -- -- -- -- -- -- --
Deferred compensation
related to grants of
stock options -- -- -- -- -- -- --
Amortization of deferred
compensation related to
grants of stock options -- -- -- -- -- -- --
Unrealized gains on
available-for-sale
securities -- -- -- -- -- -- --
Net income -- -- -- -- -- -- --
---------- ---------- ------- -------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 1997 -- $ -- -- $ -- -- $ -- $ --
========== ========== ======= ======== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
eighteen
<PAGE> 8
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
---------------------------------------------------------------------------------------------------
Common Stock
--------------------------------------- Unrealized
Additional Gain On
Number $.01 Paid-in Deferred Marketable Accumulated
of Shares Par Value Capital Compensation Securities Deficit Total
---------- -------- ----------- ------------ ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
682,487 $ 6,824 $18,134,985 $ -- $ -- $(22,857,577) $(4,715,768)
71,180 712 (50,451) -- -- -- (49,739)
-- -- -- -- -- (581,766) (581,766)
6,678 67 4,798 -- -- -- 4,865
-- -- -- -- -- (3,783,680) (3,783,680)
---------- -------- ----------- --------- ------- ------------ -----------
760,345 7,603 18,089,332 -- -- (27,223,023) (9,126,088)
-- -- -- -- -- (862,074) (862,074)
84,137 842 7,713 -- -- -- 8,555
-- -- -- -- -- (5,054,863) (5,054,863)
---------- -------- ----------- --------- ------- ------------ -----------
844,482 8,445 18,097,045 -- -- (33,139,960) (15,034,470)
2,735,000 27,350 34,626,991 -- -- -- 34,654,341
-- -- -- -- -- (441,557) (441,557)
8,108,258 81,083 14,838,203 -- -- -- 14,919,286
331,448 3,315 188,594 -- -- -- 191,909
-- -- 191,875 (191,875) -- -- --
-- -- -- 42,718 -- -- 42,718
-- -- -- -- 19,750 -- 19,750
-- -- -- -- -- 130,755 130,755
---------- -------- ----------- --------- ------- ------------ -----------
12,019,188 $120,193 $67,942,708 $(149,157) $19,750 $(33,450,762) $34,482,732
========== ======== =========== ========= ======= ============ ===========
</TABLE>
nineteen
<PAGE> 9
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------------------------------
December 30, December 28, December 31,
1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,783,680) $(5,054,863) $ 130,755
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities--
Depreciation and amortization 335,837 409,484 592,936
Changes in current assets and liabilities--
Accounts receivable 147,562 (1,254,453) (767,595)
Prepaid expenses and other current assets 159,387 (8,472) (133,377)
Accounts payable 598,989 373,464 204,268
Accrued expenses 369,333 1,646,087 1,043,658
Deferred revenue 92,648 957,625 966,801
------------ ----------- ----------
Net cash (used in) provided by operating activities (2,079,924) (2,931,128) 2,037,446
------------ ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (604,838) (734,571) (1,103,537)
Investments in marketable securities -- -- (28,661,367)
--------- --------- ------------
Net cash used in investing activities (604,838) (734,571) (29,764,904)
--------- --------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings -- 924,502 583,707
Repayments of bank borrowings -- -- (1,508,209)
Proceeds from issuance of preferred and common stock 5,457,553 -- 34,654,341
Proceeds from exercise of stock options 4,865 8,555 191,909
--------- --------- ----------
Net cash provided by financing activities 5,462,418 933,057 33,921,748
--------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,777,656 (2,732,642) 6,194,290
Cash and Cash Equivalents, beginning of year 1,618,882 4,396,538 1,663,896
------------ ------------ --------------
Cash and Cash Equivalents, end of year $ 4,396,538 $ 1,663,896 $ 7,858,186
------------ ------------ --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ -- $ 48,564 $ 126,836
------------ ------------ --------------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Accretion of dividends on preferred stock $ 581,766 $ 862,074 $ 441,557
Deferred compensation related to grants of stock options $ -- $ -- $ 191,875
Conversion of redeemable convertible preferred stock
to common stock $ -- $ -- $ 14,919,286
------------ ------------ --------------
Unrealized gain on available-for-sale securities $ -- $ -- $ 19,750
------------ ------------ --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
twenty
<PAGE> 10
Notes to Financial Statements
1. Organization and Significant Accounting Policies
Concord Communications, Inc. (the Company) is primarily engaged in the
development and sale of automated network reporting software to companies
principally in the United States and Europe.
