<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
-------------------
Commission File Number 0-25498
CONCENTRA CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2827026
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
21 NORTH AVENUE
BURLINGTON, MA 01803
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 229-4600
Securities registered pursuant to Section 12(b) of the
Act: None Securities registered pursuant to Section
12(g) of the Act:
Rights to Purchase Series A Participating Cumulative Preferred Stock
--------------------------------------------------------------------
$.00001 par value
-----------------
Common Stock $.00001 par value
------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) 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. [ ]
Aggregate market value of Registrant's voting stock held by
non-affiliates of the Registrant as of June 19, 1998 was $25,102,997. As of June
19, 1998, there were issued and outstanding 6,085,575 shares of the Registrant's
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following document has been incorporated by reference in the
following part of the Form 10-K: Definitive Proxy Statement for the August 10,
1998 Annual Meeting incorporated by reference (to the extent specified) in Part
III.
================================================================================
<PAGE> 2
CONCENTRA CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
TABLE OF CONTENTS
PART I
ITEM DESCRIPTION PAGE(s)
- ---- ----------- -------
1 Business........................................................ 3-14
2 Properties...................................................... 14
3 Legal Proceedings............................................... 14
4 Submission of Matters to a Vote of Security Holders............. 14
PART II
5 Market for Registrant's Common Equity and Related
Stockholder Matters............................................. 15
6 Selected Financial Data......................................... 16
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 17-28
8 Financial Statements............................................ 29-49
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 49
PART III
10 Directors and Executive Officers of the Registrant.............. 49
11 Executive Compensation.......................................... 49
12 Security Ownership of Certain Beneficial Owners
and Management.................................................. 49
13 Certain Relationships and Related Transactions.................. 49
PART IV
14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K..................................................... 50-51
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
Concentra Corporation was incorporated under the laws of Delaware in
1984 as ICAD, Inc. and changed its name to Concentra Corporation in 1995. Unless
the context otherwise requires, references herein to the "Company" or
"Concentra" include Concentra Corporation and its subsidiaries.
Concentra develops, markets and supports software products that
automate the processes that underlie selling customizable products, services and
systems. A significant portion of the time it takes to market and sell new
products goes into gathering accurate and timely product and market packaging
information from other parts of the enterprise, and reformatting it in order to
facilitate buy decisions and win business. The Company has developed an
innovative approach to improving sales force effectiveness based on capturing
and applying product and process knowledge necessary for selling customizable
products. This new approach enables companies to capture what and how they sell
in order to generate new configurations, quotes and complete sales proposals
directly from unique and specific customer requirements. As a result, sales and
customer service productivity is improved and the time it takes to respond to
market opportunities is substantially decreased.
INDUSTRY BACKGROUND
Since the late 1980s, Sales Force Automation ("SFA") tools have been
improving the administrative productivity of salespeople by automating tasks
such as sales contact management, opportunity management, sales forecasting,
commission tracking, call reporting, and order entry validation. Despite the
tactical productivity advances represented by SFA technology, little has been
done to improve the strategic effectiveness of salespeople or increase sales
volume, trim sales cycle time and lower the cost per sale.
In addition, over the past decade, companies have invested heavily in
technology to re-engineer manufacturing processes. Back-office systems, such as
enterprise resource planning ("ERP") software, have structured and captured
information about products, inventory, resource availability and costs, and have
streamlined back-office operations and reduced operations costs. Now
corporations are looking for ways to increase revenues in addition to reducing
the cost of operations.
At the same time, corporations face new pressures in the competitive,
global marketplace. Worldwide mergers and acquisitions have created corporations
with diverse product lines, often sold by a consolidated sales force with little
experience in selling a corporation's entire range of products. The mobile
workforce and associated staff retention issues exacerbate the problem of
effectively selling a broad product range, making it difficult for companies to
rapidly train and deploy new salespeople who can be effective in a climate where
product lines are also rapidly changing. The challenge for companies today is to
gain market leadership by helping their global sales forces effectively sell a
variety of products, whether a relatively simple item like a single replacement
window, or complex, build-to-order systems like a sophisticated, multi-level
network.
As a result, a sub-segment of SFA has emerged, commonly referred to as
Technology-Enabled Selling ("TES"), to meet the strategic selling needs of
companies. TES systems include Sales Configuration Systems ("SCS"), which are
used to capture customers' needs and determine a valid custom product, service
or system to meet those needs.
According to a recent report from Gartner Group, a leading industry
analyst firm, worldwide expenditures for TES systems were $1.4 billion in 1997
and will continue to grow at a rate of 35 percent annually through the year 2000
to approximately $3.9 billion.
Businesses that develop, manufacture and market customizable products,
services and systems must compete based on meeting customers' unique needs and
desires, response time, quality, cost, service, innovation and flexibility while
ensuring that the orders they create are valid. To achieve this, they must
3
<PAGE> 4
integrate their TES systems with other enterprise systems in order to bring
enterprise information to bear at the point of sale (e.g., kiosks, salespeople's
laptops, web sites, call center representatives PCs, etc.). Companies that
integrate TES with their other core front-and back-office enterprise systems are
better able increase sales throughput, lower selling costs, reduce order errors
and increase customer satisfaction.
The Company provides technological solutions that help companies
compete by improving sales force effectiveness.
SALES FORCE EFFECTIVENESS
The process of selling custom products, services and systems entails
performing needs assessment, facilitating option selection, performing
configuration, and generating a quote and proposal complete with drawings,
schematics and performance metrics. In cases where sales forces are not using
technology-enabled selling tools, salespeople perform ad hoc needs assessments
that vary according to selling skills, product knowledge and experience. This
variable process generally requires subsequent sales calls involving technical
sales specialists who extract detailed vocational needs from customers and map
those to the company's ability to configure the most advantageous solution,
based either on the sales engineer's experience with previous solutions or a
detailed analysis. This is particularly the case in the markets for complex
products such as industrial equipment and networked high-tech systems.
The technical sales specialist then transfers his or her understanding
of the "solution" into a price and delivery schedule or passes the technical
information to someone else who figures out the pricing and the manufacturing
schedule. This information is either given back to the salesperson or to a
proposal specialist, who creates a complex document, recapping the prospect's
needs and proposing the manufacturer's best product configuration, price,
delivery date and any other relevant terms.
This manual process leaves a great amount of what should be verbatim
information (e.g., engineering, pricing, inventory availability,
manufacturability, etc.) up to individual interpretation. There is a high
likelihood of human error in the process and the cycle time is relatively
protracted.
The Company believes that issues that have been inadequately addressed
include:
The increasing demand of the informed consumer in a customer-centric
marketplace. The early 1990s brought the concept of mass customization
to the marketplace; the web introduced "push" technology in the
mid-1990s; and the late 1990s marketplace is now evolving to serve a
"market of one." Consumers want what they want, when they want it,
packaged uniquely to meet their individual needs. Technological
advances in information management have enabled marketers to create
custom products and services, and now the consumer has come to expect a
high level of customization and service. Companies who do not practice
customer-centric marketing and selling will be hard-pressed to compete
in this climate.
Too much time lost translating prospect needs into product
specifications. As products and services have become more complex and
more finely targeted, customers are more likely to purchase from
salespeople who have the ability to understand their needs and quickly
respond with the best custom-configured product their company has to
offer. Although Sales Configuration Systems (SCS) have been available
for several years, they do not assist a salesperson in selecting the
best configuration based upon the customer's unique needs; they merely
determine whether or not the selected configuration is valid. The cost
of failing to address the customer's unique vocational needs and
subjective desires can range from poor customer satisfaction to lost
sales and market share.
Excessive cost of pre-sales technical support. The status quo technique
for translating prospect needs into product specifications is the
increased use of technical sales specialists during the pre-sale phase
of the sales process. Generally, technical sales specialists have
better knowledge of the capabilities of the entire product line and a
better understanding of how these capabilities meet prospect needs.
While somewhat effective, this technique drives up the cost of selling
and simply shifts the burden of expertise from the salesperson to the
technical sales specialist.
4
<PAGE> 5
Excessive time consumed preparing complex sales quotes and proposals.
As the pace of business accelerates, and the consumer's expectation of
response timeline shortens, it is imperative that companies deliver
accurate and thorough sales proposals in record time. The increasing
trend towards the "market of one" makes it more difficult to create
standardized proposals since each document is as unique as the product
it is proposing to sell. The cost of preparing high-quality, accurate
quotes and proposals rises relative to the level of complexity and
customization of the product. Companies that fail to systematically
address the quality and turnaround time associated with preparing sales
quotes and proposals are likely to lose sales and market share to more
responsive, fleet competitors.
The increasing cost of order errors. The increased sophistication of
custom products, services and systems has resulted in an overall
increase in the cost and frequency of order errors. Order errors occur
throughout the sales and delivery cycle. At the point of sale, an error
can be made by simply proposing a product configuration that does not
actually meet a customer's technical requirements or that is not
manufacturable. Errors occur in order entry because incompatible
options are not rejected or ancillary equipment has not been included
in the order. In manufacturing, an invalid or unbuildable configuration
can shut down the production line. If a misconfigured order is actually
shipped to a customer, the cost of correcting the mistake in the field
can be excessive, if not irrecoverable. Order errors can be attributed
to human error, ranging from not having access to current and accurate
back-office information, to misinterpreting what constitutes "valid" to
misunderstanding the product line and how it will perform when used, to
simply making typographic errors when processing an order. Companies
who do not automate these processes and integrate their selling
functions with their back-office systems will continue to be plagued by
order errors. No matter what the cause or where the errors occur in the
sales cycle, companies will incur associated costs as a result.
THE CONCENTRA SOLUTION
The Company has developed innovative approaches to Sales Force
Automation that solve the sales force effectiveness problems facing companies
today.
SELLINGPOINT
The Company's SellingPoint(R) sales configuration software turns sales
opportunities into orders by bridging the Gap between front-office opportunity
management systems and back-office systems such as ERP. SellingPoint is able to
drive revenue generation by bringing sales-critical information from existing
enterprise systems to the point of sale so that complex sales operations such as
product definition, configuration, proposal generation and order submission are
streamlined, efficient and accurate.
SellingPoint can be used to configure a broad range of products,
services and systems, from the simple to the complex. Sales forces of
market-leading industrial, high tech and consumer companies are using
SellingPoint to effectively sell a range of their offerings while rapidly
responding to business changes and new product introductions.
SellingPoint's unique ability to model both what and how a company
sells allows salespeople to present customers with the most compelling reasons
to buy their company's products and then instantly deliver valid quotes and
actionable proposals. Most sales configuration systems merely determine whether
or not a configuration is valid, while SellingPoint assesses the customer's
needs and determines the best product solution.
SellingPoint is built on a multi-tiered architecture that consists of
the SellingPoint Data Backbone, the SellingPoint Active Model and the
SellingPoint User Interface. This COM-based and ODBC-compliant architecture
speeds deployment and integration to other front- and back-office systems such
as Siebel 98 and Oracle Applications.
SellingPoint's drag-and-drop development environment and
object-oriented technology deliver a lowered cost of ownership by reducing
development and maintenance overhead. In addition, SellingPoint's technology
scales readily to accommodate the needs of a range of businesses: from simple to
complex product lines; from simple to complex sales processes; and from simple
to complex deployment styles (e.g., client-server, remote/mobile and web).
5
<PAGE> 6
SellingPoint's Active Model is a powerful configuration engine that
resolves configuration rules against customer needs and manages the
bi-directional flow of information between SellingPoint modules and other
enterprise software.
SellingPoint's flexible user interface allows companies to write one
model and run it anywhere: on a PC, a laptop or the web. Using a single model to
deploy in multiple selling modes supports the range of ways companies sell
today, from inside telesales, remote field sales to unassisted selling over the
World Wide Web.
Companies that purchase SellingPoint can expect: increased sales
effectiveness and profits; reduced order errors; reduced costs per sale; rapid
return on investment; standardized selling processes; and accelerated sales
training.
SellingPoint is licensed separately for developers and end users with
significant cost differences between the development environment used by
programmers and the runtime environment used by salespeople.
ICAD TRANSACTION
On February 26, 1998, the Company entered into a license agreement and
transition agreement to license the software and intellectual property rights
used in the ICAD Business exclusively to the Distributor, a recently established
company organized under the laws of Luxemborg by Electra Fleming Private Equity
Partners ("Electra Fleming"), a partnership of which the principal partner is
Electra Investment Trust, plc. The License Agreement and Transition Agreement
("ICAD Transaction"), provide that the Company will, among other things, grant
the Distributor an exclusive world-wide license to use the key software and
intellectual property rights of the ICAD Business, transfer and assign to the
Distributor certain assets and contracts relating to the ICAD Business, and
provide to the Distributor certain administrative and support services on a
transitional basis. Under the license agreement, the Distributor has agreed to
pay the Company fixed and variable royalties consisting of (a) eight fixed
quarterly royalty installments, totaling $18.7 million, and (b) a variable
royalty in 1999, 2000, and 2001 equal to 10% of the amount by which gross
revenues of the Distributor related to the licensed software, calculated on a
cumulative basis from the date of closing of the Transaction, exceed $17.5
million for the year ending March 31, 1999, $35.0 million for the two-year
period ending March 31, 2000 and $52.5 million for the three-year period ending
March 31, 2001, in each case less the aggregate variable royalties paid in
respect of prior periods. The Company will record revenue in the period in which
the payments have been made and the related services have been performed.
Electra Investment Trust, plc has agreed to guarantee only the payment of the
fixed royalty payments under the License Agreement. This transaction was
formally approved by the Company's shareholders on June 1, 1998.
LOANDATA LLC
On December 24, 1997, the Company entered into an agreement to acquire
a 53.4% majority interest in a newly-created limited liability company that is
the successor to the business of Loandata.inc. Loandata has developed a
SellingPoint-powered e-commerce application, Spot Finance(TM), that performs
automobile selection from available dealer inventory and electronically
underwrites car leases and loans. SellingPoint allows Spot Finance to be
flexibly deployed via kiosks or PCs in automobile dealerships, or by extending
selling to the World Wide Web. The relationship with Loandata enables the
Company to extend SellingPoint technology to new markets, such as financial
services, and to take advantage of recurring revenue opportunities from
transaction processing fees.
CONCENTRA'S STRATEGY
The Company's primary objective is to be a dominant provider of
technology-enabled selling solutions, worldwide. The key elements for
implementing this strategy include:
Developing SellingPoint Product Solutions for target markets. The
Company focuses its solutions on the Industrial Products, Networked
High Tech Systems and Financial Services markets. The Company
6
<PAGE> 7
believes that focusing the organization around the specific needs of
the target market segments will enable the creation and deployment of
global strategies, and improve customer satisfaction within the target
market segments.
Vertically focused sales configuration packages for the Industrial
Products market. The Company believes that it holds a significant
competitive advantage over its sales configuration system competitors
in the Industrial Products marketplace as a result of its engineering
heritage and its history of providing configuration capability with The
ICAD System. To that end, the Company has taken the core SellingPoint
technology and bundled it with industry-specific templates and object
libraries to create SellingPoint INDUSTRIAL. This vertically-focused
sales configuration solution gives Industrial Products companies a
custom-tailored software solution that delivers more "out-of-the-box"
functionality and speeds implementation. The Company believes that
vertically-focused applications in SFA will follow the success model
established by vertically-focused ERP systems.
Developing Rapid Deployment Tools & Methodologies. The Company believes
that its customers' strategic implementation of technology-enabled
selling can be accelerated through a structured methodology, associated
training and strategic consulting services in the area of process and
product modeling. Accordingly, the Company has developed a set of
implementation methodologies and dedicated resources to provide its
customers with this fee-based service. The Company believes it will
create a significant advantage by speeding application deployment and
return on investment for its customers.
