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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ to _______
Commission file number 0-23067
CONCORD COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2710876
(State of incorporation) (IRS Employer Identification Number)
600 Nickerson Road
Marlboro, Massachusetts 01752
(508) 460-4646
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sale price of the Company's common stock on
March 1, 2001, as reported on the Nasdaq National Market was approximately
$200,774,917.
The number of shares outstanding of Common Stock as of March 1, 2001 was
16,558,756.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K Reference
Portions of the Registrant's Proxy Statement Part III, Items
for its Annual Meeting of Stockholders to 10, 11 and 12
be held on April 25, 2001.
THIS DOCUMENT CONTAINS 91 PAGES.
THE EXHIBIT INDEX IS ON PAGE 49.
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PART I
This document contains forward-looking statements. Any statements contained
herein that do not describe historical facts are forward-looking statements.
Concord makes such forward-looking statements under the provisions of the "safe
harbor" section of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements contained herein are based on current expectations,
but are subject to a number of risks and uncertainties. Concord's actual future
results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not limited
to, the factors discussed elsewhere in this Form 10-K under the heading "Risk
Factors".
ITEM 1. BUSINESS
INTRODUCTION
Concord develops, markets and supports a suite of highly scalable software
solutions, our eHealth Suite(TM) family of products, which maximizes the
availability and performance of networks, systems, and applications that form
the critical underlying internet infrastructure on which businesses depend for
their operations.
Concord's software solutions
- Monitor to detect fault conditions throughout the infrastructure in
real time,
- Test availability and responsiveness of critical services,
- Collect, consolidate, normalize and analyze high volumes of data
from the internet infrastructure,
- Alert IT personnel to faults and potential outages,
- Automatically execute corrective action to restore availability and
maximize uptime of the internet infrastructure, if desired.
Concord's unique solution combines real time information about the complete
end-to-end infrastructure, with comprehensive historical data, to provide IT
operations personnel with the complete picture needed to manage their internet
infrastructure. Real-time with historical context enables our eHealth(TM)
software to not only detect faults, but also to proactively identify subtle
variations in performance that may signify potential outages before a problem
occurs. Our eHealth software's easy-to-use, flexible graphical user interface
enables network devices, client and server systems, applications, and specific
information about those components to be associated with the business services
they impact. Using the customizable MyHealth(TM) Web-based interface, IT
operators can tailor their own view of business services, selecting a particular
component such as the network from reports, or combining reports across the
network, systems, and application components of the internet infrastructure for
a complete end-to-end view of the business service. Our eHealth software detects
faults and performance degradations, notifies IT operations staff, isolates the
sources of delay, and enables the automation of corrective action to resolve
problems.
By providing a global view across applications, systems, and networks
comprising the internet infrastructure, Concord's products enable corporate
enterprise customers to ensure the availability and performance of the services
they are required to supply to their community of users, including internal end
users and external customers and suppliers. In addition, service providers
engaged in providing network and bandwidth services (carriers), Web hosting,
datacenter/co-location services, internet service providers (ISPs), application
services (ASPs), managed services (MSPs) and outsourcing services use Concord's
products to manage the provision of those services to their end user customers.
Concord's eHealth Suite(TM) consists of a set of solutions that identify
response time and availability problems and provide information about the
underlying causes of those problems within particular applications, clients,
servers, networks or services being provided by a corporate enterprise, a
carrier, an ISP, an ASP or a MSP. Concord's software-only solutions also provide
instrumentation to gather critical application and system information and
retrieve vital network statistics from a wide range of network devices and
operating systems. Extensive analysis is performed on the data and results are
outputted in the form of intuitive, informative, user-friendly graphical reports
that can be viewed on a historical basis or in real-time. This information is
critically important to IT and service provider executives, managers and
technicians who, in turn, use it to proactively affect the availability,
response time, performance and capacity of the services they are required to
provide.
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Concord's target markets include both business enterprises and service
providers, including Web hosting providers, datacenter/co-location service
providers, ISPs, ASPs, and MSPs. Concord markets to these potential customers
through our own sales force, sales agents, value-added resellers, distributors,
network service providers, telecommunication carriers, and OEMs. As of December
31, 2000, Concord had more than 2,100 customers operating in and serving a
variety of industries. Representative customers include Aetna, America Online,
American Express, Ameritech, Amoco, AT&T Corporation, Bell Atlantic, Blue
Cross/Blue Shield, British Telecommunications plc, Cable & Wireless, Delta Air
Lines, Deutsche Telekom, EarthLink, excite@home, Fleet Financial, Frontier
Communications, Fuji Film, Global One, Goodyear, GTE, Harvard Business School,
Lloyds of London, Maxnet, McDonald's, MCI Worldcom, Mercedes-Benz, NATO, The New
York Times, Pacific Bell, Pepsi, Qwest, Siemens, Siris, Sprint, Telecom Italia,
Toys 'R' Us, Tufts, UUNET, US West, U.S. Customs, US Internetworking, Verso,
Visa International, Wang Global and Wiltel. No individual customer accounted for
more than 10% of revenue or accounts receivable in 2000, 1999 or 1998.
