Our ability to build our business and compete effectively depends to a
significant degree on the skills, experience and efforts of our executive
officers, particularly Craig S. Tysdal, our president and chief executive
officer. Mr. Tysdal has led us during our transition from our data transport
business to the network management services field. He is our key representative
in our relationship with AT&T. We do not have employment contracts requiring
Mr. Tysdal or any of our other personnel to continue their employment for any
period of time, and we do not maintain key man life insurance on Mr. Tysdal or
any of our other personnel. The loss of the services of Mr. Tysdal would
seriously damage our business.
We began offering network management services for LANs in the quarter ended June 30, 1997.
The principal purposes of this offering are to:
.increase our capitalization and financial flexibility;
.increase our visibility in the marketplace;
.provide a public market for our common stock;
.facilitate our future access to public equity markets; and
.provide liquidity for our existing stockholders.
If the market for out-sourced network management services grows as we expect,
we believe this market will become highly competitive. Competition is likely to
increase significantly as new network management services companies enter the
market and current competitors expand their service and product lines. Many of
these potential competitors are likely to enjoy substantial competitive
advantages, including:
. larger technical staffs;
. more established sales channels;
. more software development experience;
. greater name recognition; and
. substantially greater financial, marketing, technical and other
resources.
If our operations are interrupted, we may lose customers and revenues.
We must be able to operate our network management infrastructure 24 hours per
day, seven days per week without interruption. If our operations are
interrupted, we may lose customers and revenues. All of our network management
services are provided remotely from our network management center, which is
located at a single site in Austin, Texas. We do not have any redundant systems
or facilities at a separate geographic location. In order to operate without
interruption, we must guard against:
. power outages, fires, tornados and other natural disasters at our
network management center;
. telecommunications failures;
. equipment failures or "crashes;"
. security breaches; and
. other potential interruptions.
Any interruptions could:
. require us to make payments on the contractual performance guarantees we
offer our customers;
. cause end users to seek damages for losses incurred;
. require us to spend more money replacing existing equipment or adding
redundant facilities;
. damage our reputation for reliable service;
. cause existing end users and resellers to cancel our contracts; or
. make it more difficult for us to attract new end users and resellers.
Volatility in our stock price may negatively impact the price investors may
receive for their shares of our common stock and increase the risk that we
could be the subject of costly securities litigation. The market price of our
common stock may fluctuate substantially due to a variety of factors,including:
. the reaction of the market to the negotiated public offering price;
. quarterly fluctuations in our results of operations;
. changes in our relationship with AT&T;
. adverse circumstances affecting the introduction or market acceptance of
new products or services offered by us;
. announcements of new products or services by competitors;
. changes in our business strategies;
. changes in earnings estimates by public market analysts;
. inactivity in the trading market for our stock;
. loss of market-making or securities analyst coverage for our stock;
. changes in accounting principles;
. sales of common stock by existing holders; and
. loss of key personnel.
We currently have a network management services contract with two business
units within AT&T: AT&T Solutions and AT&T Business Network Services. AT&T
accounted for 30% of our total revenues in fiscal year 1997, 52% of our total
revenues in fiscal year 1998, 59% of our total revenues in fiscal year 1999 and
69% of our total revenues in the three months ended June 30, 1999. We
anticipate that sales to AT&T will continue to comprise a substantial
percentage of our revenues at least through fiscal year 2000 and it is possible
that this percentage could increase. No other customer accounted for more than
10% of our revenues in fiscal year 1997, 1998 or 1999 or in the three months
ended June 30, 1999.
BUSINESS
We offer a range of network management and security services that allow
companies to outsource some or all specific network activities in order to
increase network reliability and up-time, reduce overall network costs, and
simplify timely migration to new technologies. Our management services are
intended to address all or selected parts of the full life cycle of network
management, which consists of network design, configuration, implementation,
monitoring, fault diagnosis, fault resolution, reporting, upgrading and
documentation. We furnish our network management services remotely 24 hours per
day, seven days per week from our network management center in Austin, Texas,
and we offer software tools that allow companies to access up-to-date network
status reports through standard web browsers. We also offer around-the-clock
remote security protection services for the Internet and intranet perimeter
points of our customers' networks. Our security offerings currently include a
managed firewall service and a remote intrusion detection and response service.