The Company is subject to the risks associated with emerging,
technology-oriented companies. Primary among these risks are competition from
substitute products and the ability to successfully develop and market its
current and future products.
FISCAL YEAR-END
Through fiscal 1996, the Company's fiscal year was the 52- or 53-week period
ended on the Saturday closest to December 31. References to 1995 and 1996 are
for the 52-week periods ended December 30, 1995 and December 28, 1996,
respectively. Beginning in 1997, the Company has changed to a calendar year-end.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company has classified its cash equivalents and marketable
securities as available-for-sale and recorded them at fair value, with the
unrealized gains and losses reported as a separate component of stockholders'
equity. The Company considers cash and highly liquid investments, purchased with
an original maturity of 90 days or less, to be cash and cash equivalents. Cash
and cash equivalents are $1,663,896 and $7,858,186 at December 28, 1996 and
December 31, 1997, respectively.
REVENUE RECOGNITION
Revenue from software product sales is recognized upon shipment of the product
to customers. In cases where significant unfulfilled vendor obligations remain
upon shipment, the related revenue is deferred until such obligations are
fulfilled. Revenue from postcontract customer support and other related services
is recognized ratably as the obligations are fulfilled or when the related
services are performed. The deferred revenue balance at December 28, 1996 and
December 31, 1997 consists of prepayments on software maintenance contracts and
shipments to customers of software products for which certain significant vendor
obligations remain.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are recorded at cost. Depreciation is provided for on
a straight-line basis over the useful lives of the assets, which are estimated
to be three to five years for all assets except leasehold improvements, which
are amortized over the life of the lease.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentration
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. The Company maintains its cash, cash equivalent
and marketable securities with established financial institutions. The Company
does not believe it has accounts receivable collection risk in excess of
existing reserves. For the years ended December 30, 1995, December 28, 1996 and
December 31, 1997, no individual customer accounted for more than 10% of
revenue.
SOFTWARE DEVELOPMENT COSTS SFAS
No. 86, Accounting for the Costs of Computer Software To Be Sold, Leased or
Otherwise Marketed, requires the capitalization of certain computer software
development costs incurred after technological feasibility is established. The
Company believes that once technological feasibility of a software product has
been established, the additional development costs incurred to bring the product
to a commercially acceptable level are not significant. There were no
capitalized software development costs at December 28, 1996 and December 31,
1997.
twenty-one
<PAGE> 11
Notes to Financial Statements (continued)
NET INCOME (LOSS) PER SHARE
In 1997, the Company adopted SFAS No. 128, Earnings Per Share, effective
December 15, 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. The Company has applied the provisions of SFAS
No. 128 retroactively to all periods presented. In accordance with Staff
Accounting Bulletin (SAB) No. 98, the Company has determined that there were no
nominal issuances of common stock or potential common stock in the period prior
to the Company's initial public offering (IPO). The dilutive effect of potential
common shares in 1997, consisting of outstanding stock options and redeemable
convertible preferred stock, is determined using the treasury method and the
if-converted method, respectively, in accordance with SFAS No. 128. Diluted
weighted average shares outstanding for 1995 and 1996 exclude the potential
common shares from stock options and redeemable convertible preferred stock
outstanding because to do so would have been antidilutive for the years
presented. Pro forma diluted net income (loss) per common and potential common
share assumes that all series of redeemable convertible preferred stock had been
converted to common stock as of the original issuance dates. Calculations of
basic, diluted and pro forma diluted net income (loss) per common share and
potential common share are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Net income (loss) $(3,783,680) $(5,054,863) $ 130,755
------------ ------------ -----------
Weighted average common shares outstanding 746,152 760,971 3,069,667
Potential common shares pursuant to stock options -- -- 1,830,774
Potential common shares pursuant to conversion of redeemable
convertible preferred stock -- -- 6,419,038
------------ ------------ -----------
Diluted weighted average shares 746,152 760,971 11,319,479
Pro forma conversion of redeemable convertible preferred stock 3,760,571 8,108,258 --
------------ ------------ -----------
Pro forma diluted weighted average shares outstanding 4,506,723 8,869,229 11,319,479