INDUSTRY BACKGROUND
The rapid emergence of business applications that are based on a complete
reliance on the internet infrastructure has significantly increased the amount
of business transaction data flowing across corporate and service provider
networks and the Internet. As these applications have become integral in
transacting business between corporate enterprises and their customers, the
requirement for fast response times, high performance, and application
availability has become a critical business priority. In order to deliver the
highest level of services required in this new environment, businesses continue
to expand their internal information technology infrastructure, and in addition,
contract with an increasing number of service provider companies supplying a
host of different solutions and services ranging from bandwidth to outsourcing.
These changes in the market have increased the complexity, difficulty and
importance of fault, availability, and performance management of the services
and the underlying applications and infrastructure required to deliver those
services. Since customers have now moved their business critical operations and
applications to the internet infrastructure, there is low tolerance for poor
service. Customers are demanding the rapid convergence of management solutions
for the components of the internet infrastructure - networks, systems and
applications - to enable them to reach their underlying goal: service
management. Whether to internal or external audiences, technology providers are
now tasked with guaranteeing service levels for availability and performance of
critical business services while at the same time reducing costs and maximizing
return on investment, leading them to require broad based management solutions,
like Concord's eHealth Suite(TM) solution.
The technical complexity of providing for high levels of automation,
aggregation, instrumentation and scalability over many critical applications and
many thousands of clients, servers and network elements has made comprehensive
fault, availability and performance management solutions difficult to develop
and deliver. Any comprehensive solution must be able to provide an integrated
management solution across a set of business processes as well as both
off-the-shelf and customized applications across all major computer and
operating systems such as UNIX, Windows NT and Linux, and across all major
networking technologies and devices from vendors that include Cisco, Lucent and
Nortel. To be truly comprehensive in this arena also requires solutions that
provide real-time fault and availability management as well as ongoing
performance management, utilizing analysis on historical information.
Other management solutions that are currently available are either point
solutions that attempt to compete in a narrow and particular area as a "best of
breed" solution, or platforms and frameworks that attempt to provide a
comprehensive solution that must be developed in a custom manner. While the
point solutions may be reasonably priced and provide adequate functionality in
one particular area, they fail to provide the comprehensive solution required
for the management of the complete internet infrastructure. Platform and
framework solutions can be expensive and time consuming to implement and very
difficult to support given the extent to which they must be customized for each
different environment.
Although tools that are considered point solutions may enhance the technical
management of a discreet area like a network, a set of computers, or a
particular application, and while they may be useful in isolating and correcting
problems after such problems have been identified, these solutions are not able
to
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determine the effect problems have on real users and assess which component
of the overall infrastructure - the application, the systems, or the network -
is contributing to the problem. Customized solutions that are developed on top
of a framework or platform are expensive and time consuming to develop and by
their proprietary nature are inflexible and must be implemented in total.
THE CONCORD SOLUTION
Concord is the only companies that provides a single-vendor solution
to manage the entire internet infrastructure end-to-end - applications, systems,
and networks - in real-time with historical context. Concord's set of solutions,
eHealth Suite(TM), is a family of turnkey, automated, scalable, Web-based
management solutions for critical applications, systems, and networks that
detects faults and potential outages, notifies IT operations staff of problems,
isolates sources of delay, enables the automation of corrective action, and
provides comprehensive data analysis and reports of both real-time status and
historical reports that track constantly changing conditions over time. Our
solution is capable of data collection, consolidation, analysis and reporting
for up to 80,000 elements by a single console. Further, our distributed
architecture allows configurations, viewable from a single console, which
supports collection and reporting of up to 1 million data elements. In addition,
our self-managing distributed systems and application management agents can work
autonomously on any number of systems.
Concord's eHealth(TM) product family provides organizations with the
following benefits:
(i) MAXIMIZE AVAILABILITY WHILE REDUCING COSTS - enables IT operators to
do more with less, and faster than ever before, using our eHealth
Suite to detect faults and potential outages throughout the
infrastructure, test and monitor availability, and even automate
corrective action to reduce downtime;
(ii) IMMEDIATE RETURN ON INVESTMENT - provides immediate value
out-of-the-box with embedded intelligence, detailed knowledge,
and automated analysis for over 450 different types of networked
devices enabling solutions to be up and running within hours or
days rather than weeks, months, or even years;
(iii) DETECTION OF FAULTS BEFORE THEY OCCUR - combines real-time management
with historical context to detect developing problem conditions
that have been pervasive, or that differ from normal behavior, in
order to alert IT operators to problems before services are
negatively impacted;
(iv) BUSINESS VIEW OF SERVICE MANAGEMENT - enables association of
organizations and business processes with the underlying
infrastructure components - networks, systems, and applications -
on which they depend;
(v) PREDICTIVE AND REAL-TIME PROBLEM SOLVING - provides actionable
information about the availability and response time of critical
applications and services so that IT management can adjust
capacities in a proactive manner to meet the contracted service
level agreements; and
(vi) ALIGNMENT OF MANAGEMENT OPERATIONS WITH CUSTOMER BUSINESS GOALS -
provides a total view into the end-to-end performance and
availability of the end-user customer environment so that
enterprise or service provider operations can deliver services
based on the business needs of that customer.