Tight Integration with Oracle Applications. Oracle is a technology and
marketing partner of the Company. SellingPoint's certified integration
with Oracle Applications allows Oracle users to streamline front- and
back-office processes and create total enterprise selling solutions
that are year 2000 compliant. SellingPoint 3.3 and later releases ship
with a data schema for Oracle that allows users to store business and
configuration data in Oracle RDBMS on their server and in Oracle Lite
on remote laptops running SellingPoint. Oracle Industrial, the vertical
business unit within Oracle Corporation that services the needs of
Aerospace, Defense, Automotive, Hi-tech/Electronics and Engineering
manufacturers, has selected SellingPoint as part of its solution
footprint.
Developing OEM technology to be embedded in third-party enterprise
software. As the market for front office solutions matures, enterprise
software companies that are selling customer relationship management
solutions are finding a need to incorporate some form of configuration
technology in their product feature set. SellingPoint INSIDE, the
Company's sales configuration component technology designed to be
embedded in private-labeled software products, uses industry standard
integration objects to ensure seamless integration of SellingPoint core
technology into third-party software. To date, the Company has one
significant OEM customer who is shipping a product that has
SellingPoint INSIDE embedded within it. The Company is currently
pursuing additional OEM opportunities.
Developing Advanced Technology-Enabled Selling Add-On Applications.
SellingPoint modules such as QuotePoint and ProposalPoint extend
technology-enabled selling beyond configuration. The Company is now
developing additional tightly integrated modules like these that
provide functionality out of the box as part of the overall
SellingPoint core product. In some cases, the modules will add-on to
SellingPoint solutions or will be sold standalone to plug-in to other
Sales Force Automation solutions.
Delivering SellingPoint-based E-Commerce/ Transaction Processing
Solutions. The Company is developing strategic relationships to create
industry-specific recurring revenue from sales facilitated via
SellingPoint solutions. Loandata, through its Spot Finance product, is
using SellingPoint to power automobile selection and financing kiosks
and desktop systems at automotive dealerships. Loandata will provide
these systems to dealerships for a hardware leasing and system
maintenance fee, and will
7
<PAGE> 8
collect a loan/lease processing fee with each transaction. The Company
will pursue other similar opportunities both directly and through
Loandata.
Technological leadership. The Company believes that technological
leadership is a result of the quality of its core technologies, its
ongoing product development activities and its understanding of and
responsiveness to the emerging market issues in enterprise software,
specifically those in front office automation. The Company plans to
build upon its technology base by adding new features and functionality
to its existing products and expanding its product line using
Microsoft-centric integration standards.
Licensing the ICAD System to Knowledge Technologies International. On
June 1, 1998, Concentra shareholders approved an agreement to license
the ICAD(R) System to Knowledge Technologies International. The terms
of the agreement call for Concentra to receive fixed payments of $18.7
million during the next two years, plus additional variable payments
until March 2001. Concentra will invest the revenues in its
SellingPoint business and focus solely on the high-growth sales force
automation market.
PRODUCTS
SELLINGPOINT
SellingPoint brings enterprise-wide knowledge of products and processes
to the point of sale so that complex sales operations such as needs assessment,
product definition, configuration, financing options, quote and proposal
generation, and order submission are streamlined, efficient and accurate.
SellingPoint applications include a development environment and a
runtime environment. The development environment is used by programmers to model
product and sales processes, enable the model to generate configuration outputs
such as drawing and performance charts, and integrate to other enterprise
systems. The runtime environment is used by salespeople to configure
simple-to-complex products, generate quotes and proposals, and seamlessly send
and receive information between SellingPoint and other enterprise applications
such as Siebel 98 and Oracle Applications.
SellingPoint's multi-tier architecture is designed for seamless
enterprise integration, which speed deployment, reduces maintenance overhead and
streamlines selling and order entry.
SellingPoint Data Backbone. The SellingPoint Data Backbone provides the
data management for the configuration model and supports Sybase, MS SQL
Server, Oracle RDBMS and Oracle Lite. The Data Backbone contains both
the business data (customer and product) and the configuration rules.
In addition, product configuration results are managed through the Data
Backbone. SellingPoint provides a full set of published interfaces for
data import/export as well as data schema extensions for customized
integrations.
SellingPoint Active Model. The Active Model maps customer needs to the
optimal product and maps configuration results to customer-driven
outputs like schematics, drawings, graphs, charts, quotes and
proposals. As the central processing unit of the SellingPoint system,
the Active Model's engine dynamically resolves product structure and
business rules that govern the relationships between components.
The Active Model's powerful, integrated processor enables system-level
configuration, customer-centric selling processes and simple-to-complex
configuration. The Active Model uses the SellingPoint Configuration
Interface Object to bi-directionally pass inputs and outputs to
SellingPoint system components and other enterprise software. The CIO
uses Microsoft's COM (Component Object Model) to inter-operate with
other SellingPoint modules and third-party applications. The Active
Model also uses a CORBA interface to handle a subset of the CIO
functionality for integration with applications that are not COM-based.
SellingPoint User Interface. SellingPoint "thin client" user interface
sends and receives needs assessment and configuration outputs between
the user and the Active Model. The user interface does not store logic
or business data, which streamlines application upgrades and
maintenance. SellingPoint user interfaces can be built in either Visual
Basic or HTML, either of which can be run from the same application
model allowing companies to deploy selling systems on desktop PCs,
kiosks, remote laptops or the Web.
The SellingPoint family of products includes:
SELLINGPOINT BASE SYSTEM -- the base sales configuration system
including:
8
<PAGE> 9
SellingPoint Development Tools. A drag-and-drop development environment
for quickly and easily building and maintaining product, service or
system models.
SellingPoint Data Backbone. A standard data schema for storing product
information, business rules and configuration rules.
SellingPoint Active Model. The configuration engine for mapping
customer needs to the optimal solution and managing the interaction
among SellingPoint modules and other enterprise systems.
QuotePoint. A complete quote system with automated quotation
generation, integrated product configuration and multiple discounting
methods.
ProposalPoint. A complete system for automatically generating
custom-tailored sales proposals from configuration session results.
SELLINGPOINT INDUSTRIAL - a vertically focused package of the base
sales configuration system plus additional engineering-based modules
designed specifically to meet the needs of Industrial Products
companies, including:
SketchPoint converts engineering sketches into solid models by driving
profile parameters from a set of pre-defined engineering calculations.
RenderPoint creates preliminary, point-of-sale "virtual product images"
of custom-configured products.
DrawingPoint creates proposals with 3D drawings at the point-of-sale.
CADPoint creates electronic definitions of custom-configured products
that can be seamlessly passed to leading CAD systems.
SolidPoint enables industrial product manufacturers to create wireframe
and feature-based parametric solid geometric models "on the fly."
SELLINGPOINT INSIDE - component sales configuration technology designed
to be embedded in third-party enterprise software.
The Loandata family of products includes:
SPOT FINANCE
Spot Finance (TM) is a SellingPoint-powered e-commerce
application that performs automobile selection from available dealer
inventory and electronically underwrites car leases and loans.
SellingPoint enables Spot Finance to be flexibly deployed via kiosks or
PCs in automobile dealerships, or by extending selling to the World
Wide Web.
Spot Finance is a consistent, integrated automobile sales and
financing system comprised of two distinct products, SpotDesk(TM) and
SpotSell(TM), for use by the sales manager and the sales
person/consumer, respectively. Both products are available as
standalone applications, but work in concert to maximize dealer
efficiency.
SPOTDESK
SpotDesk is a desktop workstation for sales and business
managers that uses SellingPoint's configuration engine to maximize
dealer profit from a given set of parameters.
SpotDesk combines "deal" parameters, dealer costs, consumer
credit, lender underwriting, rates and advance policies to calculate
potential profits on one screen. As the deal changes, profit scenarios
are listed, by lender, in real-time. It is a negotiation tool, designed
for Sales Managers and their staffs,
9
<PAGE> 10
that, unlike competitive systems, calculates specific financing options
by incorporating dealer and manufacturer costs, lender policies and
consumer data from other enterprise and back-office systems.
SPOTSELL
SpotSell is a desktop or kiosk-based system for allowing
consumers and showroom salespeople to perform a needs assessment based
on the consumer's new or used car needs, their finance history and
their current income. SpotSell maps available inventory, option
packages, after market packages and the best financing available to the
customer's financial situation, needs and wants.
Spot Finance integrates with dealer inventory systems and has
an easy-to-update interface for maintaining lender rate sheets. Spot
Finance's open integration strategy allows automobile dealerships to
deploy Spot Finance to support how they sell and the range of financing
options they offer.
THE ICAD SYSTEM
Through its licensing agreement with Knowledge Technologies
International ("KTI"), the Company's ICAD System technology is addressing the
needs of the mechanical design industry by automating the engineering process,
specifically for conceptual design and system-level design. The ICAD System
utilizes generative technology to model geometry, performance, manufacturing
issues, costs, regulatory requirements and other design/engineering functions
that complement a customer's existing CAD tools. Four major system components
comprise The ICAD System:
- The ICAD Design Language (IDL) for defining Generative Models
- Geometry modeling and drawing tools for creating rule-based
definitions of complex surfaces, solids, and drawings
- User interfaces for developing and interacting with Generative
Models
- Data integration tools for linking to other software products
including CAD systems, relational databases, analysis systems
and manufacturing equipment
SALES AND MARKETING
The Company distributes its products and provides related services
through a direct sales organization covering North America, Europe and Asia and
through independent distributors and value-added resellers (VARs) in certain
geographies.
The Company has also established marketing relationships with leading
SFA vendors, enterprise software companies and systems integrators. The
Company's marketing strategy focuses on expanding sales to new customers through
our marketing partners' install and prospect bases, expanding sales to existing
customers, and expanding its international sales. The direct sales channel is
highly focused on the Industrial Products and Networked High-Tech Systems
markets where configuration of simple to complex products comprises the majority
of their technology-enabled selling needs.
The Company markets products and services in North America and Europe
through a direct sales force. In addition to sales and marketing infrastructure
at the Company's Burlington, Massachusetts corporate headquarters, the Company
also has a sales office in the Atlanta metropolitan area. Through European
subsidiaries, the Company maintains offices in the United Kingdom and France
from which it conducts sales activities and provides technical support.
In certain foreign markets, the Company has entered into agreements
with independent distributors to market products to customers not served by the
Company's direct sales organization or to expand sales at lower cost. The
Company has distributor relationships in Italy and Denmark.
During the year ended March 31, 1998, sales of products and services to
Boeing accounted for 15.6% of the Company's revenues during that period.
Revenues from Boeing, IPTN and British Aerospace
10
<PAGE> 11
constituted 10.9%, 19.3% and 14.9% respectively, of the Company's revenues in
fiscal 1997. Revenues from Boeing and Tata Technologies constituted 16.0% and
10.1%, respectively, of the Company's revenues in fiscal 1996.
The Company's agreements with all of its current principal customers
are master licenses or distribution agreements pursuant to which the Company has
agreed to provide products and services against issuance from time to time by
the customer of purchase orders, but none of the Company's agreements with its
principal customers provides for any minimum purchases or obligates the customer
to issue any purchase orders. Except for pricing and volume discounts, the terms
of the Company's agreements with its principal customers (including affiliates
of the Company) do not differ from the terms generally offered by the Company to
its other customers.
CUSTOMER SERVICE AND SUPPORT
The Company believes that providing its customers with support,
training, consulting and other customer services helps ensure that customers
maximize the benefits offered by their products as quickly as possible. In
addition, the demand by customers for various support services provides the
Company with incremental revenue opportunities.
The Company's customers have access to the following services and
benefits:
Customer Support. Maintenance, enhancements and support are provided
for annual fees equal to approximately 15% of the initial license fees
for the supported products. The Company believes such fees are
comparable to other such fees within the industry. These services
consist of periodic updates, functional and operational problem
remedies and hot-line support for simple help and general feedback.
Feedback from customers also provides important input for the Company's
product planning process.
Training. Initial training consists of a series of classes targeting
different audiences from business/product line managers through
programmers and MIS managers. Courses are held at the Company's
headquarters or, when appropriate, at a customer site. After initial
training, the Company provides continuing education for special product
modules and advanced features of the system.
Consulting Services. Consulting services are provided by the Company's
Worldwide Client Services group. After initial purchases of software,
the Company usually recommends that customers purchase consulting
services to assist in planning and implementation of the system. The
Worldwide Client Services Group helps companies capture their product
lines and business rules into SellingPoint models. They have a
structured and unique methodology for capturing a company's business
and sales processes. Concentra's Worldwide Client Services Group
collaborates with most of the major systems integration providers that
participate in implementing product/sales process modeling or are
responsible for integrating SellingPoint applications with other
enterprise software solutions.
PRODUCT DEVELOPMENT
The Company believes that its future success will depend upon its
ability not only to enhance existing products, but also to develop and introduce
new products that keep pace with technological developments in the marketplace
and address the increasingly sophisticated needs of its customers. The Company
intends to expand existing product offerings and to introduce new applications.
While the Company expects that certain new products will be developed
internally, the Company may, based on timing and cost considerations, acquire or
license technology and/or products from third parties or consultants.
Historically, the Company has released enhanced versions of its
software modules periodically and has introduced a number of new product modules
each year. Most of the Company's software modules share the same object-oriented
foundations which have made enhancement of the entire product line more
efficient.
PROPRIETARY RIGHTS
The Company believes that, due to the rapid pace of technological
innovation, the Company's ability to establish and maintain a position of
technological leadership in its industry is more dependent upon the
11
<PAGE> 12
skills and expertise of its development personnel than upon the legal
protections afforded its technology. In addition, the Company employs a
combination of contracts, copyright law and trade secret law to protect its
proprietary technology.
The Company has a program in effect to facilitate copyright
registration of its software and documentation with the U.S. Copyright Office.
Source codes of the Company's products are protected both as trade secrets and
as unpublished copyrighted works. The Company also has internal policies and
systems to ensure limited access to, and confidential treatment of, its trade
secrets. The Company distributes its products under software license agreements,
which grant end-users licenses to use (rather than ownership of) the Company's
products and which contain various provisions to protect the Company's ownership
and the confidentiality of the underlying technology. The Company's software is
distributed with a software lock that requires an authorization code generated
by the Company's internal systems to enable the software to function on a
particular workstation. It is the Company's policy to require its employees and
other parties with access to its confidential information to execute agreements
prohibiting the unauthorized use or disclosure of the Company's technology.
Furthermore, the Company periodically reviews its proprietary technology for
patentability. Despite these precautions, it may be possible for a third party
to misappropriate the Company's technology by reverse engineering or otherwise
or independently to develop similar technology. In addition, effective copyright
and trade secret protection may not be available in every foreign country in
which the Company's products are distributed and the licenses may be
unenforceable in certain jurisdictions.
Certain technology used in the Company's products is licensed from
third parties. The Company also licenses from EDS on a perpetual,
royalty-bearing basis, software permitting an interface between SellingPoint and
EDS's Parasolid software product, which is embedded in a widely used module of
SellingPoint INDUSTRIAL. Although loss of the right to use such software could
reduce the attractiveness of the Company's products to certain customers, it
would not impair the overall operation of such products. The Company does not
believe that any of the Company's products are significantly dependent upon any
other licensed technologies due to the availability of other sources of similar
products or due to the Company's ability to build or maintain, through source
code escrow agreements, any integral source code which may in the future become
unsupported by a third party. The Company believes that the cost associated with
technology licensed from third parties is not material to its results of
operations and does not constitute a significant portion of the total cost of
the Company's products into which such third party technology is incorporated.
The Company has a trademark program to promote proper use and
registration of its primary trademarks. "Concentra" and "SellingPoint" and their
respective marks are registered trademarks of the Company in the United States
and certain foreign jurisdictions. "Loandata" , "Spot Finance", "Spot Sell",
"Spot Connect" and "Spot Desk" are trademarks of Loandata LLC in the United
States and certain foreign jurisdictions.
The Company is not engaged in any material disputes with other parties
with respect to the ownership or use of the Company's proprietary technology and
the Company believes that no basis for any such dispute exists. However, as the
number of software products in the industry increases and the functionality of
these products increasingly overlaps, the Company believes that software may
become the subject of frequent claims of infringement of the rights of others.