------------ ------------ -----------
Basic net income (loss) per common share $ (5.07) $ (6.64) $ 0.04
------------ ------------ -----------
Diluted net income (loss) per common and potential common share $ (5.07) $ (6.64) $ 0.01
------------ ------------ -----------
Pro forma diluted net income (loss) per common and potential common share $ (0.84) $ (0.57) $ 0.01
------------ ------------ -----------
</TABLE>
2. Marketable securities
It is the Company's intent to maintain a liquid investment portfolio to support
current operations and to take advantage of investment opportunities; therefore,
all marketable securities are considered to be available-for-sale and are
classified as current assets. The amortized cost, unrealized gains (losses) and
fair value of marketable securities available-for-sale as of December 31, 1997,
with maturity dates from January 1, 1998 through December 1, 2000, are as
follows:
<TABLE>
<CAPTION>
Amortized Cost Unrealized Gains (Losses) Fair Value
----------------- ------------------------- ------------
<S> <C> <C> <C>
US government obligations $ 7,450,812 $ (924) $ 7,449,888
Corporate bonds and notes 22,317,923 22,455 22,340,378
Asset-backed securities 5,402,979 (1,781) 5,401,198
----------------- ------------------------- ------------
35,171,714 19,750 35,191,464
Less: amounts classified as cash equivalents 6,510,435 (88) 6,510,347
----------------- ------------------------- ------------
Available-for-sale marketable securities $28,661,279 $19,838 $28,681,117
----------------- ------------------------- ------------
</TABLE>
3. Line of Credit and Long-Term Debt
During 1996, the Company entered into an agreement for an equipment line of
credit in the amount of $1,000,000 (the Equipment Line) with a bank. The
Equipment Line, as amended, carries interest at the bank's prime rate plus 2%
and was collateralized by substantially all of the Company's assets. As of
December 28, 1996, the outstanding borrowings under the Equipment Line were
$924,502. In 1997, the Company received additional advances of $74,185 through
March 25, 1997, at which time the total amount of $998,687 due was converted to
a term loan payable in 36 even monthly payments of principal plus interest
through March 25, 2000. In December 1997, the Company paid off all outstanding
principal and interest due on this term loan.
twenty-two
<PAGE> 12
Notes to Financial Statements (continued)
On April 3, 1997, the Company entered into an agreement for a revolving working
capital line of credit (the Working Capital Line) with the bank that also held
the Company's term loan payable. Under the agreement, the Company can borrow up
to the lesser of $2,500,000 or 90% of eligible accounts receivable, as defined,
minus the principal amount outstanding under the term loan payable. Interest on
outstanding borrowings is payable monthly and accrues at a rate of prime plus
2%. The Working Capital Line is collateralized by substantially all assets of
the Company and requires compliance with certain financial covenants, including
the maintenance of minimum levels of tangible net worth, profitability and
revenues, as defined. The Working Capital Line expires on April 2, 1998. As of
December 31, 1997, no borrowings have been made by the Company under the Working
Capital Line.
On June 9, 1997, the Company entered into an agreement with another bank to
allow the Company to draw one or more loans (the Equipment Term Loans), up to
$1,000,000, for the purchases of qualifying equipment and financing of
qualifying software/engineering costs, as defined. Interest on the Equipment
Term Loans was due and payable monthly in arrears at the prime rate plus 0.75%.
Borrowings under the Equipment Term Loans were permitted through December 31,
1997, at which time the outstanding principal would have been due and payable in
36 even, consecutive monthly installments beginning January 30, 1998 through
December 29, 2000. The Equipment Term Loans were secured by the equipment
acquired. In addition, the Company was required to comply with certain financial
covenants, which include, among other items, minimum levels of capital base,
liquidity and profitability. The Company had borrowed $509,522 under this
agreement during 1997. In December 1997, the Company paid off all outstanding
principal and interest under the Equipment Term Loans.
4. Stockholders' Equity (Deficit)
In December 1995, the Company's Board of Directors approved a one-for-three
reverse stock split of its common and redeemable convertible preferred stock. On
October 9, 1997, the Company amended its certificate of incorporation to
authorize a 1-for-2 reverse stock split of the Company's common stock and
increase the number of authorized shares of common stock to 50,000,000. The
stock splits have been retroactively reflected in the accompanying financial
statements and notes for all periods presented.
In October 1997, the Company completed an initial public offering (the IPO) of
2,735,000 shares of its common stock, inclusive of 435,000 shares exercised to
cover over-allotments. The sale of common stock resulted in net proceeds to the
Company of approximately $34,650,000, after deducting all expenses related to
the IPO.