In providing these benefits, Concord's eHealth product family incorporates
the following features:
FULLY AUTOMATED, TURNKEY IMPLEMENTATION. Concord's products provide turnkey
solutions for fully automated fault, availability, and performance management.
Installation can be accomplished in a few hours for most products, and for
certain products, installation can actually occur remotely, over the Web. Once
installed, our products provide real-time information and also historical
reports on critical areas such as (i) important trends and changes for
application response times, system and network availability and
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capacity; (ii) situations to watch for potential delays or failures in important
services and processes; and (iii) exceptions analysis for identifying deviations
from specified performance and service levels.
SCALEABLE, SOFTWARE-ONLY SOLUTION. The eHealth product family is designed to
simplify management of the heterogeneous mix of network devices, client and
server operating systems, hardware platforms, technologies, and applications
that typically comprise today's internet infrastructures. Our products are
easily scaleable to meet the demands for management as an organization's
e-business infrastructure expands. Our eHealth solution provides managers with
the ability to purchase add-on software licenses or additional agent software as
needed.
MULTI-LEVEL REPORTING. Concord's eHealth product family generates a
comprehensive package of graphical reports that provide information and analyses
on a wide variety of pre-configured parameters. Information is provided for use
at multiple levels of management, from a general overview of capacity,
availability and response time for chief information officers -- to a detailed
analysis of specific transactions, client and server components, network
equipment components, network bandwidth components and network services.
BROAD TECHNOLOGY COVERAGE. Our eHealth product family provides management
across a broad spectrum of industry standard applications like Microsoft
Exchange and Information Internet Server; open source Apache; Lotus Notes; ERP
systems from SAP, Baan and Peoplesoft; industry standard operating systems like
UNIX, Microsoft Windows NT and Windows 2000, and Linux; and industry standard
networking technologies like ATM, Frame Relay and IP.
PRODUCTS AND TECHNOLOGY
The eHealth Suite of products is comprised of the eHealth console - a
centralized console and repository where information gathered from throughout
the infrastructure is consolidated and analyzed, technology-area solution sets
that contain products pertaining to network, systems, and application management
respectively, and a number of cross-technology, suite-wide products that operate
across all technology areas.
eHEALTH(TM) CONSOLE - providing a centralized view of faults, availability
and performance across all the components of the internet infrastructure, the
eHealth console combines an extremely efficient polling engine, an industry
standard relational database, powerful data analysis algorithms, and flexible
reporting capabilities, with an intuitive, easy-to-use customizable graphical
user interface that enables eHealth console to collect and analyze data and
provide on-demand or scheduled reporting which can be viewed on the console, or
accessed via standard Web-based browsers. The eHealth console also provides the
interface for administration and configuration tasks such as associating
business organizations or processes with underlying resources and scheduling
reports. Different technology license keys enable the eHealth console to
collect, analyze and report on information from different technology areas
including networks, systems, applications, and application service response.
Providing out-of-the-box value, eHealth is embedded with the knowledge to
discover and report on more than 450 different types of network devices and
information; new types of devices can be easily added. Its powerful historical
reports include Top-N-Reporting to quickly zero in on trouble spots, At-A-Glance
Reporting, which enables users to drill down to examine critical resources, and
Trend Reporting for building custom reports. The flexible, customizable
MyHealth(TM) interface allows users to tailor their own views of business
services, selecting from reports on a particular component such as the network,
or combining reports across the network, systems, and application components for
a complete end-to-end view of a business service.
NETWORK HEALTH(R) - The Network Health(R) solution set contains products for
managing performance and optimizing availability of key network resources
including LANs, WANs, Frame Relay, ATM and Remote Access Equipment, in addition
to integration with technologies and operational support systems (OSS) from
Lucent, Newbridge and Cisco's VPN Solutions Center and NetFlow products. The
Network Health technology license key enables the eHealth console to
automatically discover, collect information from, analyze, and report on
LAN/WAN, router/switch, Frame Relay, ATM, and Remote Access technologies
enabling network managers to track performance, plan capacity, and detect
sources of service
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delay across their networks. Another product in this category, Traffic
Accountant(TM) , works with RMON2 probes and Cisco NetFlow routers to track
network traffic and report resource consumption by users, business units,
regions, or applications, thus enabling network managers to allocate network
usage costs back to individual departments or users. Reports from the Network
Health solution set make it possible for network managers to understand service
levels, proactively address potential network failures, manage bandwidth and
capacity, watch for security violations, and understand the usage patterns of
the network and the network's various elements.
SYSTEM HEALTH(TM) - Products in Concord's System Health(TM) solution set
provide real-time distributed autonomous management of client and server
systems, on-demand snap-shot status views and configuration across groups of
systems, and comprehensive reporting that tracks system performance over time.
Concord's SystemEDGE(TM) agents, distributed on client and server systems
throughout the infrastructure, work autonomously to monitor system resources,
applications, and log files, detect faults and send notifications, and, if
specified, automatically execute user-defined corrective actions such as
re-starting failed application processes or services. AdvantEDGE View provides a
Web-based graphical user interface for viewing events, real-time status
snap-shot views, software and hardware asset reports, and configuring
self-management features across groups of SystemEDGE agents. The eHealth -
server technology license key enables the eHealth console to collect,
consolidate, analyze, and report on the performance of a large number of
heterogeneous client and server systems as it changes over time thus enabling
systems administrators to track performance and plan capacity across their
systems.