There can be no assurance that other parties will not assert technology
infringement claims against the Company in the future. Such a claim would
involve significant litigation expense and management time and the Company could
be required to pay monetary damages and either refrain from distributing an
infringing product or obtain a license from a party asserting a claim (which
license may not be available to the Company on commercially reasonable terms).
COMPETITION
The Company believes that the principal bases for competition in its
market are product functionality, ease of enterprise integration, ease of
deployment and maintenance, product reliability, price/performance
characteristics, ease of product use, customer support and service, distribution
networks and corporate reputation. Competitive pressures faced by the Company
could force the Company to reduce its prices, resulting in slower revenue growth
and reduced profitability. No assurance can be given that the Company will be
able to compete successfully against current and future sources of competition
or that the
12
<PAGE> 13
competitive pressures faced by the Company will not adversely affect its
business, operating results or financial condition.
Competition in the SFA industry is intense. While major SFA and
enterprise software companies, including Oracle Corporation and Siebel Systems,
are involved in cooperative marketing relationships with the Company and
currently offer products that complement those of the Company, there can be no
assurance that these or other companies will not develop products or provide
services which compete with those of the Company. Most of these companies have
significantly greater financial, technological and marketing resources than
those of the Company.
The Company also faces competition for SellingPoint from sales
configuration companies such as Baan, Calico Technologies, Clear With Computers
(CWC), Trilogy Development and, in some cases, SAP. There can be no assurance
that competitors will not develop products or provide services equivalent or
superior to those of the Company or that achieve greater market acceptance.
MANUFACTURING
The Company's manufacturing operation consists of assembling, packaging
and shipping its software products and the documentation needed to fulfill each
order. All manufacturing is currently performed in the Company's Burlington,
Massachusetts facility. Outside vendors provide media (CD-ROM) duplication,
printing of documentation and manufacturing of packaging materials.
BACKLOG
The Company generally ships its products within 30 days after
acceptance of a customer purchase order and execution of a software license
agreement. Accordingly, the Company does not believe that its backlog at any
particular point in time is indicative of future sales levels.
EMPLOYEES
As of June 19, 1998, the Company had 107 employees, including 36 in
sales and marketing (including 12 international), 28 in technical support, 24 in
product development and 19 in general and administrative functions. The
Company's employees are not represented by a labor union and the Company
believes its relations with its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to Executive Officers of the Company, as of
June 19, 1998, is set forth below:
Name Age Position
- --------------------------------------------------------------------------------
Lawrence W. Rosenfeld (1).... 45 Chairman of the Board of Directors,
Chief Executive Officer and President
David I. Lemont............... 40 Senior Vice President and Chief Operating
Officer
Alex N. Braverman............. 38 Vice President, Chief Financial Officer
and Treasurer
Peter T. Lanell............... 46 Vice President, Worldwide Field Operations
Robert E. Phillips, Ph.D...... 42 Chief Technology Officer and Vice
President, Definition Product
Noreen H. Brochu.............. 43 Vice President, Worldwide Client Services
- -----------
(1) Member of the Executive Committee
Mr. Rosenfeld, a founder of the Company, has been Chief Executive
Officer and a director since the Company's inception in 1984, Chairman of the
Board of Directors since March 1993 and President from inception through March
1993 and again since July 1994. From 1982 to 1984, Mr. Rosenfeld was an
independent CAD/CAM consultant. From 1974 to 1981, Mr. Rosenfeld was employed in
various positions at Hood Sailmakers, Inc.
13
<PAGE> 14
Mr. Lemont joined the Company in June 1994 as Senior Vice President and
Chief Operating Officer. From February 1992 to May 1994, Mr. Lemont held several
Vice President positions in the sales organization at Computervision
Corporation. From January 1981 to February 1992, he held various sales and sales
management positions with the Unigraphics Division of McDonnell Douglas.
Mr. Braverman has been Vice President, Chief Financial Officer and
Treasurer since November 1996. From July 1994 to November 1996, he was Corporate
Controller. Mr. Braverman was Controller of Artel Communications Corporation, a
manufacturer of computer networking and video products, from 1988 until it was
merged with Chipcom Corporation in February 1994, and was employed thereafter by
Chipcom Corporation until July 1994. From 1982 to 1988, he held various
financial and managerial positions with BTU Engineering and the William Carter
Company.
Mr. Lanell has been Vice President of Worldwide Field Operations since
1997. From April 1993 to April 1996, he was Vice President, North American Field
Operations. From April 1992 to April 1993, he was the Company's Vice President,
North American Sales. Mr. Lanell joined the Company in 1988 and has held various
positions within North American Sales since that time. Prior to joining the
Company, Mr. Lanell was a salesman for Intellicorp, Inc. from 1986 to 1988. From
1982 to 1986, he held positions in sales and technical sales support at Calma, a
division of General Electric.
Dr. Phillips has been Chief Technology Officer and Vice President,
Product Definition since November of 1997. He was one of original employees of
Concentra, then ICAD, from 1985-1987. Dr. Phillips spent six years at General
Electric Aircraft Engines and was responsible for Engineering Automation
activities in that Division. He returned to Concentra in 1993 as Director, New
Product Development then became Vice President of Engineering before taking his
current position. He has 20 years of advanced computer system research,
development and deployment.
Ms. Brochu has been Vice President, Worldwide Client Services since
June 1995. From June 1993 to June 1995, she was Director of Technical Services.
Ms. Brochu joined the Company in 1988 and held the position of Director of
Technical Sales Support until June 1993. Prior to joining the Company, Ms.
Brochu was employed by Computervision in various positions. Her final position
was as the director of their applied technology center. She was employed by
Computervision from 1979 to 1988.
Officers of the Company are elected by, and serve at the discretion of,
the Board of Directors.
There are no family relationships among any of the executive officers
of the Company.
ITEM 2 - PROPERTIES
The Company's headquarters and principal operations are located in
approximately 30,000 square feet of office space in Burlington, Massachusetts
under a lease expiring in June 2000. The Company also leases additional sales
offices in the Atlanta and metropolitan areas through its wholly owned
subsidiaries, in the United Kingdom and France. While the Company believes its
facilities are adequate for its present needs, it is continually evaluating its
headquarters facilities and believes that suitable alternative space would be
available on commercially reasonable terms.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not engaged in any material legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the fiscal year ended March 31, 1998.
14
<PAGE> 15
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded in the over-the-counter market and
prices are quoted on the NASDAQ National Market System under the symbol CTRA.
The following table sets forth, for the period indicated, the high and low sales
prices for the Company's Common Stock as reported by NASDAQ from April 1, 1996
through March 31, 1998. This information reflects inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily reflect actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1998:
First Quarter $ 9 $4 1/2
Second Quarter $ 7 1/2 $5 1/2
Third Quarter $ 7 1/4 $4
Fourth Quarter $ 6 1/8 $3 1/8
Fiscal 1997:
First Quarter $ 7 $4 1/2
Second Quarter $ 7 3/8 $4 9/16
Third Quarter $11 3/4 $6 1/4
Fourth Quarter $15 1/4 $4 1/4
</TABLE>
On June 19, 1998, there were 118 holders of record of the Company's
Common Stock. The Company believes the actual number of beneficial owners of the
Common Stock is greater than the stated number of holders of record because a
large number of the shares of the Company's Common Stock is held in custodial or
nominee accounts for the benefit of persons other than the record holder.
No dividends have been paid on the Company's Common Stock to date, and
the Company does not anticipate paying dividends in the foreseeable future.
15
<PAGE> 16
ITEM 6 - SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this filing.
CONSOLIDATED FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(In thousands, except per share data) Year Ended March 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses $ 3,884 $17,670 $13,133 $10,050 $ 7,894
Services 9,143 6,797 7,135 8,004 6,356
Related party software and services 743 104 452 2,163 1,459
-------- ------- ------- ------- -------
Total revenues 13,770 24,571 20,720 20,217 15,709
Operating expenses:
Cost of software licenses 2,261 2,073 1,337 1,328 1,193
Cost of services 5,108 4,410 2,677 1,928 1,472
Sales and marketing 13,175 14,541 11,622 8,887 6,309
Research and development 3,805 3,558 2,849 2,423 2,840
General and administrative 2,877 2,655 2,511 1,971 1,779
Provision for bad debts 1,551 1,544 101 173 53
Restructuring charge -- 239 196 -- --
Charge for purchased research and development -- -- -- -- 3,711
-------- ------- ------- ------- -------
Total operating expenses 28,777 29,020 21,293 16,710 17,357
-------- ------- ------- ------- -------
(Loss) income from operations (15,007) (4,449) (573) 3,507 (1,648)
Interest income (expense), net 88 191 628 (149) (318)
Other income (expense) (424) 458 (10) 300 (4)
Loss on investment (1,510) -- -- -- --
-------- ------- ------- ------- -------
(Loss) income before income taxes (16,853) (3,800) 45 3,658 (1,970)
Provision for income taxes 50 140 9 559 264
-------- ------- ------- ------- -------
Net (loss) income $(16,903) $(3,940) $ 36 $ 3,099 $(2,234)
======== ======= ======= ======= =======
Net (loss) income per common share - basic (1) $ (2.94) $ (0.73) $ 0.01 $ 1.01 $ (0.87)
======== ======= ======= ======= =======
Weighted average number of common shares
outstanding - basic (1) 5,741 5,391 5,750 3,060 2,578
======== ======= ======= ======= =======
Net (loss) income per common share - diluted (1) $ (2.94) $ (0.73) $ 0.01 $ 0.82 $ (0.72)
======== ======= ======= ======= =======
Weighted average number of common shares
outstanding - diluted (1) 5,741 5,391 5,758 3,768 3,089
======== ======= ======= ======= =======
<CAPTION>
As of March 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,067 $ 3,890 $ 9,121 $17,010 $ 1,558
Working capital (deficit) (3,781) 9,568 12,179 15,137 114
Total assets 11,212 25,031 25,109 26,462 7,706
Total debt (including current portion) 821 1,034 1,161 221 3,638
Redeemable common stock -- -- -- -- 1,777
Total stockholders' equity (deficit) 425 15,068 18,307 17,907 (4,458)
</TABLE>
- --------------------------------------------------------------------------------
(1) Earnings per share have been restated for all periods presented to reflect
the adoption of SFAS No. 128 during the fiscal year ended March 31, 1998.
16
<PAGE> 17
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, markets and supports software products that
automate the engineering and sales process. The Company was founded in 1984 and
initially provided consulting services for customers relating to the automation
of the product design process. In the course of performing these consulting
services, the Company recognized a market opportunity for software tools to
automate the engineering process, and began the development of tools which
became the foundation for The ICAD System. The Company's proprietary software
products enable customers to reduce design cycle time and improve quality by
automating repetitive engineering processes.
The Company funded its early product development efforts and operations
through a combination of consulting service revenues and license fees from early
customers. As the Company grew, it funded its operations through private equity
transactions with corporate partners and product development agreements with
computer hardware vendors.
During fiscal 1995, the Company began development of its new sales
engineering automation product called SellingPoint. The initial version of
SellingPoint was released on June 30, 1995. This development continued through
fiscal 1998 and will continue as an ongoing development activity.
The Company distributes its products and provides related services
through a direct sales organization covering North America and has international
direct sales organizations in the United Kingdom and France. The Company has
also entered into distribution agreements covering certain other countries in
Europe and Asia.
On February 26, 1998, the Company entered into a license agreement and
transition agreement to license the software and intellectual property rights
used in the ICAD Business exclusively to the Distributor, a recently established
company organized under the laws of Luxemborg by Electra Fleming Private Equity
Partners ("Electra Fleming"), a partnership of which the principal partner is
Electra Investment Trust, plc. The License Agreement and Transition Agreement
("ICAD Transaction"), provide that the Company will, among other things, grant
the Distributor an exclusive world-wide license to use the key software and
intellectual property rights of the ICAD Business, transfer and assign to the
Distributor certain assets and contracts relating to the ICAD Business, and
provide to the Distributor certain administrative and support services on a
transitional basis. Under the license agreement, the Distributor has agreed to
pay the Company fixed and variable royalties consisting of (a) eight fixed
quarterly royalty installments, totaling $18.7 million, and (b) a variable
royalty in 1999, 2000, and 2001 equal to 10% of the amount by which gross
revenues of the Distributor related to the licensed software, calculated on a
cumulative basis from the date of closing of the Transaction, exceed $17.5
million for the year ending March 31, 1999, $35.0 million for the two-year
period ending March 31, 2000 and $52.5 million for the three-year period ending
March 31, 2001, in each case less the aggregate variable royalties paid in
respect of prior periods. The Company will record revenue in the period in which
the payments have been made and the related services have been performed.
Electra Investment Trust, plc has agreed to guarantee only the payment of the
fixed royalty payments under the License Agreement. This transaction was
formally approved by the Company's shareholders on June 1, 1998.
Historically, a significant portion of the Company's revenues in any
particular period has been attributable to sales to a limited number of
customers. During fiscal 1998, the Company's largest five customers represented,
in the aggregate, approximately 43.3% of the Company's revenues during the
period. In fiscal 1997 and fiscal 1996, the Company's largest five customers
represented, in the aggregate, approximately 62.6% and 42.6%, respectively, of
the Company's revenues in those years. This
17
<PAGE> 18
concentration of customers can cause the Company's revenues and earnings to
fluctuate from quarter to quarter, based on major customers' requirements and
the timing of their orders. Sales to affiliates represented 5.4% of the
Company's revenues during fiscal 1998. In fiscal 1997 and fiscal 1996, sales to
affiliates represented 0.4% and 2.2%, respectively, of the Company's revenues
for such years.
The Company has experienced and may experience in the future
significant quarter-to-quarter fluctuations in its operating results. Factors
such as the timing of significant orders, the timing of new product
introductions and upgrades, the length of customer product evaluation periods,
the mix of products sold and the mix of domestic versus international revenues
could contribute to this quarterly variability. A substantial portion of the
Company's revenues in a quarter are derived from purchase orders received in
that quarter, which makes the Company's financial performance more susceptible
to an unexpected downturn in business and more unpredictable. In addition, the
Company's expense levels are based in part on expectations of future revenue
levels and a shortfall in expected revenues could therefore result in a
disproportionate decrease in the Company's net income.
Management's Discussion and Analysis of Financial Condition and Results
of Operations, as well as other portions of this document, include certain
forward-looking statements about the Company's business and new products,
revenues, expenditures and operating and capital requirements. In addition,
forward-looking statements may be included in various other Company documents to
be issued in the future and in various oral statements by Company
representatives to security analysts and investors from time to time. Any such
statements are subject to risks that could cause the actual results or needs to
vary materially. These risks are discussed later in "Risk Factors."
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
TOTAL REVENUES. Substantially all of the Company's revenues are derived
from the licensing of software products and the performance of related services.
The Company's total revenues decreased 44% to $13.8 million for the year ended
March 31, 1998 from $24.6 million for the year ended March 31, 1997. This
decrease resulted from a decrease in sales of software licenses partially offset
by an increase in service fees, as discussed below. See "Liquidity and Capital
Resources" for discussion on extended payment terms granted to customers to
close business.
SOFTWARE LICENSES. Software license fees decreased 78% to $3.8 million
for the year ended March 31, 1998 from $17.7 million for the year ended March
31, 1997, and decreased as a percentage of revenues to 28% from 72%. The
decrease was primarily due to the revenue shortfall in the ICAD business due to
the pending ICAD Transaction, as well as $700,000 of revenue reversals that were
recorded for the fourth quarter. This decrease was partially offset by the
increase in SellingPoint revenues from the prior year. See "Subsequent Events"
for discussion regarding this transaction.
SERVICES. Service fees increased 35% to $9.1 million for the year ended
March 31, 1998 from $6.8 million for the year ended March 31, 1997, and
increased as a percentage of revenues to 66% from 28%. Service revenues are
derived from consulting, training and customer support services. The increase in
revenues was primarily due to an increase in the number of consulting projects
currently in process for the SellingPoint product.