5. Preferred Stock
In connection with the IPO, the Company's redeemable convertible preferred stock
was converted into 8,108,258 shares of common stock. Thereafter, the Company's
certificate of incorporation was amended to authorize 1,000,000 shares of
preferred stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend rights and rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences, and the number of shares constituting any series or
designation of such series. At December 31, 1997, the Company has no issued or
outstanding shares of preferred stock.
6. Stock Option Plans
In 1995, the Company's Board of Directors (the Board) approved the 1995 Stock
Plan, which provides for the granting of incentive stock options (ISOs) and
nonqualified stock options. Prior to the adoption of the 1995 Stock Plan, the
Board granted options under the 1982 Employee Incentive Stock Option Plan, the
1986 Nonqualified Stock Option Plan and the 1986 Stock Plan. Following the
completion of the IPO, the Company adopted the 1997 Stock Plan, the 1997
Employee Stock Purchase Plan and the 1997 Nonemployee Director Stock Option
Plan, for which the Company reserved 750,000, 375,000 and 95,000 shares of
common stock, respectively, for future issuance.
Under the 1995 and 1997 Stock Plans (the Plans), the Company may issue options
to purchase up to 2,687,300 shares of common stock, of which 556,200 options are
available for grant as of December 31, 1997. ISOs may be granted at an exercise
price not less than the fair market value per share of common stock on the date
of grant, as determined by the Board. The price per share relating to each
nonqualified option granted under the Plans shall not be less than the lesser of
(i) the book value per share of common stock as of the end of the Company's
fiscal year immediately preceding the date of grant or (ii) 50% of the fair
market value per share of common stock on the date of grant. Vesting of the
options is determined by the Board, and the options expire 8 years from the date
of grant. An employee may convert his or her unexercised ISOs into nonqualified
options at any time prior to the expiration of such ISOs.
twenty-three
<PAGE> 13
Notes to Financial Statements (continued)
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, which requires the measurement of the
fair value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to the financial statements. As permitted
by SFAS No. 123, the Company will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
has elected the disclosure-only alternative under SFAS No. 123 for options
granted using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The weighted average fair value per share of options granted during 1995, 1996
and 1997 was $0.46, $0.17 and $5.64, respectively. The weighted average
assumptions are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.5% 6.3% 5.1 - 6.0%
Expected dividend yield -- -- --
Expected lives 7 years 7 years 7 years
Expected volatility 80% 80% 80%
</TABLE>
Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net income (loss) and basic, diluted and pro forma diluted
net income (loss) per common and potential common share would have been as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Net income (loss), as reported $(3,783,680) $(5,054,863) $ 130,755
------------ ------------ -----------
Net income (loss), pro forma $(3,812,217) $(5,105,339) $ (320,629)
------------ ------------ -----------
Net income (loss) per share, as reported
Basic $ (5.07) $ (6.64) $ 0.04
------------ ------------ -----------
Diluted $ (5.07) $ (6.64) $ 0.01
------------ ------------ -----------
Pro forma diluted $ (0.84) $ (0.57) $ 0.01
------------ ------------ -----------
Net income (loss) per share, pro forma
Basic $ (5.11) $ (6.71) $ (0.10)
------------ ------------ -----------
Diluted $ (5.11) $ (6.71) $ (0.03)
------------ ------------ -----------
Pro forma diluted $ (0.85) $ (0.58) $ (0.03)
------------ ------------ -----------
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation may not
be representative of that to be expected in future years.