APPLICATION HEALTH(TM) - There are two main components of application
management: the first is managing the operation of the application running on a
host system, the other is tracking the responsiveness and availability
experienced in USING the application. Concord's Application Health(TM) solution
set provides products for managing application operation, and also products for
tracking application availability, usage, and service response time. Concord's
Application Response(TM) tracks the application usage and response times
experienced by ACTUAL users as they perform application transactions from their
desktop clients. With support for important business applications like Oracle,
SAP, Peoplesoft and Baan, Application Response enables IT managers to identify
which applications are slowest, which business users are most impacted, and
whether the source of delay lies within the client, the network, or the server.
Concord's Transaction Response(TM) takes it one level deeper to identify exactly
which transactions within the application are the most frequently used or suffer
the slowest response. Concord's Service Response(TM) product enables the
automation of active tests to test availability and service response time for
critical internet services such as accessing a Web site, transferring a file, or
sending E-mail, and can also support custom, user-specified application tests.
IT managers can use Service Response to continuously test critical services and
automatically notify the operations center if availability or responsiveness
drops below acceptable parameters. For managing the operation of applications on
the system, Concord provides plug-in modules for real-time fault, availability
and performance management with the ability to track performance, show
configuration settings, monitor thresholds and application events, and, if
specified, perform automated corrective action such as re-starting failed
application processes and services. Plug-in modules are currently available for
Microsoft Exchange and Information Internet Server, and open source Apache web
servers, with support for additional applications to follow.
LIVE HEALTH(TM) - Concord's Live Health(TM) software is a suite-wide
product that combines real-time data with historical context to identify faults,
potential outages, and delays BEFORE business services are impacted. Using
powerful delay-detection algorithms, Live Health software leverages our strength
in historical data collection to offer a precise assessment while automatically
eliminating redundant fault noise. Our Live Health product provides
out-of-the-box exception profiles that detect performance degradations and
subtle "brown-out" conditions, eliminating the need to configure complicated
rules. It leverages the data collected by Concord's eHealth solutions to provide
real-time management and historical analysis with no additional network traffic
or overhead. Applying historical context, our Live Health software identifies
pervasive conditions that have been "too wrong for too long" and performance
that deviates from normal behavior and alerts the operations center. IT managers
can view events in the Live Exceptions browser and instantly drill-down to
powerful historical reports to diagnose the problem. Live Health alerts can also
be forwarded to other third-party fault management applications. Easy to deploy
and
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install, our Live Health software provides unmatched end-to-end visibility
of the entire internet infrastructure with an assessment of what's likely to
fail and why.
CUSTOMER SERVICE
Concord's post-sales support organization is responsible for providing
ongoing technical support and training for our customers. For an annual fee, a
customer receives telephone and email support, as well as updated product
releases. We offer 24x7 support coverage to customers for an additional fee. We
provide a toll-free customer support line to all customers. Support personnel
are on call to answer the technical support calls and generally provide same-day
responses to questions that cannot be resolved during the initial call. All
calls are logged, opened, tracked, and closed with regular updates to the
customer, our sales teams and our executive management team. As of December 31,
2000, we employed 40 technical post-sales support personnel, 5 inside sales
representatives and one administrative person. In addition, we also had 42
professional service and training personnel who provide services to our
customers on a fee-for-service basis.
SALES AND MARKETING
Concord markets our products in the United States to large and medium-sized
organizations, as well as service providers, including telecommunications
carriers, ISPs, ASPs, MSPs, systems integrators and outsourcers primarily
through a direct sales force, sales agents and through value added resellers
(VARs). Internationally, Concord markets primarily through distributors.
Additionally, we have entered into joint marketing and joint development
arrangements with a number of companies.
As of December 31, 2000, Concord had 24 North America sales teams, each
comprised of one direct sales person and one or two technical support people
targeting the following four regions: East, Central, West and Federal. We had 8
international sales teams, also comprised of one direct sales person and one or
two technical support people, targeting the following three geographic regions:
Europe, Middle East and Africa (EMEA); Asia/Pacific; and Latin America. In
addition, we employed 42 inside sales and technical management individuals who
support both the North America and International Sales teams.
As of December 31, 2000, we had relationships with 43 North American VARs
and 56 international distributors. It is the responsibility of each sales team
to manage all sales within its geographic territory by signing up, training, and
managing a small number of sales agents, VARs, distributors, network service
providers and outsourcers, as well as selling directly to customers. Concord
generates sales leads through seminars, trade shows, Internet postings, press
articles, referrals, mass mailings and cold calling as well as through
relationships with sales agents, distributors, VARs, network service providers
and outsourcers.
As of December 31, 2000, Concord had relationships with over 100 service
providers. These service providers offer our products as part of their service
offerings. On December 31, 2000, we also had joint marketing and development
partners that work with our direct sales force, including ADC
Telecommunications, Alcatel, Ascend Communications, Inc., Cabletron Systems,
Inc., Cisco Systems, Inc., Fore Systems, Inc., Ganymede, Lucent Technologies,
Inc., Micromuse, NetScout Systems, Inc., Nortel Networks, Paradyne, Response
Networks, Shomiti and Visual Networks, Inc. We also have a professional services
referral program aimed at our key network-consulting partners. Under this
program, Concord will provide professional services through these partners
directly to our customers.