We have offered network management services since 1995 and currently have over
600 end users representing approximately 9,500 managed sites. We target middle
market enterprises, and provide services both directly to end users as well as
indirectly through resellers such as AT&T. Industry background
Businesses increasingly depend on the ability to access and share electronic
information reliably. To enable effective internal communication, more and more
companies are relying on client/server-based databases and applications, e-
mail, remote access by mobile workers and various forms of online information.
The proliferation of the use of the Internet and the emergence of e-commerce
are driving the need for businesses to exchange electronic information
externally with customers, business partners and vendors. In response to the
growing need to share information internally and externally, companies'
operations increasingly depend on data networks, including both wide area
networks, or WANs, which allow companies to communicate with a large number of
computers over a broad geographic area, and local area networks, or LANs, which
are generally more limited in the number of computers in the network and the
geographic area covered. This proliferation of networks has resulted in a
dramatic increase in network traffic as well as heightened requirements for
network performance. It has also increased the magnitude of sensitive corporate
information shared over networks, causing network security to become a high
priority for many businesses. As a result of these trends, a growing number of
businesses view responsive, reliable and secure networks as mission-critical to
their operations.
As networks have become a more integral part of day-to-day operations, many
companies are seeking to control network costs and improve operating
efficiencies. Economic and performance issues are especially important for
organizations operating WANs to connect geographically dispersed sites.
Providers of WAN equipment and services have responded to customer demand by
introducing switched data technologies which allow any user to be connected to
any other user in a more efficient manner than traditional network
architectures. Examples of these switched data technologies include Frame
Relay, Asynchronous Transfer Mode, or ATM, and Internet Protocol, or IP. These
new switched data technologies are able to share and allocate bandwidth, the
electronic frequencies used to transmit data over computer networks, based on
actual network use, while traditional network architectures use fixed bandwidth
and dedicated circuits regardless of network use. The shared bandwidth of
switched data technologies typically results in WANs that are more reliable and
less expensive than those based on traditional leased-line services. As a
result, switched data services have grown rapidly since WAN service providers
initially introduced Frame Relay services as a solution. ATM services, a
switched data technology characterized by higher capacities and higher speeds,
are less widely offered today but are expected to compete with Frame Relay and
experience rapid growth in the next several years. Likewise, services based on
IP are becoming an important option to the traditional dedicated circuit WAN
infrastructure.
The growth of the switched data market has been enabled by the rapid
development of sophisticated networking hardware such as routers, inverse
multiplexers and switches. At the same time, software companies have introduced
network management and security software designed to work with and optimize the
new hardware. Implementation and management of new hardware and software
technologies typically require
significant expertise in order to maintain reliability, performance and
security, especially since networks have grown more complex and heterogeneous
as new technologies have been integrated with legacy networks. Further, the
tools available to manage today's networks are complex and often require
incremental investments in hardware, software, personnel and training. The
proliferation of services available from WAN service providers, such as the
major telecommunications carriers, further complicates network management and
security.
Many companies have encountered difficulties implementing and managing
networks internally because of the significant shortage of qualified networking
and information technology, or IT, professionals. Based on information
published by the Gartner Group, we believe that between 15% and 30% of
permanent IT positions were unfilled in mid-1998. The United States Department
of Commerce, in a report released in June 1999, projects 75% growth in the
demand for core IT occupations in the decade ending in 2006 as compared to 14%
growth in demand for all occupations. Maintaining internal IT staffs is costly
since network management skills must be constantly upgraded to respond to the
rapid changes in networking and security technologies. This situation is even
more acute in the area of network security, an area that is increasing in
importance due to threats of security attacks via the Internet as well as
rapidly changing security technology. The resource scarcity and high cost of
internal IT staffs represent significant challenges for businesses, especially
mid-sized companies that are large enough to require sophisticated networks,
but too small to gain efficiencies of scale achievable by a large enterprise
that can amortize the costs of an in-house IT network management group across a
large organization.
Many companies are beginning to turn to third-party service providers for
network management and security, particularly when those skills are not core
business competencies. While some companies out-source their entire computing
environment, a growing number of companies are managing their computing
environments more actively and affordably by out-tasking a particular set of
activities. Businesses seeking to out-task network management services
typically need to migrate quickly to newer technologies as they become
available, increase the reliability of their networks and reduce the overall
cost of managing their networks. Further, these businesses' networks must be
available to internal and external users 24 hours per day, seven days per week.