RELATED PARTY SOFTWARE AND SERVICES. Revenues from related parties
increased 614% to $.7 million for the year ended March 31, 1998 from $0.1
million for the year ended March 31, 1997, and increased as a percentage of
revenues to 5% from 1%. The increase in revenues was due to higher software
license and consulting revenues for related party customers.
COST OF SOFTWARE LICENSES. Cost of software licenses, consisting of the
amortization of capitalized software, license fees to third party suppliers and
software duplication and fulfillment costs, increased 9% to $2.3 million for the
year ended March 31, 1998 from $2.1 million for the year ended March 31, 1997,
and increased as a percentage of software license fees to 58% from 12%. The
increase in cost of software licenses was primarily due to the write-off of an
intangible asset.
18
<PAGE> 19
COST OF SERVICES. Cost of services, consisting primarily of personnel
costs for customer support, training and applications consulting, increased 16%
to $5.1 million for the year ended March 31, 1998 from $4.4 million for the year
ended March 31, 1997, and decreased as a percentage of service revenues to 56%
from 65%. The increase in cost of services was primarily due to the increase in
services revenue, partially offset by lower outsourcing costs.
SALES AND MARKETING. Sales and marketing expenses decreased 9% to $13.2
million for the year ended March 31, 1998 from $14.5 million for the year ended
March 31, 1997, and increased as a percentage of revenues to 96% from 59%. The
decrease in dollars was due primarily to lower commissions due to the decrease
in software license fees, as well as a decrease in marketing and promotional
activities during the year.
RESEARCH AND DEVELOPMENT. Research and development expenses, consisting
primarily of employee salaries and benefits and development tools, increased 7%
to $3.8 million for the year ended March 31, 1998 from $3.6 million for the year
ended March 31, 1997, and increased as a percentage of revenues to 28% from 14%.
The increase was primarily due to the addition of research and development
employees associated with the development of the SellingPoint product and the
utilization of consulting services from an outside engineering firm. The Company
intends to increase its research and development expenditures over the next
twelve months to keep pace with the technological needs of the marketplace.
GENERAL AND ADMINISTRATIVE. General and administrative expenses,
consisting primarily of expenses associated with the finance, human resources
and administrative departments, increased 8% to $2.9 million for the year ended
March 31, 1998 from $2.7 million for the year ended March 31, 1997 and increased
as a percentage of revenues to 21% from 11%. The increase in general and
administrative expenses in fiscal 1998 was primarily due to higher legal and
accounting costs associated with the "ICAD Transaction."
PROVISION FOR BAD DEBTS. Provision for bad debts increased to
$1,551,000 for the year ended March 31, 1998 from $1,544,000 for the year ended
March 31, 1997. The provision for the year ended March 31, 1998 was established
primarily to protect against foreign currency issues in Asia, for a United
Kingdom VAT receivable that has aged significantly and for a domestic customer
whose project has been cancelled.
RESTRUCTURING. There were no restructuring expenses incurred for the
year ended March 31, 1998. Restructuring expenses, consisting of severance costs
associated with the termination of fourteen employees, were $239,000 for the
year ended March 31, 1997.
INTEREST INCOME. Interest income, consisting of interest from cash and
cash equivalents, decreased 36% to $189,000 for the year ended March 31, 1998
from $296,000 for the year ended March 31, 1997. This decrease was attributable
to lower cash balances during the year ended March 31, 1998.
INTEREST EXPENSE. Interest expense, consisting of interest on debt,
decreased 3% to $102,000 for the year ended March 31, 1998 from $105,000 for the
year ended March 31, 1997.
OTHER INCOME (EXPENSE). In fiscal year 1998, other expense of $424,000
consisted primarily of foreign exchange losses on intercompany transactions. In
fiscal year 1997, other income of $458,000 consisted primarily of the expense
related to marking to market certain trading securities and foreign exchange
losses on intercompany transactions.
LOSS ON INVESTMENT. Loss on investment consists of recording losses
related to an investment in Loandata, Inc. During the nine month period ended
December 31, 1997, the Company expensed $1,510,000 which relates to amounts
funded pertaining to the Company's investment in Loandata. On December 24, 1997,
the Company entered into an agreement to acquire 53.4% majority interest in a
newly-created limited liability company that will be the successor to the
business of Loandata. Consequently, the Company consolidated this new entity in
its operating results for the three month period ended March 31, 1998.
PROVISION FOR INCOME TAXES. The income tax provision for the year ended
March 31, 1998 and 1997 was $50,000 and $140,000, respectively. The provision
represents foreign withholding and state taxes. At
19
<PAGE> 20
March 31, 1998, the Company had net operating loss carryforwards of
approximately $21,750,000 million which expire in the years 2008 through 2012 of
which approximately $2,700,000 million is subject to an annual limitation of
approximately $180,000. The Company also has federal, state and foreign tax
credit carryforwards of $810,000 million, $310,000 million and $249,000 million,
respectively, available to reduce taxable income in future periods.
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996
TOTAL REVENUES. Substantially all of the Company's revenues are derived
from the licensing of software products and the performance of related services.
The Company's total revenues increased 16% to $24.1 million for the year ended
March 31, 1997 from $20.7 million for the year ended March 31, 1996. This
increase resulted from an increase in sales of software licenses partially
offset by a decrease in service fees, as discussed below. See "Liquidity and
Capital Resources" for discussion on extended payment terms granted to customers
to close business.
SOFTWARE LICENSES. Software license fees increased 31% to $17.2 million
for the year ended March 31, 1997 from $13.1 million for the year ended March
31, 1996, and increased as a percentage of revenues to 71% from 63%.
Contributing to the increases were the increased adoption of the Company's
products by both new and existing customers. In the fourth quarter of fiscal
1997, the Company recorded a provision of approximately $518,000 against license
revenue. The major component of this provision consisted of a sale recorded in
the first quarter to a new customer. This customer experienced turnover of the
key officer who committed their respective company to the license agreement. In
the fourth quarter of fiscal 1997, the Company reversed this sale based upon the
customer's refusal to honor the prior contract.
SERVICES. Service fees decreased 5% to $6.8 million for the year ended
March 31, 1997 from $7.1 million for the year ended March 31, 1996, and
decreased as a percentage of revenues to 28% from 35%. Service revenues are
derived from consulting, training and customer support services. The decreases
in revenues were primarily due to more consulting services that were contracted
by the Company's customers to other consulting companies during fiscal 1997, as
compared to fiscal 1996.
RELATED PARTY SOFTWARE AND SERVICES. Revenues from related parties
decreased 77% to $0.1 million for the year ended March 31, 1997 from $0.5
million for the year ended March 31, 1996, and decreased as a percentage of
revenues to approximately 1% from 2%. The decrease in revenues was due to lower
maintenance revenues for related party customers.
COST OF SOFTWARE LICENSES. Cost of software licenses, consisting of the
amortization of capitalized software, license fees to third party suppliers and
software duplication and fulfillment costs, increased 55% to $2.1 million for
the year ended March 31, 1997 from $1.3 million for the year ended March 31,
1996, and increased as a percentage of software license fees to 12% from 10%.
The increases in cost of software licenses was primarily due to royalties
associated with higher software license revenues, the amortization of intangible
assets and capitalized software.
COST OF SERVICES. Cost of services, consisting primarily of personnel
costs for customer support, training and applications consulting, increased 65%
to $4.4 million for the year ended March 31, 1997 from $2.7 million for the year
ended March 31, 1996, and increased as a percentage of service revenues to 65%
from 38%. The increases in cost of services was primarily due to the contracting
of additional personnel at higher rates and consulting companies to support
consulting services previously performed by personnel who were transferred to
sales and marketing.
SALES AND MARKETING. Sales and marketing expenses increased 25% to
$14.5 million for the year ended March 31, 1997 from $11.6 million for the year
ended March 31, 1996, and increased as a percentage of revenues to 60% from 56%.
The increase was primarily due to the transfer and addition of sales and
marketing employees and increased marketing and promotional activities, all of
which occurred in anticipation of increased selling activities.
20
<PAGE> 21
RESEARCH AND DEVELOPMENT. Research and development expenses, consisting
primarily of employee salaries and benefits and development tools, increased 25%
to $3.6 million for the year ended March 31, 1997 from $2.8 million for the year
ended March 31, 1996, and increased as a percentage of revenues to 15% from 14%.
The increase was primarily due to the addition of research and development
employees associated with the development of the Company's new product,
SellingPoint, and the utilization of consulting services from an outside
engineering firm.
GENERAL AND ADMINISTRATIVE. General and administrative expenses,
consisting primarily of expenses associated with the finance, human resources
and administrative departments, increased 6% to $2.7 million for the year ended
March 31, 1997 from $2.5 million for the year ended March 31, 1996, and
decreased as a percentage of revenues to 11% from 12%. The dollar increase is
primarily due to higher legal costs in the current period.
PROVISION FOR BAD DEBTS. Provision for bad debts increased to
$1,544,000 for the year ended March 31, 1997 from $101,000 for the year ended
March 31, 1996. The Company increased their provision for bad debts after
repeated unsuccessful attempts were made to collect certain receivables. This
increased provision is principally made up of two large domestic receivables and
two international receivables. Notwithstanding this fourth quarter provision,
the Company is continuing to pursue collection of these receivables.
RESTRUCTURING. Restructuring expenses, consisting of severance costs
associated with the termination of fourteen employees, were $239,000 for the
year ended March 31, 1997. Restructuring expenses, consisting of severance costs
associated with the termination of twelve employees, were $196,000 for the year
ended March 31, 1996.
INTEREST INCOME. Interest income, consisting of interest from cash and
cash equivalents, decreased 57% to $296,000 for the year ended March 31, 1997
from $682,000 for the year ended March 31, 1996. This decrease was attributable
to lower cash balances during the year ended March 31, 1997.
INTEREST EXPENSE. Interest expense, consisting of interest on debt,
increased 94% to $105,000 for the year ended March 31, 1997 from $54,000 for the
year ended March 31, 1996. This increase was attributable to a full year of
interest expense associated with capital leases during the year ended March 31,
1997.
OTHER INCOME (EXPENSE). In fiscal year 1997, other income of $458,000
consisted primarily of the expense related to marking to market certain trading
securities and of foreign exchange losses on intercompany transactions. In
fiscal year 1996, other expense of $10,000 consisted primarily of foreign
exchange losses on intercompany transactions.
PROVISION FOR INCOME TAXES. The income tax provision for the year ended
March 31, 1997 was $140,000 which primarily represented foreign withholding and
state taxes. The income tax provision for the year ended March 31, 1996 was
$9,000 representing an effective tax rate of approximately 20%. The effective
tax rate in 1996 was lower than the statutory rate principally due to the
utilization of net operating loss carryforwards and other reductions in the
valuation allowance against otherwise recognizable deferred tax assets. At March
31, 1997, the Company had net operating loss carryforwards of approximately $6.3
million which expire in the years 2008 through 2012 of which approximately $2.7
million is subject to an annual limitation of approximately $150,000. The
Company also had federal, state and foreign tax credit carryforwards of $.9
million, $.3 million and $.5 million, respectively, available to reduce taxable
income in future periods.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash and cash equivalents of $1.1
million. The Company currently does not have a line of credit arrangement with a
financial institution. As of March 31, 1997 the Company had a line of credit
with a commercial lender. Under this credit line, as amended, the Company had a
$2,500,000 unsecured working capital line of credit. This line of credit bore
interest at the bank's
21
<PAGE> 22
base lending rate, and expired on June 30, 1997. The line of credit contained
financial covenants which consisted of minimum tangible capital base, ratio of
total liabilities to tangible capital base and debt service coverage. The
Company also had a $1,750,000 equipment line of credit, collateralized by the
equipment, which bore interest at the bank's base lending rate and expired on
March 31, 1997. For the years ended March 31, 1998 and 1997 the Company had
borrowings under the equipment line of credit of $1,407,000 and 1,322,000,
respectively.
During fiscal 1998, the Company had a net loss of $16.9 million and
used cash of $2.8 million. The decrease in cash was primarily due to $3.6
million used for operations and $1.2 million used in investing activities. The
Company's operating activities included a net decrease in accounts receivable of
$8.0 million, an increase in accounts payable of $1.9 million and a decrease in
accrued expenses and deferred revenue of $0.8 million and $0.3 million,
respectively. The decrease in accounts receivable and the increase in accounts
payable from the previous year is a direct and indirect result, respectively, of
the decrease in revenues during the year related to the revenue shortfall in the
ICAD business due to the pending "ICAD Transaction." Investing activities
included the purchase of property and equipment for $0.3 million and capitalized
software costs of $0.9 million. The Company occasionally extends payment terms
with new and existing customers to close business in a particular reporting
period.
Also during 1998, the Company entered into a license agreement with a
Distributor to license the software and intellectual property rights used in the
ICAD Business exclusively to the Distributor. See "Subsequent Events" for
details of this transaction. Under the license agreement, the Distributor has
agreed to pay the Company fixed and variable royalties consisting of (a) eight
fixed quarterly royalty installments, totaling $18.7 million, and (b) a variable
royalty in 1999, 2000, and 2001 equal to 10% of the amount by which gross
revenues of the Distributor related to the licensed software, calculated on a
cumulative basis from the date of closing of the Transaction, exceed $17.5
million for the year ending March 31, 1999, $35.0 million for the two-year
period ending March 31, 2000 and $52.5 million for the three-year period ending
March 31, 2001, in each case less the aggregate variable royalties paid in
respect of prior periods. The Company will record revenues in the period in
which the payments have been made and the related services have been performed.
Electra Investment Trust, plc has agreed to guarantee only the payment of the
fixed royalty payments under the License Agreement. The Distributor is a
recently established company organized under the laws of Luxembourg by funds
managed by Electra Fleming (of which the principal source of funds is Electra
Investment Trust plc, the guarantor of certain of the obligations of the
Distributor pursuant to the License Agreement) for the purposes of entering into
the Transaction and acting as distributor under the License Agreement.
During fiscal 1997, the Company had a net loss of $3.9 million and used
cash of $5.2 million. The decrease in cash was primarily due to $4.2 million
used from operations and $1.4 million used in investing activities. The
Company's operating activities included a net increase in accounts receivable of
$6.8 million, an increase in accrued expenses of $1.9 million and a increase in
deferred revenue of $0.9 million. Investing activities included the purchase of
property and equipment for $0.3 million, the purchase of intangible assets for
$0.1 million and capitalized software costs of $1.0 million.
During fiscal 1996, the Company relocated its corporate headquarters.
The terms of the five year lease for the new facility provide that the Company
will make annual rental payments of approximately $202,000. Also, during fiscal
1996, the Company entered into a $5,000,000 five year applications consulting
services contract with a significant customer of the Company. The five year
applications consulting services contract contains volume pricing discounts
subject to adjustments for increased costs. The Company has a minimum commitment
of $2,500,000 of outside applications services that will be used by the Company
over a five year period. The minimum commitment of $2,500,000 will be paid in
five yearly payments commencing December 31, 1996. These yearly payments are
$250,000, $500,000, $550,000, $600,000 and $600,000 for the five calendar years
beginning December 31, 1996, respectively. As a consequence of the ICAD
Transaction, the payment of the minimum commitment fee for the last three years
of the contract will be shared equally between the Company and the Distributor.