As of December 31, 2000, Concord employed 34 marketing personnel who
position, promote and market our products. These individuals are engaged in a
variety of activities, including direct marketing, public relations, tradeshows,
advertising, Internet postings, and seminars. As of December 31, 2000, we
employed 129 sales personnel.
PRODUCT DEVELOPMENT
We believe that our future success depends in large part on our success in
enhancing existing products and developing new products that maintain
technological competitiveness and deliver value to existing and
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new customers. We have made and intend to continue to make substantial
investments in product development. Extensive product development input is
obtained through customers and our monitoring of end user needs and changes in
the marketplace.
Concord introduced the initial version of our Network Health product focused
at the LAN and WAN environments in the first quarter of 1995. During 1996, we
introduced three additional versions of our Network Health software -- Frame
Relay, Router/Switch and Traffic Accountant. During 1997, we introduced two
additional versions of Network Health software -- Server and Service Level
Reporting. During 1998, we introduced two additional versions of our Network
Health product -- ATM and Remote Access. During 1999, we introduced one
additional version of our Network Health product -- Response, which is now
incorporated into our Application Health product. During 2000, we introduced our
eHealth Suite(TM) which offers end-to-end performance, capacity and availability
management across applications, systems, and networks. The introduction of the
eHealth Suite is the direct result of the integration of the products of Empire
Technologies, Inc. and FirstSense Software, Inc. which we acquired in 1999 and
2000, respectively, into our Network Health product: Systems Management from
Empire and Application Management, from FirstSense. We also introduced our first
Fault Management application, Live Health, which detects and reports performance
and availability faults in real time. The eHealth historical database provides
the Live Health application the historical context to reduce fault notifications
and to detect performance brownouts as well as hard faults. We are now
developing a new distributed infrastructure with a focus on large-scale
installations and ease of administration. The introduction of new technologies
like DSL, VoIP, VPN, SAN, Wireless, and others continually round out the
end-to-end solution set. A new Live Health summary display for Network Operation
Center (NOC) environments will provide a high level view of overall business
health and provide the pivotal point for end-to-end service management.
Additionally, a special solution set of products and professional services
targeting the service provider market was rolled out in early 2001.
Concord's total expenses for research and development were $21.1 million,
$14.4 million and $9.9 million in 2000, 1999 and 1998, respectively. We
anticipate that we will continue to commit substantial resources to research and
development in the future and that product development expenses may increase in
absolute dollars in future periods. To date, our development efforts have not
resulted in any capitalized software development costs. As of December 31, 2000,
our product development organization consisted of 128 people.
COMPETITION
The market for Concord's products is highly competitive and subject to rapid
technological change. Although we have experienced limited competition to date
from products with comparable capabilities, we expect competition to increase in
the future. We currently compete principally on the basis of: (i) the breadth of
our products' features; (ii) the automated, scaleable, and cost effective nature
of our products; and (iii) our knowledge, expertise and service abilities gained
from years of close interaction with customers. While we believe that we
currently compete favorably overall with respect to these factors, there can be
no assurance that we will be able to continue to do so.
We compete or may compete directly or indirectly with the following
categories of companies:
(i) report toolset vendors, such as Desktalk Systems, Inc. and InfoVista;
(ii) large, well established networking OEMs such as International
Business Machines Corporation, Lucent Technologies Inc.,
Hewlett-Packard Company, and Cabletron Systems, Inc. that have
developed network management platforms;
(iii) developers of network element management solutions such as Cisco
Systems, Inc., 3Com Corporation and Nortel Networks, Inc.;
(iv) to a lesser degree, probe vendors such as NetScout Systems, Inc. and
Visual Networks, Inc; and
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(v) enterprise management software, framework and platform providers such
as BMC Software, Inc. and Computer Associates, Inc.
Additional competitors, including large networking or telecommunications
equipment manufacturers, telecommunications service providers, and computer
hardware and software companies, may enter this market, thereby further
intensifying competition. Additionally, there can be no assurance that one or
more of our customers may not attempt to develop competing products internally
or that one or more of the companies we have developed relationships with, such
as the network management platform developers and probe vendors, will not try to
develop one or more products that compete more directly with our products.
Many of our current and prospective competitors have significantly greater
financial, sales and marketing, technical and other resources than Concord. As a
result, these competitors may be able to devote greater resources to the
development, promotion, sale and support of their products than Concord.
Moreover, these companies may introduce additional products that are competitive
with or better than Concord's products or may enter into strategic relationships
to offer better products than those currently offered. There can be no assurance
that our products would effectively compete with such new products.
To remain competitive, we must continue to invest in research and
development, sales and marketing, and customer service and support. In addition,
as we enter new markets and utilize different distribution channels, the
technical requirements and levels and bases of competition may be different than
those experienced in our current market. There can be no assurance that we will
be able to successfully compete against either current or potential competitors
in the future.