Even if network management activities are out-tasked, internal IT managers need
access to network information and performance reporting at all times. In
addition, network security must be assured, with access to the networks limited
to authorized users, and then only to those applications and data for which the
users have been authorized. All of this network management must be done in an
environment of constant and rapid change in networking and security technology
where the time to implement new technologies can affect the time to market of
new products and services. Our solution
We offer network management services that allow customers to out-task
network-specific activities in order to increase network reliability and up-
time, reduce overall network costs and migrate to new technologies and services
on a timely basis. We also offer security protection for network perimeter
points such as an enterprise's Internet or intranet connections. Our solutions
are designed to address the needs of middle market enterprises. We currently
have over 600 middle market end users that maintain approximately 9,500 managed
sites. We believe our solution offers the following key benefits:
Full breadth of network management services. Our network management services
cover the entire life cycle of an enterprise's network, including network
design, configuration, implementation, monitoring, fault diagnosis, fault
resolution, reporting, upgrading and documentation. End users have the ability
to outsource all of their network requirements to us, or they can retain
control over certain aspects of their network and out-task only selected
network management tasks.
Reduced costs. Substantial costs are incurred in retaining and maintaining an
internal IT staff that is qualified to manage a complex, multi-site network. We
are able to amortize these personnel-related costs, as well as costs of
necessary network infrastructure, software and tools, over hundreds of end
users. As a result,
we believe we are able to offer a better network solution at a lower cost than
if an end user attempted to manage its network in-house. Furthermore, we
evaluate, purchase, develop and integrate application-specific software and
tools that allow us to deliver reliable solutions at low costs. We support only
the relatively small number of providers of networking hardware and carrier
services that we believe collectively dominate the market. By focusing on the
leading equipment manufacturers and carriers, we are able to leverage economies
of scale in managing multiple end-user networks.
Increased network reliability, security and up-time. As enterprises continue
to increase their use of networks for internal and external communication and
for conducting e-commerce, the need for reliable and secure networks becomes
more critical. We provide our remote network management and security services
to end-user locations worldwide 24 hours per day, seven days per week. Our
remote network management services for WANs generally include a guarantee to
provide end-to-end network availability for at least 99.5% of the time in any
given month.
Ease of network maintenance and technology upgrades. Our network management
professionals act as an extension of the customer's IT staff. By relying on our
expertise, infrastructure and tools, end users are able to meet the challenges
posed by rapidly evolving technologies and move quickly and affordably to more
advanced network solutions as needed. We report to end users on an ongoing
basis and recommend upgrades or changes when appropriate.
Web-enabled network monitoring and reporting. End users can out-task to us
the complex, frustrating and expensive responsibilities of dealing with day-to-
day network management and security issues, yet still be able to understand and
see their networks in operation. End users can access our web-enabled network
management and monitoring tools and view on their computer screens a network
map that gives a current status of every site on their networks. We also
provide end users with reports of network activity periodically or on demand.
Strategy
Our goal is to be a leading provider of remote network management services.
The key elements of our strategy include the following:
Target middle market enterprises. We believe that a significant market
opportunity exists for our services among enterprises that are large enough to
employ WANs across multiple sites, but too small to amortize the costs of an
in-house IT network management staff across a large organization. These middle
market companies, which typically have between 100 and 1,000 employees and
annual revenues between $25 million and $1.0 billion, are facing a growing need
for network expertise and technology. At the same time, they are encountering
increased difficulties in attracting qualified and affordable networking
professionals. We believe that our network management and security services
offer an attractive solution for many middle market companies and we intend to
target these companies, as we market our existing services and develop new
services.
Support leading technologies. We have been able to provide cost-effective
solutions to our customers by supporting only the leading providers of
networking hardware and carrier services. The suppliers that we support include
AT&T, MCI/WorldCom, Qwest Communications and Sprint in the data transport
arena, and 3Com, Bay/Nortel and Cisco in the market for customer premise
equipment, or CPE. We believe these suppliers are the predominant providers of
networking hardware and carrier services to our target market. By designing our
services to support this select group of leading service and equipment vendors,
we seek to leverage our expertise, technologies and processes, while still
providing support for the needs of most middle market companies. We intend to
continue to develop our processes and tools to support new hardware and
services introduced by leading vendors. This ongoing support may require us to
modify existing services and, in some cases, develop new services. For example,
we recently began managing ATM devices and are actively attempting to define
new value added services.
Expand service offerings. We seek to expand our service offerings by
leveraging our existing expertise, technologies and processes in the network
management arena. In August 1996, we introduced a security service that
provides remote intrusion detection. In March 1999, we introduced an add-on
service to our WAN management service that offers customers increased
proactive network management capabilities, including our ability to identify
many network problems and faults before the customer's network goes down.