As of March 31, 1998 the Company was not current on the payment of the 1997
commitment. Subsequent to year end the Company is current with all payments
under this commitment. Pursuant to this reciprocal buying
22
<PAGE> 23
agreement, the Company recognized revenue and collected cash in the amount of
$1,805,000 upon the execution and delivery of software with respect to the
software license agreement for the year ended March 31, 1996. The Company's
policy is to record the consulting service expenses as the expenses are
incurred. The Company believes that based on current forecasts the minimum
payment accruals will be utilized. However, given the significant sales
fluctuations which may occur in any given period, it is possible that the
minimum commitment would not be met, thus requiring the Company to record a
charge in excess of the services utilized. At March 31, 1998, the Company has
used the minimum first-year commitment of $250,000, but did not fully use the
second-year commitment of $500,000 and has recorded a liability for the unused
portion of $251,000, due to the fact that payment of the 1997 commitment was not
made until after year end. Subsequent to year end, in conjunction with the
payment of the 1997 commitment, the Company has included such amount in other
current assets and expects to recognize this amount, along with the fiscal 1999
minimum commitment, during the next fiscal year.
The Company believes that existing sources of liquidity and funds from
operations, along with the royalties expected from the ICAD Transaction,
provided that the Company meets all of its obligations under this agreement,
will satisfy the Company's working capital and capital expenditure requirements
through at least June 30, 1999.
In the normal course of business, the Company evaluates potential
acquisitions of businesses, products or technologies that complement the
Company's business. The Company has no present plans, agreements or commitments
and is not currently engaged in any negotiations with respect to any material
acquisitions of other businesses, products or technologies. However, the Company
may acquire businesses, products or technologies in the future.
Inflation is not expected to have a significant effect upon the
Company's business in the near future.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements. SFAS
130 requires that an enterprise (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. The
Company plans to adopt SFAS 130 in Fiscal 1999 and believes that its impact will
be immaterial.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. SFAS 131 does not
need to be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application. SFAS 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments interim financial reports issued to
shareholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement
supersedes FASB Statement No. 14, Financial Reporting for Segments of a Business
Enterprise, but retains the requirement to report information about major
customers. It also amends FASB Statement No. 94, Consolidation of All
Majority-Owned Subsidiaries, to remove the special disclosure requirements for
previously unconsolidated subsidiaries. The Company plans to adopt SFAS 131 in
Fiscal 1999 and believes that its impact will be immaterial.
In October 1997, the Financial Accounting Standards Board issue
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. Retroactive application of the provisions of SOP 97-2 is
prohibited.
23
<PAGE> 24
SOP 97-2 provides guidance on applying generally accepted accounting principles
in recognizing revenue on software transactions. This SOP supersedes SOP 91-1,
Software Revenue Recognition, the AICPA's current guidance on software revenue
recognition. While some principles remain the same, there are several key
differences between the two pronouncements, particularly where multiple element
arrangements are concerned. The Company plans to adopt SOP 97-2 in Fiscal 1999
and has not yet determined the impact of this adoption.
RISK FACTORS
Dependence on Principal Products. With the approval of the "ICAD
Transaction" by the Company's shareholders, thereby licensing the ICAD products
from the Company's group of products, the risks associated with the Company's
current reliance on the Sales Force Automation core group of products and
Loandata have been exacerbated. As a result, any factor adversely affecting
sales of the Company's Sales Force Automation products would have a material
adverse effect on the Company. The Company's future financial performance will
depend in significant part upon the successful development, introduction and
customer acceptance of new or enhanced versions of the Sales Force Automation
products and other products. There can be no assurance that the Company will be
successful in marketing SellingPoint and related products or any new or enhanced
products the Company may develop in the future, including Loandata. In addition,
competitive pressures or other factors may result in price erosion that could
have a material adverse effect on the Company's results of operation.
Broader Market Acceptance. Broader market acceptance of the Company's
products is critical to the Company's future success. The Company believes that
broader market acceptance of its products will depend on a number of factors
including: product functionality, product reliability, price/performance
characteristics, ease of use and the displacement of existing design approaches.
For many potential customers, the methodology represented in the Company's
products generally represents a new approach to the sales process. As a result,
a decision by a customer to purchase the Company's products often involves a
significant evaluation period. Failure or material delay of the Company's
products to achieve broader market acceptance would have a material adverse
effect on the Company's business and financial results. In addition, any factor
adversely affecting the overall Sales Force Automation software market could
have a material adverse effect on the Company's business and financial results.
See "Business - Industry Background."
History of Losses. Although the Company has been profitable for the
fiscal years ended March 31, 1995 and 1996, the Company has experienced net
losses in the fiscal years ended March 31, 1998, 1997, 1994. As a result, as of
March 31, 1998, the Company had an accumulated deficit (including
acquisition-related expenses) of approximately $27.0 million. Although the
guaranteed royalty payments to the Company under the license agreement with the
Distributor will partially offset the loss of revenue from direct sales of the
ICAD product, there can be no assurance that the Company will be able to
generate revenue for the Sales Force Automation Business and other sources in
amounts sufficient to replace the ICAD revenues as they taper off during the
period of the guaranteed fixed royalties. Furthermore, there can be no
assurances that, even if the future loss of ICAD revenue is fully offset by
increases in Sales Force Automation revenue, the Company will achieve or sustain
profitability in future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Need for Additional Liquidity. The Company expects to devote
substantially the entire proceeds from the "ICAD Transaction" to finance its
continuing operations. The Company's strategy for growth of the Sales Force
Automation Business may require significant additional resources and, in light
of the Company's recent losses and the current unavailability of institutional
lines of credit, there can be no certainty that adequate funding will be
available from other sources to sustain operation or growth of the Company's
business after termination of the guaranteed royalty payments. The revenue
derived from royalties under the License Agreement may prove to be less than the
aggregate revenues the Company would have been able to earn from continued
operation of the ICAD Business.
Concentration of Customers. Historically, a significant portion of the
Company's revenues in any particular period has been attributable to sales to a
limited number of customers. During the fiscal year
24
<PAGE> 25
ended March 31, 1998, one customer accounted for greater than ten percent of the
Company's revenues, and revenues from the Company's five largest customers
during such period represented, in the aggregate, approximately 43.3% of the
Company's revenues during such period. In fiscal 1997, three customers each
accounted for greater than ten percent of the Company's revenues, and revenues
from the Company's five largest customers represented approximately 62.6% of the
Company's revenues. In fiscal 1996, two customers each accounted for greater
than ten percent of the Company's revenues, and revenues from the Company's five
largest customers represented approximately 42.6% of the Company's revenues.
This concentration of customers can cause the Company's revenues and earnings to
fluctuate from quarter to quarter, based on major customers' requirements and
the timing of their orders. Although the Company believes that, with the
expansion of the Sales Force Automation Business, its reliance on a small number
of significant customers will be reduced, there can be no assurances that the
Company will be able to expand its customer base. Furthermore, during the period
of fixed royalties under the License Agreement, the Company expects to receive a
substantial part of its revenue from the Distributor. There can be no assurances
that any of the Company's major Sales Force Automation customers will continue
to purchase products and services in amounts similar to previous years. The loss
of business from one or more of these customers may have a material adverse
impact on the Company. See "Business - Sales and Marketing" and "Certain
Transactions."
Potential for Losses in Remaining Business. With the consummation of
the "ICAD Transaction," the Company now has two principal operating components,
SellingPoint and Loandata, which are smaller, less mature businesses and which
are currently in a development stage and operating at a loss. Depending on the
growth and performance of SellingPoint and Loandata, the Company could continue
to be faced with operating losses in future periods.
Uncertainty of Variable Royalty Payments. If the Distributor does not
perform to certain minimum revenue targets over the period in which the Company
would be due incremental payments for the strong performance of the Distributor,
the variable portion of the royalty payments will not be paid. The License
Agreement includes certain variable royalty payments based upon the operation of
the ICAD Business by the Distributor. (See "Liquidity and Capital Resources").
There can be no assurance that the Distributor will successfully operate the
ICAD Business or that any variable royalty payments will become due as a result.
In addition, the variable royalty payments under the License Agreement are not
guaranteed by the Guarantor or any other party.
Absence of Security for Future Payments. Although Electra Investment
Trust, plc is guaranteeing the fixed royalty payments under the License
Agreement, the guarantee is unsecured. If the Distributor and Electra Investment
Trust, plc encounter financial difficulties, there can be no assurance that all
royalty payments will be paid.
Accounts Receivable Risks. The Distributor is responsible for aiding
the collection of the outstanding accounts owed to the Company with respect to
the ICAD Business. Should the Distributor not successfully collect the
outstanding accounts receivable, the Company will need to take independent
measures to collect for products sold and services already rendered. Such
efforts may be hindered by the fact that certain of the account debtors who were
customers of the ICAD Business but not of SellingPoint will not have a
continuing business relationship with the Company following the Transaction.
ICAD Business Personnel. Garreth Evans, the executive officer of the
Company who has been primarily responsible for ICAD System strategic planning
and sales, will join the Distributor along with approximately 40 other employees
of the ICAD Business. The Company believes that the Distributor will need to
quickly add senior management personnel for the ICAD Business and other general
overhead functions to improve the likelihood of the Distributor's overall
success with the ICAD Business. In the interim, an incomplete Distributor
management team represents a risk that the Distributor will not meet its
budgeted revenue targets, therefore potentially negatively impacting the
possibility of variable royalty payments being made to the Company. Should the
Distributor experience significant difficulty in filling positions in the ICAD
Business management team, this could create significant financial difficulties
for the Distributor and could jeopardize the ability of the Distributor to make
future variable royalty payments.
25
<PAGE> 26
Reduction in ICAD Business Research and Development. The Company has
reduced research and development efforts relating to the ICAD Business in recent
months, as the Company has re-focused its resources on SellingPoint. Should the
Distributor not be able to revitalize such development effort in the short term,
the future competitiveness of the ICAD Business as operated by the Distributor
could be jeopardized. Failure to revitalize such development efforts, among
other factors, could result in the Distributor's inability to achieve its
projections for operation of the ICAD Business. In such case, the Company might
receive either reduced or no variable royalty payments.
Competition. The market in which the Company offers SellingPoint and
other Sales Force Automation products is highly competitive. Many of the
Company's competitors and potential competitors have significantly greater
financial, technological and marketing resources than the Company. Competitive
pressures faced by the Company could force the Company to reduce its prices,
resulting in slower revenue growth and reduced profitability. Furthermore, the
products offered by other companies may prove to be superior to the Company's
products or may achieve greater market acceptance. There can be no assurance
that the Company will be able to compete successfully against current and future
sources of competition in the sale force automation sector or that competition
will not have a material adverse effect on the Company's business, operating
results or financial condition.
Variability of Quarterly Operating Results. The Company has experienced
and may experience in the future significant quarter-to-quarter fluctuations in
its operating results. Factors such as the timing of significant orders, the
timing of new product introductions and upgrades, the length of customer product
evaluation periods, the mix of products sold and the mix of domestic versus
international revenues could contribute to this quarterly variability. A
substantial portion of the Company's revenues in a quarter are derived from
purchase orders received that quarter, which makes the Company's financial
performance more susceptible to an unexpected downturn in business and more
unpredictable. In addition, the Company's expense levels are based in part on
expectations of future revenue levels and a shortfall in expected revenues could
therefore result in a disproportionate decrease in the Company's net income.
Dependence on Third Party Licensed Technology. The Company licenses
from Electronic Data Systems ("EDS"), a principal customer and marketing partner
of the Company, a solid modeling software module called Parasolid, which is one
of the most widely used of The SellingPoint System modules. The loss of the
right to use such software could reduce the attractiveness of the Company's
products to certain customers. The Company believes that alternative solid
modeling software is available. However, there can be no assurances that such
alternatives would achieve market acceptance or be available on a timely basis
or on similar terms. The Company believes that the cost associated with
technology licensed from third parties is not material to its results of
operations and does not constitute a significant portion of the total cost of
the Company's products into which such third party technology is incorporated.
See "Business - Proprietary Rights."
Technological Demands of the Marketplace. The sales force automation
market in which the Company competes is characterized by rapid technological
changes and advances. The Company's future success will depend upon its ability
to enhance its existing products and introduce new products which keep pace with
technological developments in the marketplace and address the increasingly
sophisticated needs of its end-users. There can be no assurance that the Company
will be successful in introducing and marketing product enhancements or new
products on a timely basis, or that enhancements or new products will achieve
market acceptance.
Loss of ICAD Business Customers. Historically, the Company has derived
a significant portion of its revenues from a limited number of customers. All of
the customers who individually accounted for 10% or more of the Company's
revenues in the fiscal years 1997, 1996 and 1995 were primarily or exclusively
customers of the ICAD Business, and it is likely that such customers will not
continue to be significant customers of the Company following the ICAD
Transaction. Although the royalty payments from the Distributor under the
License Agreement will offset a portion of the revenues lost from the
significant customers of the ICAD Business, there can be no assurance that the
amount of the lost revenues will be fully matched by the royalties under the
License Agreement or that, following full payment of the
26
<PAGE> 27
guaranteed fixed royalties, the Company will be able to generate sufficient
substitute revenue from Sales Force Automation Business customers or other
sources.
Dependence on Proprietary Technology. The Company's success is heavily
dependent upon its proprietary technology. The Company does not have patents on
any of its technology and relies on contracts and the laws of copyright and
trade secrets to protect such technology. The Company maintains a trade secrets
program, enters into confidentiality or license agreements with its employees,
resellers and end-users and limits access to and distribution of its software,
documentation and other proprietary information. Effective copyright and trade
secret protection may not be available in every foreign country in which the
Company's products are distributed. There can be no assurance that the steps
taken by the Company to protect its proprietary technology will be adequate to
prevent misappropriation of its technology by third parties, or that third
parties will not be able to develop similar technology independently. Although
the Company is not aware that any of its technology infringes the rights of
third parties, there can be no assurance that other parties will not assert
technology infringement claims against the Company, or that, if asserted, such
claims will not prevail. See "Business Proprietary Rights."
Dependence on Key Personnel. The Company's success depends in large
part upon a number of key management and technical employees. The loss of the
services of one or more key employees, including Lawrence W. Rosenfeld, the
Company's Chairman and Chief Executive Officer, could have a material adverse
effect on the Company. In addition, the Company's success will depend in
significant part upon its ability to attract and retain highly-skilled
management, technical, and sales and marketing personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. See "Executive Officers
of the Registrant."
Management of Growth. The Company's business has grown significantly
over the past several years as a result of both internal growth and business and
product acquisitions. The Company may make additional acquisitions in the
future. Managing this growth and integrating acquired products and businesses
require a significant amount of management time and skill. There can be no
assurance that the Company will be effective in managing its future growth or in
assimilating acquisitions or that any failure to manage growth or assimilate an
acquisition will not have a material adverse effect on the Company's business,
operating results or financial condition.
Year 2000 Compliance. The Company recognizes that it must ensure that
its products and operations will not be adversely impacted by year 2000 software
failures (the "Year 2000 issue") which can arise in time-sensitive software
applications which utilize a field of two digits to define the applicable year.
In such applications, a date using "00" as the year may be recognized as the
year 1900 rather than the year 2000. In general, the Company expects to resolve
Year 2000 issues through planned replacement or upgrades. In addition, the
Company expects that any costs incurred to modify its internal systems will not
be material. Although management does not expect Year 2000 issues to have a
material impact on its business or future results of operations, there can be no
assurance that there will not be interruptions of operations or other
limitations of system functionality or that the Company will not incur
significant costs to avoid such interruptions or limitations.
International Operations. The Company's international revenues were
$5.2 million, $12.0 million and $7.7 million in the fiscal years ended 1998,
1997 and 1996 respectively, representing 37.7%, 50.0% and 37.3%, respectively,
of the Company's revenues in such years. Although the Company expects that
international revenues will fluctuate from period to period, it expects such
revenues to account for a significant percentage of its revenues in the future.
The international portion of the Company's business is subject to a number of
inherent risks, including difficulties in building and managing international
operations, difficulties in managing distributors, difficulties in translating
products into foreign languages, fluctuations in the value of foreign
currencies, import/export duties and quotas and unexpected regulatory, economic
or political changes in international markets. There can be no assurance that
these factors will not adversely affect the Company's international revenues or
its overall financial performance. See "Business - Sales and Marketing."
27
<PAGE> 28
Forward-Looking Statements. The Private Securities Litigation Reform
Act of 1995 contains certain safe harbors regarding forward-looking statements.