PROPRIETARY RIGHTS
Concord relies on a combination of patent, copyright, trademark and trade
secret laws, non-disclosure agreements and other contractual provisions to
establish, maintain and protect our proprietary rights in our products. We have
nine issued U.S. patents, five pending U.S. patent applications and various
foreign counterparts. There can be no assurance that patents that have been or
may be issued will not be challenged, invalidated or circumvented, or any rights
thereunder will provide protection of Concord's intellectual property rights.
Certain technologies used in our products are licensed from third parties,
including the database technology employed in our Network Health product family.
Such third-party licenses are generally non-exclusive, royalty-based licenses.
With respect to the database technology, we are obligated to make minimum fixed
price payments to the extent that the royalty under such license does not exceed
a certain minimum threshold. The termination of any such licenses, or the
failure of the third-party licensors to adequately maintain or update their
products, could result in delay in our ability to ship certain of our products
while we seek to implement technology offered by alternative sources, and any
required replacement licenses could prove costly. While it may be necessary or
desirable in the future to obtain other licenses relating to one or more of our
products or relating to current or future technologies, there can be no
assurance that we will be able to do so on commercially reasonable terms or at
all.
REVENUE BY GEOGRAPHIC REGION
The following table presents Concord's revenue by major geographic regions:
Year ended December 31,
---------------------------------------------
2000 1999 1998
---------- --------- ----------
United States.......... $ 62,015 $ 54,924 $ 34,469
Europe................. 17,290 9,084 5,582
Rest of the World... 12,179 4,812 1,918
---------- -------- ----------
Total.................... $ 91,484 $ 68,820 $ 41,969
========== ======== ==========
No one country, except the United States, accounts for greater than 10% of total
revenues.
EMPLOYEES
As of December 31, 2000, we had a total of 454 employees, all but 37 of whom
were based in the United States. Of the total, 128 were in research and
development, 89 were in customer service, 129 were in sales, 34 were in
marketing, 33 were in operations and information technology and 41 were in
finance, human resources and administration. Our future performance depends in
significant part upon the continued service of our key engineering, technical
support and sales personnel. Competition for such personnel is intense and there
can be no assurance that we will be successful in attracting or retaining such
personnel in the future. None of our employees are represented by a labor union
or are subject to a collective bargaining agreement. We have not experienced any
work stoppages and consider our relations with our employees to be good.
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RISK FACTORS
References in these risk factors to "we," "our" and "us" refer to Concord
Communications, Inc., a Massachusetts corporation. Any investment in our common
stock involves a high degree of risk. If any of the following risks actually
occur, our business, results of operations and financial condition would likely
suffer.
The information we provide or statements made by our employees may contain
forward looking statements. This document contains forward looking statements.
Any statements contained in this document that do not describe historical facts
are forward looking statements. We make such forward looking statements under
the provisions of the "safe harbor" section of the Private Securities Litigation
Reform Act of 1995. The forward looking statements contained in this document
are based on current expectations, but are subject to a number of risks and
uncertainties. In particular, statements contained in Management's Discussion
and Analysis of Financial Condition and Results of Operations, which are not
historical facts (including, but not limited to, statements concerning: the
plans and objectives of management; increases in sales and marketing, research
and development, customer support and service, and general and administrative
expenses; expectations regarding increased competition and Concord's ability to
compete successfully; sustenance of revenue growth; the size, scope and
description of Concord's target customer market; future product development,
including but not limited to anticipated expense levels to fund product
development, acquisitions and the integration of acquired companies; and our
expected liquidity and capital resources) constitute forward looking statements.
Our actual future results and actions may differ significantly from those stated
in any forward looking statements. Factors that may cause such differences
include, but are not limited to, the factors discussed below.
OUR FUTURE OPERATING RESULTS ARE UNCERTAIN.
We changed our focus to network management software in 1991 and
commercially introduced our first Network Health(R) product in 1995. We acquired
Empire Technologies in October 1999 and FirstSense Software in February 2000,
bringing us into the broader performance, availability and fault management
market. Accordingly, we have a relatively limited operating history in this
broader market upon which you can evaluate our business and prospects. We
incurred significant net losses in each of the five fiscal years prior to
earning a small profit in 1997, and remaining profitable in 1998, 1999 and 2000.
As of December 31, 2000, we had accumulated net losses of $23.5 million. Our
limited operating history makes the prediction of future results of operations
difficult or impossible. Our prospects must be considered in light of the risks,
costs and difficulties frequently encountered by emerging companies,
particularly companies in the competitive software industry.
WE CANNOT ASSURE THAT OUR REVENUES WILL GROW OR THAT WE WILL REMAIN PROFITABLE.
Although we have achieved recent revenue growth and profitability for the
fiscal years ended 2000, 1999, and 1998, we cannot assure that we can generate
substantial additional revenue growth on a quarterly or annual basis, or that we
can sustain any revenue growth that we achieve. In addition, we have increased,
and plan to increase further, our operating expenses in order to:
- fund higher levels of research and development;
- increase our sales and marketing efforts;
- develop new distribution channels;
- broaden our customer support capabilities; and
- expand our administrative resources in anticipation of future growth.