The following table summarizes information about options outstanding at December
31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- --------------------------------------
Weighted
Average Weighted Average Weighted Average
Range of Number Remaining Exercise Price Number Exercise Price
Exercise Price Outstanding Contractual Life per Share Outstanding per Share
- ---------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
$ .10 - 1.90 1,642,550 6.27 $ .44 516,879 $ .19
4.10 - 10.00 294,750 7.36 4.67 -- --
18.88 - 21.88 193,800 7.80 19.38 -- --
---------
2,131,100
---------
</TABLE>
twenty-four
<PAGE> 14
Notes to Financial Statements (continued)
The following schedule summarizes the activity under the stock option plans for
the three-year period ended December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average
Number of Price per Price
Shares Share per Share
--------- ---------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1994 220,329 $ 1.20 $1.20
Granted 540,399 .60 .60
Exercised (6,678) .60 - 1.20 .73
Terminated (328,028) .60 - 1.20 1.00
--------- ---------- ---------
Outstanding at December 30, 1995 426,022 .60 .60
Granted 1,881,259 .10 - 1.90 .22
Exercised (84,137) .10 - .60 .10
Terminated (518,802) .10 - .60 .51
--------- ---------- ---------
Outstanding at December 28, 1996 1,704,342 .10 - 1.90 .23
Granted 784,700 1.90 - 21.88 7.29
Exercised (331,448) .10 - 1.90 .58
Terminated (26,494) .10 - 8.50 2.56
--------- ---------- ---------
Outstanding at December 31, 1997 2,131,100 $ .10 - 21.88 $2.76
--------- ---------- ---------
Exercisable at December 31, 1997 517,816 $ .10 - 1.90 $0.19
--------- ---------- ---------
</TABLE>
In 1997, the Company granted one officer and one director options to purchase in
total 143,750 shares of common stock at an exercise price of $1.90 per share. At
the date of grant, the estimated fair value per share of the Company's common
stock exceeded the exercise price of the options, and accordingly, the Company
has recorded deferred compensation of $191,875 related to this difference at the
date of grant. For the year ended December 31, 1997, the Company has recorded
compensation expense of $42,718 related to these options grants.
The exercise price of all other options outstanding represents the fair market
value per share of common stock as of the date of grant.
7. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This standard requires, among other things,
recognition of future tax effects, measured by enacted tax rates, attributable
to deductible temporary differences between the financial statement and income
tax bases of assets and liabilities.
The approximate income tax effects of these temporary differences are as
follows:
<TABLE>
<CAPTION>
December 28, December 31,
1996 1997
--------------- --------------
<S> <C> <C>
Net operating loss and federal tax credit carryforwards $ 12,291,000 $ 10,689,000
Reserves not yet deductible for tax purposes 282,000 344,000
Depreciation 145,000 101,000
Deferred revenue 43,000 174,000
Capitalized research and development expenses 1,276,000 2,284,000
Valuation allowance (14,037,000) (13,592,000)
------------------- ---------------
$ -- $ --
------------------- ---------------
</TABLE>
twenty-five
<PAGE> 15
Notes to Financial Statements (continued)
The Company has available net operating loss carryforwards of approximately
$23,000,000 and federal research and development tax credit carryforwards of
approximately $1,500,000 as of December 31, 1997 to reduce future income tax
liabilities. These carryforwards are subject to review and possible adjustment
by the appropriate taxing authorities and expire from 1999 through 2011 as
follows:
<TABLE>
<CAPTION>
Research and
Net Operating Loss Development Tax
Fiscal Year Carryforwards Credit Carryforwards
- ----------------------------------------------------------- --------------------
<C> <C> <C>
1999 $ 3,358,000 $ --
2000 3,659,000 --
2001 2,870,000 1,252,000
2002-2006 1,369,000 150,000
2007-2011 11,744,000 98,000
----------- ----------
$23,000,000 $1,500,000
----------- ----------
</TABLE>
The Company has recorded a 100% valuation allowance against the net deferred tax
asset as of December 28, 1996 and December 31, 1997, as the Company believes
that it is more likely than not that it will not be able to realize this asset.
The decrease in the valuation allowance in 1997 primarily relates to the
Company's operating results.
Pursuant to the Tax Reform Act of 1986, the utilization of net operating loss
carryforwards for tax purposes may be subject to an annual limitation if a
cumulative change of ownership of more than 50% occurs over a three-year period.
As a result of the Company's preferred stock financings, such a change in
ownership occurred. As a result of this ownership change, the utilization of
$17,000,000 of the Company's net operating loss carryforwards will be limited to
approximately $325,000 per year. The Company is currently determining whether
the IPO resulted in another ownership change. If so, the utilization of
additional net operating loss carryforwards may be limited.
8. Commitments and Contingencies
LEASES
The Company leases facilities under an operating lease that expires in June
2002. The approximate future minimum rental payments under this lease, as
amended, are as follows:
<TABLE>
<CAPTION>
Amount
-------------------------------
<S> <C> <C>
1998 $ 444,000
1999 504,000
2000 564,000
2001 575,000
2002 293,000
----------
$2,380,000
----------
</TABLE>
Rent expense was approximately $234,000, $244,000 and $346,000 for the years
ended December 30, 1995, December 28, 1996 and December 31, 1997, respectively.