These offerings use our network management center and tools infrastructure and
are supplemented by additional proprietary and third-party tools. In addition,
the security service is enhanced by engineers with specific network security
expertise. In the future, we intend to further develop our proactive network
management service involving performance engineering and to add services
addressing capacity planning.
Add distribution partners. We believe that we can market our services to
middle market companies most effectively by partnering with resellers that
bundle our services with transport services or CPE. We believe that we can
expand our current distribution relationships to include other major carriers,
competitive local exchange carriers, or CLECs, and Internet service providers,
or ISPs, and that we can also establish sales referral relationships with
various manufacturers of networking hardware. We believe that these
relationships will provide us with a significant competitive advantage.
Network management services
Our network management services include one-time services such as design and
implementation of new networks, as well as ongoing, or recurring, management
and security services. Our current service offerings are grouped under three
general categories: remote network management services, Internet and intranet
security services, and web-enabled network management tools.
Remote network management services
Our services include the remote management of router-based WANs and LANs,
LAN switches and intelligent hubs, as well as the monitoring of servers. These
services are intended to address the full life cycle of network management,
which includes the activities depicted below:
Network Management Life Cycle Activities
[Three rectangles are linked by arrows pointing from left to right. The three
rectangles contain the following words:]DesignConfigureImplement
[Six items linked by arrows circumscribe the words "Operate and Support." The
six items consist of the following words, beginning at the top and moving
clockwise:]AlarmFixReport & TrendUpgradeDocumentMonitor
We provide services to address each of these life cycle activities. Customers
may elect to purchase full life cycle management services or may, in some
cases, purchase individual services, such as network design or monitoring.
Pricing for recurring services is generally established as a monthly fee on a
per-managed-device basis. The following highlights services performed by us for
each life cycle activity: Life cycle activity Our services
------------------- --------------------------------------------------------
Design . Design network to meet specific end-user requirements
. Offer CPE and maintenance pricing information
Configure . Configure CPE to enhance initial and ongoing network
performance
. Determine addressing, packet filtering and routing
protocol
Implement . Provide project management
. Stage, configure and install equipment
. Verify operational readiness
Monitor . Monitor network 24 hours per day, 7 days per week from
our network management center
Diagnose . Proactively diagnose faults
. Notify end user of status
Resolve . Proactively resolve faults
. Notify end user of status
Report . Offer network performance, transport provider
performance and cost analysis reports
. Offer real-time reporting on network performance which
falls below predefined thresholds
Upgrade . Upgrade or change components in the network as
requirements or configurations change
. Review software releases
. Install and configure new software and equipment as
appropriate
Document . Download and archive on our management platform
information related to CPE configurations, carrier and
CPE service provider data and other network
connectivity information
. Create and update network maps
We have two branded network management service offerings: ProWatch for WANs
and ProWatch for LANs.
ProWatch for WANs. We introduced our first WAN remote management
service in January 1994 to enable remote management of router-based
Frame Relay and ATM networks. This service is marketed by us and
certain of our resellers as ProWatch for WANs. It is also marketed by
other resellers, sometimes in modified versions, under the various
brands of those resellers. The managed elements in this service include
the WAN-attached router, the customer service unit, or CSU, connecting
the router to the transport provider's Frame Relay or ATM service; and
the transport provider's network services. Features offered in
different options of ProWatch for WANs include:
. performance engineering and fault management;
. proactive monitoring; and . performance reporting.
The ProWatch for WANs service generally includes a guarantee to provide
the customer end-to-end network availability for at least 99.5% of the
time in any given month, with the customer generally receiving a refund
of the management fee in any month the guaranteed availability rate is
not achieved. Substantially all of our recurring network management
services revenues are derived from ProWatch for WANs and related WAN
services.
ProWatch for LANs. We introduced our LAN remote management service in
May 1997 to measure, monitor and manage the routers, switches and
intelligent hubs in corporate LANs. This service can also monitor the
availability of servers manageable by the Simple Network Management
Protocol, or SNMP. Our LAN management services are marketed by us and
certain of our resellers as ProWatch for LANs and are also marketed by
other resellers under the various brands of those resellers. In
developing the ProWatch for LANs service, we leveraged the expertise,
technologies and processes we developed in providing ProWatch for WANs.
The primary differences between ProWatch for LANs and ProWatch for WANs
are the exclusion of the transport provider's network services and the
inclusion of additional performance reporting capabilities.