To the extent that increases in our expenses precede or are not followed by
increased revenue, our profitability will suffer. Our revenue must grow
substantially in order for us to remain profitable on a quarterly or annual
basis. In addition, in view of recent revenue growth, the rapidly evolving
nature of our business and markets, our recent acquisitions and our limited
operating history in our current market, we believe that one should not rely on
period-to-period comparisons of our financial results as an indication of
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our future performance. In light of our strong performance in 1998, we used all
of our remaining unrestricted tax net operating loss and credit carryforwards in
1998. Accordingly, we recorded a tax provision of $532,600 during 1998, $5.6
million during 1999 and $447,000 for 2000. The continuing restrictions on our
future use of our net operating loss carryforwards will severely limit the
benefit, if any, we will attribute to this asset.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
We are likely to experience significant fluctuations in our quarterly
operating results caused by many factors, including, but not limited to:
- changes in the demand for our products by customers or groups of customers;
- the timing, composition and size of orders from our customers, including
the tendency for significant bookings to occur in the last month of each
fiscal quarter;
- our success in integrating products from acquisitions to our current
product line;
- our customers' spending patterns and budgetary resources for performance
management software solutions;
- the success of our new customer generation activities;
- introductions or enhancements of products, or delays in the introductions
or enhancements of products, by us or our competitors;
- changes in our pricing policies or those of our competitors;
- changes in the distribution channels through which products are sold;
- our success in anticipating and effectively adapting to developing markets
and rapidly changing technologies;
- changes in networking or communications technologies;
- our success in attracting, retaining and motivating qualified personnel;
- changes in the mix of products sold by us and our competitors;
- the publication of opinions about us and our products, or our competitors
and their products, by industry analysts or others; and
- changes in general economic conditions.
Unlike other software companies with a longer history of operations, we do
not derive a significant portion of our revenues from maintenance contracts, and
therefore we do not have a significant ongoing revenue stream that may mitigate
quarterly fluctuations in operating results. Furthermore, we are trying to
expand our channels of distribution. Increases in our revenues will depend on
our successful implementation of our distribution strategy. Due to the buying
patterns of certain of our customers and also to our own sales incentive
programs focused on annual sales goals, revenues in our fourth quarter could be
higher than revenues in our first quarter of the following year. There also may
be other factors, such as seasonality and the timing of receipt and delivery of
orders within a fiscal quarter, that significantly affect our quarterly results,
which are difficult to predict given our limited operating history.
Our quarterly sales and operating results depend generally on:
- the volume and timing of orders within the quarter;
- the tendency of sales to occur late in fiscal quarters; and
- our fulfillment of orders received within the quarter.
In addition, our expense levels are based in part on our expectations of
future orders and sales, which are extremely difficult to predict. A substantial
portion of our operating expenses are related to personnel, facilities and sales
and marketing programs. Accordingly, we may not be able to adjust our fixed
expenses
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quickly enough to address any significant shortfall in demand for our products
in relation to our expectations.
Due to all of the foregoing factors, we believe that our quarterly
operating results are likely to vary significantly in the future. Therefore, in
some future quarter our results of operations may fall below the expectations of
securities analysts and investors. In such event, the trading price of our
common stock would likely suffer.
THE MARKET FOR PERFORMANCE MANAGEMENT SOFTWARE IS EMERGING.
The market for our products is in an early stage of development. Although
the rapid expansion and increasing complexity of computer networks, systems and
applications in recent years has increased the demand for performance management
software products, the awareness of and the need for such products is a recent
development. Because the market for these products is only beginning to develop,
it is difficult to assess:
- the size of this market;
- the appropriate features and prices for products to address this market;
- the optimal distribution strategy; and
- the competitive environment that will develop.
The development of this market and our growth will depend significantly
upon the willingness of telecommunications carriers, ISPs, systems integrators
and outsourcers to integrate performance management software into their product
and service offerings. The market for performance management software may not
grow or we may fail to assess properly and address the needs of this market.
OUR SUCCESS IS DEPENDENT UPON SALES TO TELECOMMUNICATIONS CARRIERS.
We derive and likely will continue to derive a significant portion of our
revenues from the sales of our products to telecommunications carriers. The
domestic telecommunications market has suffered from a turbulent economy during
2000 and Concord has been negatively affected by the downturn in capital
spending within this market. Our future performance depends upon
telecommunications carriers' increased incorporation of our products and
services as part of their package of product and service offerings to end users.
Our products may fail to perform favorably in and become an accepted component
of the telecommunications carriers' product and service offerings. The volume of
sales of our products and services to telecommunications carriers may increase
slower than we expect or may decrease.
MARKET ACCEPTANCE OF OUR eHEALTH(TM) PRODUCT FAMILY IS CRITICAL TO OUR SUCCESS.
We currently derive substantially all of our revenues from our eHealth(TM)
product family, and we expect that revenues from these products will continue to
account for substantially all of our revenues for the foreseeable future. Broad
market acceptance of these products is critical to our future success. We cannot
assure that market acceptance of our eHealth(TM) product will increase or even
remain at current levels. Factors that may affect the market acceptance of our
products include:
- the availability and price of competing products and technologies; and
- the success of our sales efforts and those of our marketing partners.
Moreover, if demand for performance management software products increases,
we anticipate that our competitors will introduce additional competitive
products and new competitors could enter our market and offer alternative
products. Product introductions by our competitors may also reduce future market
acceptance of our products.
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OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE. OUR SUCCESS DEPENDS UPON
MAINTENANCE OF STANDARD PROTOCOLS.