From time to time, information provided by the Company or statements made by its
directors, officers or employees may contain "forward-looking" information
subject to numerous risks and uncertainties. Any statements made herein that are
not statements of historical fact are forward-looking statements including, but
not limited to, statements concerning the characteristics and growth of the
Company's markets and customers, the Company's objectives and plans for future
operations and products and the Company's expected liquidity and capital
resources. Such forward-looking statements are based on a number of assumptions
and involve a number of risks and uncertainties, and, accordingly, actual
results could differ materially. Factors that may cause such differences
include, but are not limited to: the continued and future acceptance of the
Company's products; the rate of growth in the industries of the Company's
products; the presence of competitors with greater technical, marketing and
financial resources; the Company's ability to promptly and effectively respond
to technological change to meet evolving customer needs; risks associated with
sales in foreign countries; and the Company's ability to successfully expand its
operations.
28
<PAGE> 29
ITEM 8 - FINANCIAL STATEMENTS
CONCENTRA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Report of Independent Accountants........................................ 30
Consolidated Balance Sheets as of March 31, 1998 and 1997................ 31
Consolidated Statements of Operations for the years ended
March 31, 1998, 1997 and 1996......................................... 32
Consolidated Statements of Stockholders' Equity for
the years ended March 31, 1998, 1997 and 1996......................... 33
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996......................................... 34
Notes to Consolidated Financial Statements............................... 35-48
29
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Concentra Corporation:
We have audited the accompanying consolidated balance sheets of
Concentra Corporation as of March 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1998. 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 consolidated financial position of
Concentra Corporation as of March 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1998 in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 29, 1998, except for
Note M, for which the
date is June 1, 1998.
30
<PAGE> 31
CONCENTRA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31,
---------------------
ASSETS 1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,067 $ 3,890
Marketable securities -- 203
Accounts receivable, net of allowance for doubtful
accounts of $795 and $125 4,507 14,050
Other current assets 959 693
-------- --------
Total current assets 6,533 18,836
Property and equipment, net 1,874 2,612
Capitalized software costs, net 1,986 1,878
Intangible assets, net 516 1,333
Other assets 303 372
-------- --------
Total assets $ 11,212 $ 25,031
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,481 $ 1,551
Accrued expenses 3,469 4,123
Income tax payable 302 273
Deferred revenue 2,714 2,898
Current portion of capital lease obligations 348 423
-------- --------
Total current liabilities 10,314 9,268
Capital lease obligations 473 611
Deferred revenue -- 84
Commitments and contingencies (Note F) -- --
Stockholders' equity:
Preferred stock - $.01 par value; 4,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock - $.00001 par value; 40,000,000 shares
authorized, 6,093,806 and 5,499,211 shares issued and
outstanding at March 31, 1998 and 1997, respectively. -- --
Additional paid-in capital 27,789 25,578
Accumulated deficit (27,002) (10,099)
Cumulative translation adjustment (362) (411)
-------- --------
Total stockholders' equity 425 15,068
-------- --------
Total liabilities and stockholders' equity $ 11,212 $ 25,031
======== ========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE> 32
CONCENTRA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Software licenses $ 3,884 $17,670 $13,133
Services 9,143 6,797 7,135
Related party software and services 743 104 452
-------- ------- -------
Total revenues 13,770 24,571 20,720
Operating expenses:
Cost of software licenses 2,261 2,073 1,337
Cost of services 5,108 4,410 2,677
Sales and marketing 13,175 14,541 11,622
Research and development 3,805 3,558 2,849
General and administrative 2,877 2,655 2,511
Provision for bad debts 1,551 1,544 101
Restructuring charge -- 239 196
-------- ------- -------
Total operating expenses 28,777 29,020 21,293
Loss from operations (15,007) (4,449) (573)
Interest income 189 296 682
Interest expense (101) (105) (54)
Other income (expense) (424) 458 (10)
Loss on Investment (1,510) -- --
-------- ------- -------
(Loss) income before income taxes (16,853) (3,800) 45
Provision for income taxes 50 140 9
-------- ------- -------
Net (loss) income (16,903) (3,940) 36
======== ======= =======
Net (Loss) income per common share - basic $ (2.94) $ (0.73) $ 0.01
======== ======= =======
Weighted average number of common shares outstanding - basic 5,741 5,391 5,750
======== ======= =======
Net (Loss) income per common share - diluted $ (2.94) $ (0.73) $ 0.01
======== ======= =======
Weighted average number of common shares outstanding - diluted 5,741 5,391 5,758
======== ======= =======
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE> 33
CONCENTRA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Total
------------------- Paid-In Accumulated Translation Stockholders'
Shares Amount Capital Deficit Adjustment Equity
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 5,247,175 -- $24,553 $ (6,195) $(451) $ 17,907
--------- ---- ------- -------- ----- --------
Stock options exercised 79,152 224 224
Shares issued in connection with
employee stock purchase plan 7,324 32 32
Translation adjustment 108 108
Net income -- -- -- 36 -- 36
--------- ---- ------- -------- ----- --------
Balance at March 31, 1996 5,333,651 -- 24,809 (6,159) (343) 18,307
--------- ---- ------- -------- ----- --------
Stock options exercised 142,070 667 667
Shares issued in connection with
employee stock purchase plan 23,490 102 102
Translation adjustment (68) (68)
Net loss -- -- -- (3,940) -- (3,940)
--------- ---- ------- -------- ----- --------
Balance at March 31, 1997 5,499,211 -- 25,578 (10,099) (411) 15,068
========= ==== ======= ======== ===== ========
Stock options exercised 94,992 116 116
Shares issued in connection with
employee stock purchase plan 29,014 104 104
Shares associated with
private placement, net 470,589 1,991 1,991
Translation adjustment 49 49
Net loss -- -- -- (16,903) -- (16,903)
--------- ---- ------- -------- ----- --------
Balance at March 31, 1998 6,093,806 -- $27,789 $(27,002) $(362) $ 425
========= ==== ======= ======== ===== ========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE> 34
CONCENTRA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(16,903) $(3,940) $ 36
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization 2,209 2,413 1,362
Foreign exchange loss (gain) 163 166 38
Write off of intangible asset 372 -- --
Provision for bad debts 1,551 1,026 101
Change in net unrealized holding gain on trading security -- (203) --
Loss on sale of marketable security 14 -- --
Write down of other asset 82 -- --
Changes in operating assets and liabilities:
Accounts receivable 8,012 (6,770) (2,546)
Other assets (229) (102) (244)
Accounts payable 1,893 382 48
Accrued expenses (758) 1,883 (890)
Deferred revenue (322) 875 (1,591)
Income taxes payable 29 73 (212)
-------- ------- --------
Net cash used in operating activities (3,887) (4,197) (3,898)
-------- ------- --------
Cash flows used in investing activities:
Capitalized software costs (925) (970) (865)
Purchase of property and equipment (261) (326) (1,928)
Purchase of intangible assets (31) (96) (1,322)
Proceeds from sale of marketable security 189 -- --
-------- ------- --------
Net cash used in investing activities (1,028) (1,392) (4,115)
-------- ------- --------
Cash flows provided by financing activities:
Proceeds from issuance of common stock, net of issuance cost 1,991 -- --
Proceeds from exercise of stock options 116 667 224
Proceeds from employee stock purchase plan 104 102 32
Principal payments under capital lease obligations (214) (230) (243)
-------- ------- --------
Net cash provided by financing activities 1,997 539 13
-------- ------- --------
Effects of exchange rates on cash and cash equivalents 95 (181) 111
Net decrease in cash and cash equivalents (2,823) (5,231) (7,889)
Cash and cash equivalents at beginning of year 3,890 9,121 17,010
-------- ------- --------
Cash and cash equivalents at end of year $ 1,067 $ 3,890 $ 9,121
======== ======= ========
Supplemental disclosure of cash flow information:
Interest paid $ 101 $ 106 $ 54
Income taxes paid 21 67 221
Supplemental disclosure of non-cash investing and financing activities:
Equipment acquired under capital lease obligations 85 139 1,183
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE> 35
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Description of Business
Concentra Corporation, formerly ICAD, Inc. (the "Company") was
incorporated in April 1984 and operates in one business segment. The Company
develops, markets and supports software products that automate the sales
process.
The Company is subject to a number of risks similar to other companies
in the industry, including dependence on one principal product, concentration of
customers, competition from substitute products and larger companies, rapid
technological change, uncertainty of market acceptance of products, dependence
on third-party licensed technology and proprietary technology, dependence on key
personnel, dependence on domestic and international distributors and resellers,
the need to obtain additional financing and the risks associated with
international operations.
The Company has experienced and may experience in the future
significant quarter-to-quarter fluctuations in its operating results. Factors
such as the timing of significant orders, the timing of new product
introductions and upgrades, the length of customer product evaluation periods,
the mix of products sold and the mix of domestic versus international revenues
could contribute to this quarterly variability. A substantial portion of the
Company's revenues in a quarter are derived from purchase orders received in
that quarter, which makes the Company's financial performance more susceptible
to an unexpected downturn in business and more unpredictable. In addition, the
Company's expense levels are based in part on expectations of future revenue
levels and a shortfall in expected revenues could therefore result in a
disproportionate decrease in the Company's net income.
B. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
On December 24, 1997 the Company entered into an agreement to acquire a
53.4% majority interest in a newly-created limited liability company which is
the successor to the business of Loandata. Loandata contributed all of its
assets, including its proprietary technology, to the newly-established
subsidiary of the Company, in exchange for a minority interest in the
subsidiary. As a consequence of this transaction, the Company consolidated 100%
of Loandata in its consolidated balance sheet as of March 31, 1998 and in its
consolidated statement of operations for the period from December 24, 1997 to
March 31, 1998. Prior to December 24, 1997, the Company used the equity method
of accounting.
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Use of Accounting Estimates
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 and would
impact financial position, results of operations and cash flows.
35
<PAGE> 36
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents. Those
instruments with maturities between three months and twelve months are
considered to be short-term marketable securities and investments with
maturities of greater than one year are classified as long-term marketable
securities.
Cash equivalents, which include debt securities, are carried at
amortized cost plus accrued interest which approximates fair value.
The Company generally classifies investments in debt and equity
securities as available for sale. During the year ended March 31, 1998, the
Company sold an investment with a carrying basis of $203,000, at a loss of
$14,000. This loss was included in other income (expense) for the year ended
March 31, 1998.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method based on the following estimated useful lives:
Computer equipment 3-5 years
Furniture and fixtures 5-7 years
Amortization of leasehold improvements is computed on a straight-line
method over the shorter of the estimated useful life of the leasehold
improvements or the remaining term of the lease.
Expenditures for maintenance, repairs and renewals that neither
materially add to the value of the property nor appreciably prolong its life are
charged to expense as incurred. When assets are retired or disposed of, the
assets and related allowances for depreciation are eliminated from the accounts
and any resulting gain or loss is reflected in operations.
Research and Development and Capitalized Software Costs
Costs incurred prior to the establishment of technological feasibility
are charged to research and development expense. Software production costs
incurred subsequent to the establishment of technological feasibility are
capitalized until the product is available for general release to customers.
Amortization of capitalized software costs are recognized on a straight-line
basis over the estimated economic lives of the related products of three years,
which amount is greater than the amount computed using the ratio of current
gross revenues for a product to the total of current and anticipated future
gross revenues for that product.
Amortization of capitalized software costs, included in cost of
software licenses, amounted to approximately $817,000, $360,000 and $290,000 for
the years ended March 31, 1998, 1997 and 1996, respectively.
36
<PAGE> 37
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible Assets
Intangible assets, which represent various software licenses, are
recorded at cost and are amortized over their estimated useful lives of three to
five years. Amortization of intangible assets amounted to approximately
$850,000, $995,000 and $317,000 for the years ended March 31, 1998, 1997, and
1996, respectively, and are included in cost of software licenses.
During 1995, the Company entered into a five year software license
agreement with a significant customer and marketing partner. The agreement
required an upfront fee of $1,000,000, as well as additional payments for the
use of software which is embedded in certain of the Company's products (See Note
F). This asset is being amortized over the five year life of the agreement.
Revenue Recognition
Revenue from software license agreements is recognized upon shipment of
the license provided that no significant vendor obligations remain outstanding
and collection of the related receivable is deemed probable by management.
Revenue from annual or multi-year maintenance agreements, including maintenance
bundled in initial software licenses, is recognized ratably over the term of the
agreements. Revenue from consulting and training agreements is recognized as the
services are performed.
Income Taxes
The Company provides taxes for income based on the liability method,
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred taxes are
determined based on the difference between the income tax bases of assets and
liabilities and the corresponding financial reporting amounts using enacted tax
rates in effect in the years in which the differences are expected to reverse.
The Company provides a valuation allowance against net deferred tax assets if,
based upon the available evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized.
Foreign Currency
Assets and liabilities of the Company's foreign subsidiaries are
translated at the exchange rates in effect at year end. Revenues and expenses
are translated using currency exchange rates in effect during the year. Gains or
losses resulting from translation adjustments are reported as a separate
component of stockholders' equity. Foreign exchange (losses) gains resulting
from intercompany foreign currency transactions of approximately $(163,000),
$(166,000) and $(38,000) for the years ended March 31, 1998, 1997 and 1996,
respectively, are included in other income and expense.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of temporary cash investments and trade
receivables.
37
<PAGE> 38
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company invests its cash balances with banks and other financial
institutions. As of March 31, 1998 and 1997, the Company has cash equivalents
which are comprised of a repurchase agreement with a bank and U.S. Treasury
Securities. The carrying amount of these cash equivalents approximates fair
value because of their short-term maturity. The Company does not require
collateral on its repurchase agreements.
Credit risk with respect to trade receivables is concentrated due to
the limited amount of large orders recorded in any particular reporting period.
The Company regularly extends payment terms with new and existing customers to
close business in a particular reporting period. The Company does not require
collateral, letters of credit, or other security to support customer
receivables. The Company's credit review procedures are generally more limited
for overseas customers, and the Company has experienced greater credit losses
with such overseas customers than anticipated. Due to the factors discussed
above, it is reasonably possible that the Company's estimate for doubtful
accounts could differ from actual experience and adversely impact the Company's
financial position, results of operations and cash flows.
Computation of Net Income (Loss) Per Common Share
The Company adopted the Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
for the period ended March 31, 1998. All historical net income per share data
presented has been restated to conform to the provisions of this statement. SFAS
128 requires the Company to present basic and diluted earnings per share (EPS)
on the face of the income statement. Basic earnings per share is computed by
dividing net income by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share is computed by dividing net income by
the sum of the weighted-average number of common shares outstanding for the
period plus the assumed exercise of all dilutive securities, such as stock
options. Basic and diluted earnings per share presented on the statement of
operations represents historical net income (loss) per common share.
The following table reconciles the numerators and the denominators of
the basic and diluted earnings per share computations as shown on the
Consolidated Statement of Operations for each of the three years ended March 31,
1998.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
--------------------------
DESCRIPTION 1998 1997 1996
- ------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Basic weighted average shares outstanding 5,741 5,391 5,750
Weighted average effect of dilutive stock options -- -- 8
Dilutive weighted average shares outstanding 5,741 5,391 5,758
</TABLE>
Options to purchase 1,352,681 and 1,240,719 shares of common stock at
prices ranging $1.375 to $11.25 were outstanding during the twelve month period
ended March 31, 1998 and 1997, respectively, but were not included in the
computation of diluted EPS because of their anti-dilutive nature.
38
<PAGE> 39
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following investments (in
thousands):
<TABLE>
<CAPTION>
March 31,
--------------------
1998 1997
------ ------
<S> <C> <C>
Demand Deposits and CDs $1,067 $1,762
U.S. Treasury Securities -- 2,128
------ ------
$1,067 $3,890
====== ======
D. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<CAPTION>
March 31,
--------------------
1998 1997
------ ------
<S> <C> <C>
Computer equipment $4,490 $4,353
Furniture and fixtures 1,739 1,615
Leasehold improvements 1,142 1,142
------ ------
7,371 7,110
Less accumulated depreciation and amortization 5,497 4,498
------ ------
$1,874 $2,612
====== ======
Depreciation and amortization expense was approximately $999,000,
$1,056,000 and $761,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.