ROYALTIES
The Company has entered into several software license agreements that provide
the Company with exclusive worldwide licenses to distribute or utilize certain
patented computer software. The Company is required to pay royalties on all
related sales. Under one software license agreement, as amended, the Company is
obligated to make minimum quarterly royalty payments from 1995 through 1999. The
minimum payments are noncancelable and nonrefundable, but any minimum payments
in excess of amounts due for actual license sales in any quarter may be used as
a credit against future royalty fees in excess of the specified minimum
payments. The minimum royalty payments under this agreement are as follows:
<TABLE>
<CAPTION>
Amount
--------------------------------
<S> <C> <C>
1998 $490,000
1999 450,000
--------
$940,000
--------
</TABLE>
Royalty expense under royalty agreements was $101,000, $735,000 and $902,892 for
fiscal 1995, 1996 and 1997, respectively.
twenty-six
<PAGE> 16
Notes to Financial Statements (continued)
LEGAL PROCEEDINGS
From time to time, the Company may be exposed to litigation relating to its
products and operations. The Company is not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company's financial conditions or results of operations.
9. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 28, December 31,
1996 1997
------------ ------------
<S> <C> <C>
Payroll and payroll-related $ 537,959 $ 681,923
Royalties 213,360 372,853
Outside commissions 255,519 143,543
Customer deposits 382,075 1,085,521
Other 936,014 1,084,745
---------- ----------
$2,324,927 $3,368,585
---------- ----------
</TABLE>
10. Employee Benefit Plan
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code covering all eligible employees, as defined. The Plan
allows for employees to defer a portion of their salary up to 15% of pretax
compensation. While the Company has the discretion to make contributions to the
plan, no such contributions were made in 1995, 1996 or 1997.
11. Financial Information by Geographic Area
Revenues by geographic destination and as a percentage of total revenues are as
follows:
<TABLE>
<CAPTION>
Geographic Area by Destination 1995 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
North America $3,965,078 $8,042,984 $17,159,771
Europe 218,559 914,314 2,009,926
Asia 156,144 49,467 83,249
Other 15,223 -- 316,648
---------- ---------- -----------
$4,355,004 $9,006,765 $19,569,594
---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
Geographic Area by Destination 1995 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
North America 91% 89% 88%
Europe 5 10 10
Asia 4 1 1
Other -- -- 1
---- ---- ----
100% 100% 100%
---- ---- ----
</TABLE>
12. Valuation and Qualifying Accounts
The following table sets forth activity in the Company's accounts receivable
reserve account:
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Charges to End of
of Year Expenses Deductions Year
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1995 $ 20,000 $110,000 $ -- $130,000
1996 130,000 135,000 (54,884) 210,116
1997 $210,116 $ 70,000 $ -- $280,116
</TABLE>
twenty-seven
<PAGE> 17
Notes to Financial Statements (continued)
TO THE BOARD OF DIRECTORS OF CONCORD COMMUNICATIONS, INC.:
We have audited the accompanying balance sheets of Concord Communications, Inc.
(a Massachusetts corporation) as of December 28, 1996 and December 31, 1997, and
the related statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Concord Communications, Inc. as
of December 28, 1996 and December 31, 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
Boston, Massachusetts
January 19, 1998
twenty-eight
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES
Concord Communications Securities Corporation
33 Boston Post Road, West
Marlboro, MA 01752
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the incorporation
of our report dated January 19, 1998 included in this Form 10-K, into the
Company's previously filed Registration Statements on Form S-8 (File nos.
333-40645 and 333-38363).
Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-10-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 7,858
<SECURITIES> 28,681
<RECEIVABLES> 3,041
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 282
<PP&E> 6,559
<DEPRECIATION> 4,507
<TOTAL-ASSETS> 41,914
<CURRENT-LIABILITIES> 7,431
<BONDS> 0
0
0
<COMMON> 68,063
<OTHER-SE> (33,581)
<TOTAL-LIABILITY-AND-EQUITY> 41,914
<SALES> 17,344
<TOTAL-REVENUES> 19,570
<CGS> 1,485
<TOTAL-COSTS> 2,874
<OTHER-EXPENSES> 16,862
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 297
<INCOME-PRETAX> 131
<INCOME-TAX> 0
<INCOME-CONTINUING> 131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 131
<EPS-PRIMARY> .04
<EPS-DILUTED> .01
</TABLE>