Internet and intranet security services
Our network security services, marketed under the brand name ProWatch Secure,
provide protection 24 hours per day, seven days per week for networks' Internet
and intranet perimeter points. This security service includes the following
elements of remote network security management: security assessment and
recommendations; implementation; ongoing security management; assurance;
security reports and consultation; configuration management; and virtual
private network, or VPN, configuration management. The pricing for these
security services is generally established as a monthly fee on a per-managed-
device basis. We offer two different security services:
ProWatch Secure Managed Firewall Service. This service provides
active management of the firewall, the electronic barrier between
network segments. Our security engineers regularly review firewall logs
and alarms to detect suspicious activity. Through this monitoring we
can consult with the end user regarding potential changes in the
firewall configuration. ProWatch Secure Managed Firewall Service is
supported on Cisco's PIX Firewall series. The Cisco PIX Firewall is
configured by our security engineers to enforce the security policy
that best meets the end user's requirements to control access by
specified applications and source addresses. The ProWatch Secure
Managed Firewall Service was introduced in September 1998 as a more
basic security service than our Remote Intrusion Detection and Response
Service.
ProWatch Secure Remote Intrusion Detection and Response Service. For
more demanding security environments, such as those engaged in e-
commerce, customers can implement intrusion detection monitoring as a
second layer of network security. This service provides additional
perimeter security beyond that offered by the access protection of
ProWatch Secure Managed Firewall Service. ProWatch Secure Remote
Intrusion Detection and Response Service uses Cisco's NetRanger
intrusion detection system to detect suspicious activity on customer
networks, repel attack attempts and bar the potential intruder from
accessing the end user's network. We introduced our ProWatch Secure
Remote Intrusion Detection and Response Service in August 1996.
End users may purchase these services individually, together or as part of a
combined network management service offering. Web-enabled tools
Our web-enabled network management tools provide end users with access to up-
to-date status information of their networks, giving end users greater control
and understanding of their networks while out-tasking day-to-day management to
us. Access to this information is included as a component of our standard
network management services and is provided to end users at no additional
charge. End users access these tools through a standard web browser using our
ProWatch Exchange application. ProWatch Exchange provides trouble ticket status
and history, plus network installation project status. An active network map
displays the status of all managed sites in an end user's network. ProWatch
Exchange also provides on-line viewing access to the monthly availability and
performance reports included with the various remote network managementservices.
Equipment and other services
We resell customer premises equipment from leading network equipment
manufacturers or their resellers. This equipment typically includes routers,
CSUs and LAN switches and is obtained from Cisco and, to a lesser extent, from
3Com, Bay/Nortel, Paradyne and others. Sales of this equipment are made only
to our network management services customers in conjunction with the sale of
our services. This equipment, including routers, CSUs and LAN switches,
constitutes the primary components of the end-user networks we manage.
Customers who purchase this equipment from us rather than from other sources
typically do so for the convenience of a single supplier solution.
We also resell on-site maintenance services, primarily to customers who have
purchased the associated equipment from us. These services address issues
associated with hardware failures and software bugs, as well as software
upgrades provided for under the equipment provider's maintenance contract.
These maintenance services are provided by 3Com, Bay/Nortel, Cisco and Racal.
Customers Our solutions are designed to address the needs of middle market
enterprises, roughly defined as companies that have between 100 and 1,000
employees and annual revenues between $25 million and $1.0 billion. We
currently have over 600 middle market end users that maintain approximately
9,500 managed sites. Our end users consist of our direct customers as well as
customers of our resellers. The following is a selected list of our direct
customers grouped by industry.
Business Services Education High Technology
Complete Business Bucks County School Santa Cruz
Solutions, Inc. District Operation
The Kinetic Group Corinthian Colleges, Verifone, Inc.
Inc.
Chemicals Manufacturing
Financial Services/Real
Estate
CONDEA Vista Company Temple-Inland
Forest
Helena Chemical Company
Amresco Products Corp.
Distribution Security Capital Group Texas Industries
BT Office Products Food and Agricultural Medical
International Products
Computer Discount Warehouse American Medical
Kendall-Jackson Response
Sun Gro Horticulture YFCS, Inc.
When sold to end users by resellers, such as AT&T, our services are
typically sold under the reseller's trade or brand name. In some instances,
however, the reseller utilizes our brand names. In all cases, we receive our
revenues directly from the resellers. In some situations, the resellers
include the cost of our services in the pricing they establish for their
related services while in other cases the services and CPE we p |