Property and equipment under capital leases consists of the following
(in thousands):
<CAPTION>
March 31,
--------------------
1998 1997
------ ------
<S> <C> <C>
Computer equipment $1,130 $1,109
Furniture and fixtures 803 739
------ ------
1,933 1,848
Less accumulated amortization 1,098 1,067
------ ------
$ 835 $ 781
====== ======
E. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<CAPTION>
Year Ended March 31,
--------------------
1998 1997
------ ------
<S> <C> <C>
Compensation $1,037 $1,347
Value-added tax 217 922
Reserve for customer settlement 525 --
Other 1,690 1,854
------ ------
$3,469 $4,123
====== ======
</TABLE>
39
<PAGE> 40
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. COMMITMENTS AND CONTINGENCIES
Line of Credit
The Company currently does not have a line of credit arrangement with a
financial institution. As of March 31, 1997 the Company had a line of credit
with a commercial lender. Under this credit line, as amended, the Company had a
$2,500,000 unsecured working capital line of credit. The Company also had a
$1,750,000 equipment line of credit, collateralized by the equipment, which bore
interest at the bank's base lending rate and expired on March 31, 1997. For the
years ended March 31, 1998 and 1997 the Company had borrowings under the
equipment line of credit of $1,407,000 and 1,322,000, respectively.
Capital and Operating Leases
The Company has entered into certain operating lease agreements for
computer equipment and its office and sales facilities, expiring through fiscal
2001. The Company also leases certain computer equipment and furniture and
fixtures under capital leases. Under the terms of certain operating lease
agreements, the Company may be required to pay for utilities, real estate taxes,
insurance and maintenance expenses.
On June 2, 1995, the Company signed a new five year operating lease for
its corporate headquarters. The terms of the new lease provide that the Company
will make annual rental payments of approximately $202,000.
At March 31, 1998, approximate future minimum lease payments under
capital and operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31, Capital Leases Operating Leases
-------------------- -------------- ----------------
<S> <C> <C>
1999 $ 367 $ 508
2000 367 407
2001 178 149
2002 25 --
----- ------
Total future minimum lease payments 937 $1,064
Amount representing interest (116) ======
Present value of future minimum lease -----
payments on capital leases 821
Current portion (348)
-----
Long term portion $ 473
=====
</TABLE>
Rental expense under operating leases was approximately $1,159,000,
$1,188,000 and $1,005,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.
40
<PAGE> 41
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Royalty and Consulting Arrangements
During fiscal 1996 the Company entered into a $5,000,000 five year
applications consulting services contract (the "Contract") with a significant
customer of the Company. The Contract contains volume pricing discounts subject
to adjustments for increased costs. The Company has a minimum commitment of
$2,500,000 for outside applications services that will be used by the Company
over a five year period. The minimum commitment of $2,500,000 is being paid in
five yearly payments of $250,000, $500,000, $550,000, $600,000 and $600,000 for
the five calendar years beginning December 31, 1996, respectively. As a
consequence of the ICAD Transaction, the payment of the minimum commitment fee
for the last three years of the contract will be shared equally between the
Company and the Distributor, Knowledge Technologies International, a new
company formed by Electra Fleming, a UK based investment management firm. The
Company's policy is to recognize the consulting service expenses as the expenses
are incurred. The Company believes that based on current forecasts the minimum
payment accruals will be utilized. However, given the significant sales
fluctuations which may occur in any given period, it is possible that the
minimum commitment would not be met, thus requiring the Company to record a
charge in excess of the services utilized. At March 31, 1998, the Company has
used the minimum first-year commitment of $250,000 but has not fully used the
second-year commitment of $500,000. The Company also is not current on the
payment of the 1997 commitment as of March 31, 1998 and therefore, has recorded
a liability for the unused portion which is due under the contract, of $251,000.
Subsequent to year end, the Company has paid this liability and has included
such amount in other current assets and expects to recognize this amount, along
with the fiscal 1999 minimum commitment, during the next fiscal year. Pursuant
to this reciprocal buying agreement, the Company recognized revenue and
collected cash in the amount of $1,805,000 upon the execution and delivery of
software with respect to the software license agreement for the year ended March
31, 1996.
If the Company does not make the Fixed Payments in a timely manner,
the customer or its assigns may, at their option, gain access to the source
code through an escrow arrangement and may market KBCar to others or require
the Company to market to others in order to regain any shortfall in the Fixed
Payments. This remedy is not available in the event of a failure to make the
Variable Payments.
During fiscal 1996 the Company entered into a distribution agreement
with this same significant customer to exclusively distribute the Company's
products to the customer's group of companies. The Company also licensed,
through this customer as a distributor, $500,000 of ICAD software. In addition,
the Company licensed through the distributor use of 100 copies of the software
application known as Obedient Mannequin ("OM") for $1,265,000, in addition to
the continuing rights to OM for $50,000 on an exclusive, perpetual basis.
Additionally, the Company licensed to the customer for $50,000, an unlimited
number of copies of the product known as Concept Car ("CC"). The customer also
granted to the Company the exclusive rights to distribute the product known as
KBCar which property includes both CC and OM. The customer also agreed to
continue the development and enhancement of KBCar. The royalty paid to the
customer is 50% of the net revenue after payment of all royalties to third
parties. To date, there have been no revenues generated from KBCar.
During fiscal 1995 the Company entered into a five year license and
royalty agreement, as amended, with a significant customer and marketing partner
of the Company (See Note H). Pursuant to this agreement, the Company recognized
revenue and collected cash in the amount of $1,000,000 upon the execution and
delivery of software with respect to this software license arrangement. In
addition, the Company, in connection with an arrangement to license a software
module from this significant customer, has paid $1,000,000 in prepaid royalties
to be amortized over the life of the five year agreement, commencing January 1,
1995. Also, during fiscal 1996 the Company paid additional royalty amounts to
this customer of $1,000,000 in four quarterly installments. The Company
amortizes these additional royalty payments to cost of software licenses based
upon predetermined percentages of revenues generated from the sale of product.
G. INCOME TAXES
The components of the provision for income taxes consist of the
following (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
Foreign 45 120 --
State 5 20 9
---- ---- ----
50 140 9
Deferred:
Federal -- -- --
State -- -- --
---- ---- ----
-- -- --
---- ---- ----
$ 50 $140 $ 9
==== ==== ====
</TABLE>
41
<PAGE> 42
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income (loss) before income taxes for domestic and foreign operations
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Domestic $(14,846) $(2,240) $ 828
Foreign (2,007) (1,560) (783)
-------- ------- -----
$(16,853) $(3,800) $ 45
======== ======= =====
The following is a reconciliation between the U.S. federal statutory rate and
the effective tax rate:
<CAPTION>
Year Ended March 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate (34.0)% (34.0)% 34.0%
State taxes, net of applicable federal tax benefit -- .3 13.2
Foreign withholding tax 0.3 3.2 --
Losses not benefited 34.0 33.5 --
Net operating loss utilized -- -- --
Other reductions in valuation allowance -- -- (60.1)
Non-deductible meals and entertainment .7 32.9
---- ---- ----
0.3% 3.7% 20.0%
==== ==== ====
The following represents the significant components of the Company's net
deferred tax assets (in thousands):
<CAPTION>
March 31,
----------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets (liabilities):
Federal net operating losses $ 7,412 $ 2,144
Tax credit carryforwards 1,119 1,426
Foreign net operating loss 1,793 1,793
Difference in cost recognition basis, accrual
for books and cash for tax 1,041 456
Depreciation and amortization 209 200
State tax credits and net operating
losses, net of federal benefit 700 717
Capitalized software (800) (756)
------- ------
Deferred tax asset 11,474 5,980
Valuation allowance for deferred tax assets (11,474) (5,980)
------- ------
$ -- $ --
======= ======
</TABLE>
The Company believes there is uncertainty surrounding the realization
of favorable tax benefits in future tax returns; accordingly the net deferred
tax assets at March 31, 1998 and 1997 have been fully offset by a valuation
allowance.
42
<PAGE> 43
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 1998, the Company had approximately $21,750,000 of net
operating loss carryforwards for federal income tax purposes which begin to
expire in the years 2008 through 2012. Approximately $1,020,000 of the Company's
net operating loss is attributable to the exercises of stock options which, when
utilized, will be credited to additional paid in capital. Pursuant to a change
in ownership, $2,700,000 of the federal net operating loss is subject to an
annual limitation of approximately $180,000. The Company has research and
development credits for federal and state income tax purposes of approximately
$810,000 and $310,000 respectively, that begin to expire in 2000. Foreign tax
credit carryforwards of approximately $249,000 expire in the years 1998 through
2001. Alternative minimum tax credits of approximately $60,000 carries forward
indefinitely.
H. SIGNIFICANT CUSTOMERS
The following represents significant customer revenue in each of the
years ended March 31, 1998, 1997 and 1996, respectively. Customers A-E may vary
year to year depending on the revenues for each particular year.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Customer A 15.6% 20.9% 16.0%
Customer B 9.9% 19.3% 10.1%
Customer C 7.3% 14.9% 7.8%
Customer D 5.4% 4.2% 6.5%
Customer E 5.1% 3.3% 2.2%
---- ---- ----
43.3% 62.6% 42.6%
==== ==== ====
</TABLE>
I. RELATED PARTY TRANSACTIONS
In June 1997, the Company entered into a software license agreement
with a related party. In conjunction with this agreement, the Company also
signed technical and support service agreements with the related party. The
related party purchased 102 licenses totaling $544,000, which was paid in full
during fiscal 1998. The Company has also entered into a technical services
agreement with the related Party, for which work has been performed but no
revenues have been recorded. The Company will record revenue or these services
when collectibility is probable.
J. STOCKHOLDERS' EQUITY
Preferred Stock
On November 18, 1994, the Board of Directors authorized 4,000,000
shares of $.01 par value Preferred Stock. The Board of Directors is authorized,
subject to certain limitations prescribed by law, without further stockholder
approval, to issue from time to time up to an aggregate of 4,000,000 shares of
Preferred Stock in one or more series and to fix the designations, preferences,
qualifications and limitations on restrictions of the shares of each said
series, including the dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences, conversion rights and preemptive
rights and the number of shares constituting any series.
43
<PAGE> 44
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preferred Share Purchase Rights
On April 21, 1997, the Board of Directors declared a dividend of one
Right for each outstanding share of Common Stock, par value $0.00001 per share,
of the Company. The Rights were distributed on April 24, 1997, to holders of
record on that date. The rights will expire on April 24, 2007. Each Right will
entitle shareholders to buy 1/1000 of a share of Series A preferred stock at an
exercise price of $30.00. Initially, no separate Rights certificates will be
distributed. The Rights will trade with the Company's Common Stock and will not
be exercisable until one of the following conditions occur: 1) the Company
receives notice of the acquisition of 20 percent or more of the Company's Common
Stock by a person or group; or 2) such date as the Company's Board of Directors
determines following the commencement of a tender offer for 20 percent or more
of the Company's Common Stock. At the discretion of the Board of Directors, the
Rights can be redeemed at any time prior to the date that the Rights become
exercisable. If the Rights are not redeemed by the Board, and the Company is
acquired, holders of the Rights (other than an "Acquiring Person") will be
entitled to purchase shares of Preferred Stock of the Company equivalent to
shares of Common Stock having a fair market value of twice the exercisable
price.
Stock Options
On September 15, 1987 and June 11, 1993, the Board of Directors and
stockholders approved the Company's 1987 Stock Plan and 1993 Stock Plan (the
"Plans"), respectively. The Plans provide for the granting of incentive stock
options to officers and employees, to purchase shares of the Company's common
stock at a price not less than fair value, as determined by the Board of
Directors, on the grant date. The Plans also provide for the granting of
non-qualified stock options or awards of Common Stock to employees, officers and
directors of and consultants to the Company. Options expire 10 years from the
date of grant. Certain executive officers have options that vest eight years
from the date of grant. If certain performance targets are met, 20% of these
options will vest linearly over three years annually from the time of
achievement so long as the executive officer continues to be employed by the
Company. At March 31, 1998, 1,981,178 shares of Common Stock are reserved for
issuance under the Plans.
Information related to stock options granted under the Plans is as
follows:
<TABLE>
<CAPTION>
Exercisable
Weighted Weighted
Average Average
Exercise Number Exercise
Shares Option Price Price Exercisable Price
------ ------------------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at March 31, 1995 839,523 $1.375 - $11.250 $5.25 305,540 $3.61
---------- ------ ------- ----- ------- -----
Granted 369,033 5.500 - 11.000 9.14
Canceled (52,061) 4.125 - 11.250 8.01
Exercised (79,152) 1.375 - 6.875 9.96
---------- ------ ------- ----- ------- -----
Outstanding at March 31, 1996 1,077,343 1.375 - 11.250 6.44 464,004 $4.83
---------- ------ ------- ----- ------- -----
Granted 440,750 4.875 - 14.500 5.64
Canceled (135,304) 4.125 - 14.500 7.21
Exercised (142,070) 1.375 - 11.250 9.34
---------- ------ ------- ----- ------- -----
Outstanding at March 31, 1997 1,240,719 1.375 - 14.500 6.33 476,107 $5.55
---------- ------ ------- ----- ------- -----
Granted 1,468,517 3.875 - 6.000 4.46
Canceled (1,251,138) 4.125 - 14.500 6.47
Exercised (63,300) 1.375 - 6.875 3.66
---------- ------ ------- ----- ------- -----
Outstanding at March 31, 1998 1,394,798 $1.375 - $14.500 $4.32 604,415 $4.29
---------- ------ ------- ----- ------- -----
</TABLE>
44
<PAGE> 45
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At March 31, 1998, options for 595,573 shares of Common Stock were
available for future grants.
On March 4, 1998, the Board of Directors authorized that certain stock
options under the 1987 and 1993 Stock Option Plans at exercise prices ranging
from $4.125 to $11.250 would be eligible to be exchanged for options with an
exercise price at the then fair market value of $3.875 per share. This
cancellation and reissuance of stock options affected 1,057,067 options.
On October 24, 1995, the stockholders approved the Company's 1995
Employee Stock Purchase Plan (the "Stock Purchase Plan"), which is intended to
qualify as an employee stock purchase plan under Section 423 of the Internal
Revenue Code. The Stock Purchase Plan covers up to 440,000 shares of the
Company's Common Stock. At March 31, 1998, 59,828 shares of Common Stock had
been issued under the Stock Purchase Plan.
Stock Compensation Plan
At March 31, 1998, the Company has several stock-based compensation
plans, which are described above. The Company applies Accounting Principles
Board Opinion No. 25 ("APB Opinion 25"), "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock option
plans and its stock purchase plan. Had compensation cost for the Company's two
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method prescribed
by Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting
for Stock-Based Compensation," the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
March 31, March 31, March 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net (loss) income
As reported $(16,903) $(3,940) $ 36
Pro forma $(17,929) $(4,791) $(635)
Primary earnings per share
As reported $ (2.94) $ (0.73) $ .01
Pro forma $ (3.12) $ (0.89) $ (11)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. In computing these pro forma
amounts, the Company has assumed weighted-average assumptions used for grants in
1998, 1997 and 1996, respectively; dividend yield of 0.0%; expected volatility
of 80 percent; weighted average risk-free interest rates of 5.86%, 5.96% and
5.96%; and expected lives of five years. The average fair value of the options
granted during 1998, 1997 and 1996 is estimated as $2.38, $3.84 and $6.23,
respectively, on the date of the grant.
Fixed Stock Option Plans
The Company has two fixed option plans. Under the 1987 Employee Stock
Option Plan, the Company may grant options to its employees for up to 909,091
shares of common stock. Under the 1993 Employee Stock Option Plan, the Company
may grant options to its employees for up to 1,159,091 shares of common stock.
Under the plans, the exercise price of each option equals the market price of
the Company's stock on the date of grant and option's maximum term is 10 years.
Options are granted throughout the year and typically begin vesting at the end
of the first year under the Plans.
45
<PAGE> 46
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about fixed stock options outstanding
at March 31, 1998:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OUTSTANDING AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF AS OF REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES 3/31/98 CONTRACTUAL LIFE EXERCISE PRICE AS OF 3/31/98 EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 1.3750 - $ 2.7500 15,034 2.30 $ 2.4005 15,034 $ 2.4005
$ 3.8750 - $ 3.8750 1,057,067 7.17 $ 3.8750 414,376 $ 3.8750
$ 4.1250 - $ 4.8750 159,414 6.48 $ 4.4390 108,478 $ 4.2728
$ 5.0000 - $ 6.8750 115,408 7.58 $ 6.2972 46,517 $ 6.3146
$ 7.3750 - $ 7.3750 2,400 8.58 $ 7.3750 600 $ 7.3750
$ 8.7500 - $ 8.7500 1,000 7.75 $ 8.7500 500 $ 8.7500
$ 9.2500 - $ 9.2500 500 7.57 $ 9.2500 200 $ 9.2500
$ 9.5000 - $ 9.5000 38,185 7.19 $ 9.5000 15,274 $ 9.5000
$11.0000 - $11.0000 200 7.32 $11.0000 80 $11.0000
$11.2500 - $11.2500 5,590 6.92 $11.2500 3,356 $11.2500
--------- ---- -------- ------- --------
1,394,798 7.08 $ 4.3200 604,415 $ 4.2908
</TABLE>
K. FOURTH QUARTER ADJUSTMENTS
The Company recorded net adjustments affecting operating
expenses and accrued liabilities of approximately $525,000 in the
fourth quarter of fiscal 1998. Of this amount, $450,000 is a liability
pertaining to a settlement agreement with one of the Company's software
customers related to a sale made in fiscal 1996. The remaining $75,000
pertains to legal costs that the Company anticipates to be incurred in
connection with the consummation of the settlement agreement.
The Company recorded net adjustments affecting revenue of
approximately $700,000 in the fourth quarter of fiscal 1998. These
amounts relate to the Company's establishing a reserve for certain
software license sales and consulting services provided during fiscal
1998. Of this amount, $300,000 relates to software revenue where the
related customer has withheld payment until the completion of
consulting services being provided separately by the Company. The
remaining $400,000 relates to consulting revenue recorded in fiscal
1998 for which services have been provided to the customer but the
Company has not been paid. The Company is still pursuing collections of
these amounts and will record the related revenue if and when
collectibility is deemed to be probable.
The Company recorded net adjustments affecting receivables of
approximately $1,544,000 in the fourth quarter of fiscal 1997. Of this
amount, $1,026,000 related to an increase in the provision for doubtful
accounts which the Company recorded after repeated unsuccessful
attempts were made to collect certain receivables. This provision was
principally made up of one large domestic receivable and two
international receivables. Notwithstanding this fourth quarter
provision, the Company continued to pursue collection of these
receivables. The remaining $518,000 relates to a receivable recorded in
the first quarter to a new customer. This customer experienced
turnover of the key officer who committed their respective company to
the license agreement. In the fourth quarter of fiscal 1997, the
Company recorded the provision based upon the customer's refusal to
honor the prior contract.
The Company recorded a restructuring charge of approximately
$239,000 in the fourth quarter consisting of severance costs
associated with the termination of fourteen employees for fiscal 1997.
At March 31, 1997, the outstanding unpaid balance of $216,000 was
included in accrued expenses.
46
<PAGE> 47
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. DEFINED CONTRIBUTION PLAN
In 1991, the Board of Directors adopted the Company's 401(k) Plan (the
"401(k) Plan"), which is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986, as amended. All employees who are at least 21
years of age and have been employed by the Company for at least six months are
eligible to participate in the 401(k) Plan. Each eligible employee may elect to
contribute to the 401(k) Plan, through payroll deductions, up to 15% of his or
her salary, subject to statutory limitation.
The Company may at its discretion make matching contributions on behalf
of each participating employee in an amount equal to some uniform percentage
fixed from time to time by the Board of Directors. The Company is not currently
making matching contributions. If the Company were to do so in the future, under
the current terms of the 401(k) Plan, employees would become vested in such
Company contributions at the rate of 25% per year of service.
M. SUBSEQUENT EVENTS
On June 1, 1998 the Company completed its agreement to license the ICAD
System (R), a knowledge-based engineering software product, to Knowledge
Technologies International (The Distributor), a new company formed by Electra
Fleming, a UK based investment management firm. The Source License and Exclusive
Distributorship Agreement and the related Transition Agreement, herein referred
together as the "ICAD Transaction," grants the Distributor an exclusive
world-wide license to use the key software and intellectual property rights of
the ICAD Business transfer and assign to the Distributor certain assets and
contracts relating to the ICAD Business, and provide to the Distributor certain
administrative and support services on a transitional basis. Under the terms of
the License Agreement, the Distributor has agreed to pay the Company fixed and
variable royalties consisting of (a) eight fixed quarterly royalty installments,
totaling $18.7 million, and (b) a variable royalty in 1999, 2000, and 2001 equal
to 10% of the amount by which gross revenues of the Distributor related to the
licensed software, calculated on a cumulative basis from the date of closing of
the Transaction, exceed $17.5 million for the year ending March 31, 1999, $35.0
million for the two-year period ending March 31, 2000 and $52.5 million for the
three-year period ending March 31, 2001, in each case less the aggregate
variable royalties paid in respect of prior periods. The Company will record
revenue in the period in which the payments have been made and the related
services have been performed. Electra Investment Trust, plc has agreed to
guarantee only the payment of the fixed royalty payments under the License
Agreement.
47
<PAGE> 48
CONCENTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. GEOGRAPHIC DATA
The Company has subsidiaries in various foreign countries in Europe, which
sell the Company's products and services in their respective geographic areas.
Revenues are reflected in the geographic areas from which the sales are made.
Financial information, summarized by geographic area, is as follows (in
thousands):
<TABLE>
<CAPTION>
North America Europe Eliminations Consolidated
--------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended March 31, 1998
Total revenues:
Unaffiliated customers $ 8,637 $ 4,390 $ -- $ 13,027
Affiliated customers (Note H) 743 -- -- 743
Intercompany transfers 1,015 -- (1,015) --
-------- ------- ------- --------
Total $ 10,395 $ 4,390 $(1,015) $ 13,770
======== ======= ======= ========
Net (loss) $(14,896) $(2,007) $ -- $(16,903)
======== ======= ======= ========
Identifiable assets $ 8,252 $ 2,960 $ -- $ 11,212
======== ======= ======= ========
Year ended March 31, 1997
Total revenues:
Unaffiliated customers $ 17,491 $ 6,976 $ -- $ 24,467
Affiliated customers (Note H) 104 -- -- 104
Intercompany transfers 3,526 -- (3,526) --
-------- ------- ------- --------
Total $ 21,121 $ 6,976 $(3,526) $ 24,571
======== ======= ======= ========
Net (loss) $ (2,380) $(1,560) $ -- $ (3,940)
======== ======= ======= ========
Identifiable assets $ 19,738 $ 5,293 $ -- $ 25,031
======== ======= ======= ========
Year ended March 31, 1996
Total revenues:
Unaffiliated customers $ 16,822 $ 3,446 $ -- $ 20,268
Affiliated customers (Note H) 452 -- -- 452
Intercompany transfers 1,297 -- (1,297) --
-------- ------- ------- --------
Total $ 18,571 $ 3,446 $(1,297) $ 20,720
======== ======= ======= ========
Net income (loss) $ 819 $ (783) $ -- $ 36
======== ======= ======= ========
Identifiable assets $ 21,903 $ 3,206 $ -- $ 25,109
======== ======= ======= ========
</TABLE>
- --------------------------------------------------------------------------------
Intercompany transfers primarily represent shipments of software to
international subsidiaries and are eliminated from consolidated revenues.
Export sales to unaffiliated customers were approximately $855,000,
$5,400,000 and $3,829,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.
48
<PAGE> 49
ITEM 9 - CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report in that
the Registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report an certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement that
specifically address the items set forth herein are incorporated by reference.
Such incorporation does not include the Compensation Committee Report or the
Performance Graph included in the Proxy Statement.
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this
Item is incorporated by reference to the sections entitled "Proposal No.1 -
Election of Directors," "Meetings of the Board of Directors and Committees," and
"Director Compensation" in the Company's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on August 10, 1998.
The information concerning the Company's executive officers required by
this Item is incorporated by reference herein to this section of this Report in
Part I, Item 1, entitled "Executive Officers of the Registrant."
There is incorporated herein by reference to the discussion under
"Principal and Management Stockholders" in the Company's definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on August 10, 1998
the information with respect to delinquent filing of reports pursuant to section
16(a) of the Securities Exchange Act of 1934.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the section entitled "Executive Compensation" in the Company's definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on August 10, 1998.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the section entitled "Principal and Management Stockholders" in the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
August 10, 1998.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement for its Annual Meeting of Stockholders to
be held on August 10, 1998.
49
<PAGE> 50
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are included as part of this report:
(1) FINANCIAL STATEMENTS
The following financial statements of the Company and the
report of the independent accountants are filed as part of
this report:
Report of Independent Accountants
Consolidated Balance Sheets as of March 31, 1998 and 1997
Consolidated Statements of Operations for the years
ended March 31, 1998, 1997 and 1996 Consolidated
Statements of Stockholders' Equity for the years ended
March 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years
ended March 31, 1998, 1997 and 1996 Notes to
Consolidated Financial Statements
(2) EXHIBITS
Certain of the exhibits listed hereunder have been previously
filed with the Commission as exhibits to certain registration
statements as indicated in the footnotes below and are
incorporated herein by reference pursuant to Rule 411
promulgated under the Securities Act of 1933 and Rule 24 of
the Commission's Rules of Practice. The location of each
document so incorporated is indicated by footnote.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
+3.01 -- Restated Certificate of Incorporation of the Registrant, as
amended.
+ 3.02 -- Restated By-Laws of Registrant.
++++++3.03 -- Certificate of Designations.
+ 4.01 -- Specimen Stock Certificate for Common Stock, $.00001 par
value.
++++++4.02 -- Rights Agreement dated April 24, 1997 between the Registrant
and The First National Bank of Boston.
++++++4.03 -- Form of Rights Certificate representing Right to Purchase
shares of Series A Participating Cumulative Preferred Stock.
+10.01 -- Noncompetition and Termination Agreement dated June 16, 1993
between the Registrant and Lawrence W. Rosenfeld.
+10.07 -- Employee Non-competition, Nondisclosure and Developments
Agreement between the Registrant and David I. Lemont.
+10.08 -- Form of Employee Non-competition, Nondisclosure and
Developments Agreement.
+10.09 -- Form of Indemnity Agreement between the Registrant and each
director and executive officer of the Registrant.
**+10.10 -- 1987 Stock Plan, together with forms of Stock Option
Agreements.
**+++++10.11 -- 1993 Stock Plan, together with forms of Stock Option
Agreements, as amended.
**+10.12 -- 1994 Non-Employee Directors Stock Option Plan.
**+++10.13 -- 1995 Employee Stock Purchase Plan.
50
<PAGE> 51
+10.14 -- Registration Rights Agreement dated as of June 16, 1993 by and
among the Registrant, Elsag International N.V., Toyo
Corporation, Avrum P. Belzer, Steven J. Cucchiaro, Patrick M.
O'Keefe, David F. Place, and Lawrence W. Rosenfeld.
+10.15 -- Stock Option Agreement between the Registrant and Philip G.
Greenspun, together with Partial Assignment of Stock Options
to Mark A. Stull.
++10.17 -- Lease dated June 2, 1995 between MTP Limited Partnership and
the Registrant for premises located at 21 North Avenue,
Burlington, Massachusetts, together with supplements.
++++10.18 -- Developer Software License Agreement between Franz, Inc. and
the Registrant, together with Amendment No. 1 (previously
filed as an Exhibit to the Registrant's Registration Statement
No. 33-86550) and Amendment No. 2 dated February 16, 1996
(filed herewith).
+10.20 -- Form of Software License Agreement.
+++++++10.25 -- Source License and Exclusive Distributorship Agreement dated
February 26, 1998 between the Registrant and Knowledge
Technologies International S.A.
+++++++10.26 -- Transition Agreement dated February 26, 1998 between the
Registrant and Knowledge International S.A.
+++++++10.27 -- Guarantee dated as of March 5, 1998 by Electra Investment
Trust, P.L.C.
++21.01 -- Subsidiaries of Registrant.
++++++++23.01 -- Consent of Coopers & Lybrand L.L.P.
++++++++27.00 -- Financial Data Schedule
- ---------
+ Previously filed as an Exhibit to the Registrant's Registration
Statement No. 33-86550.
++ Previously filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995.
++ Previously filed with the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
++++ Previously filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1996.
+++++ Previously filed with the Registrant's Definitive Proxy Statement
dated July 26, 1996.
++++++ Previously filed as an exhibit to the Registrant's Registration
Statement on Form 8-A filed on May 6, 1997.
+++++++ Previously filed with the Registrant's Definitive Proxy Statement date
May 12, 1998.
++++++++ Filed herewith.
* Confidential treatment as to certain portions.
** Indicates an exhibit which constitutes an executive compensation plan.
(b) Reports on Form 8-K
None.
51
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONCENTRA CORPORATION
By: /s/ Alex N. Braverman
----------------------------------------------
Alex N. Braverman
Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting 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 in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Lawrence W. Rosenfeld Chairman of the Board of June 22, 1998
- ------------------------------ Directors, President
Lawrence W. Rosenfeld and Chief Executive
Officer (Principal
Executive Officer)
/s/ Alex N. Braverman Vice President, June 22, 1998
- ------------------------------ Chief Financial
Alex N. Braverman Officer and Treasurer
(Principal Financial
and Accounting Officer)
/s/ A. William Berkman, Jr. Director June 22, 1998
- ------------------------------
A. William Berkman, Jr.
/s/ Vincenzo Cannatelli Director June 22, 1998
- ------------------------------
Vincenzo Cannatelli
/s/ Stephen J. Cucchiaro Director June 22, 1998
- ------------------------------
Stephen J. Cucchiaro
/s/ Alberto de Benedictis Director June 22, 1998
- ------------------------------
Alberto de Benedictis
/s/ William E. Kelly Director June 22, 1998
- ------------------------------
William E. Kelly
52
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of Concentra Corporation on Form S-8 (File No. 33-97040) of our report dated
May 29, 1998, except for note M, for which the date is June 1, 1998, on our
audits of the consolidated financial statements of Concentra Corporation as of
March 31, 1998 and 1997, and for each of the three years in the period ended
March 31, 1998, which report is included in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
June 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,067
<SECURITIES> 0
<RECEIVABLES> 4,507
<ALLOWANCES> 795
<INVENTORY> 0
<CURRENT-ASSETS> 6,533
<PP&E> 7,371
<DEPRECIATION> 5,497
<TOTAL-ASSETS> 11,212
<CURRENT-LIABILITIES> 10,314
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 425
<TOTAL-LIABILITY-AND-EQUITY> 11,212
<SALES> 13,770
<TOTAL-REVENUES> 13,770
<CGS> 7,369
<TOTAL-COSTS> 7,369
<OTHER-EXPENSES> 19,857
<LOSS-PROVISION> 1,551
<INTEREST-EXPENSE> 101
<INCOME-PRETAX> (16,853)
<INCOME-TAX> 50
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,903)
<EPS-PRIMARY> (2.94)
<EPS-DILUTED> (2.94)
</TABLE>