The software industry is characterized by:
- rapid technological change;
- frequent introductions of new products;
- changes in customer demands; and
- evolving industry standards.
The introduction of products embodying new technologies and the emergence
of new industry standards can render existing products obsolete and
unmarketable. Our Network Health(R) products' analysis and reporting, as well as
the quality of its reports, depends upon its utilization of the
industry-standard Simple Network Management Protocol (SNMP) and the data
resident in conventional Management Information Bases (MIBs). Any change in
these industry standards, the development of vendor-specific proprietary MIB
technology, or the emergence of new network technologies could affect the
compatibility of our Network Health(R) products with these devices which, in
turn, could affect its analysis and generation of comprehensive reports or the
quality of the reports. Furthermore, although our products currently run on
industry-standard UNIX operating systems and Windows NT, any significant change
in industry-standard operating systems could affect the demand for, or the
pricing of, our products.
WE MUST INTRODUCE PRODUCT ENHANCEMENTS AND NEW PRODUCTS ON A TIMELY BASIS.
Because of rapid technological change in the software industry and
potential changes in the performance management software market and industry
standards, the life cycle of versions of our eHealth(TM) products is difficult
to estimate. We cannot assure that:
- we will successfully develop and market enhancements to our eHealth(TM)
products or successfully develop new products that respond to technological
changes, evolving industry standards or customer requirements;
- we will not experience difficulties that could delay or prevent the
successful development, introduction and sale of such enhancements or new
products; or
- that such enhancements or new products will adequately address the
requirements of the marketplace and achieve any significant degree of
market acceptance.
OUR ACQUISITIONS MAY NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.
In October 1999, we acquired Empire Technologies, Inc. Empire is a provider
of solutions for proactive self-management of UNIX, Linux and Windows NT
systems, as well as mission-critical applications. In February 2000, we acquired
FirstSense Software, Inc. FirstSense is a provider of application response
management solutions. Because these acquisitions have been recorded as
"poolings-of-interests" for accounting and financial reporting purposes, we
recorded the expenses of these acquisitions, which were substantial, in the
period in which each acquisition occurred. The reporting of expenses of each
acquisition as a current charge will have a significant adverse impact on our
post-acquisition results of operations.
INTEGRATING OUR ACQUIRED PRODUCTS AND SERVICES MAY BE DIFFICULT.
The anticipated benefits of our acquisitions may not be achieved unless,
among other things, our operations, products, services and personnel are
successfully combined with those of our acquired companies in a timely and
efficient manner. The diversion of our attention, and any difficulties
encountered in our transition processes, could harm the combined enterprise. We
cannot assure that we will successfully integrate our acquired companies,
because, among other things:
- the products and services offered by us and our acquired companies are
highly complex and have been developed independently; and
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- integration of our product lines with those of our acquired companies will
require coordination of separate development and engineering teams from
each company.
If the anticipated benefits of our acquisitions are not achieved or are not
achieved in a timely fashion, then our acquisitions could harm our operating
results for a significant period of time that cannot now be determined.
THE MARKET FOR OUR PRODUCTS IS INTENSELY COMPETITIVE.
The market for our products is new, intensely competitive, rapidly evolving
and subject to technological change. Our current and future competitors include:
- remote monitoring (RMON) probe vendors;
- element management software vendors;
- systems management software vendors;
- other performance analysis and reporting vendors;
- companies offering network performance reporting services;
- large network management platform vendors which may bundle their products
with other hardware and software in a manner that may discourage users from
purchasing our products; and
- developers of network element management solutions.
We expect competition to persist, increase and intensify in the future with
possible price competition developing in our markets. Many of our current and
potential competitors have longer operating histories and significantly greater
financial, technical and marketing resources and name recognition than us. We do
not believe our market will support a large number of competitors and their
products. In the past, a number of software markets have become dominated by one
or a small number of suppliers, and a small number of suppliers or even a single
supplier may dominate our market. If we do not provide products that achieve
success in our market in the short term, we could suffer an insurmountable loss
in market share and brand name acceptance. We cannot ensure that we will compete
effectively with current and future competitors.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY HARM OUR COMPETITIVE
POSITION IN THE FAULT, AVAILABILITY AND PERFORMANCE MANAGEMENT SOFTWARE MARKET.
Our success depends significantly upon our proprietary technology. We rely
on a combination of patent, copyright, trademark and trade secret laws,
non-disclosure agreements and other contractual provisions to establish,
maintain and protect our proprietary rights. These means afford only limited
protection. We have nine issued U.S. patents, five pending U.S. patent
applications, and various foreign counterparts. We cannot ensure that patents
will issue from our pending applications or from any future applications or
that, if issued, any claims allowed will be sufficiently broad to protect our
technology. In addition, we cannot assure that any patents that have been or may
be issued will not be challenged, invalidated or circumvented, or that any
rights granted thereunder would protect our proprietary rights. Failure of any
patents to protect our technology may make it easier for our competitors to
offer equivalent or superior technology. We have registered or applied for
registration for certain trademarks, and will continue to evaluate the
registration of additional trademarks as appropriate. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or services or to obtain and use information that we regard as
proprietary. Third parties may also independently develop similar technology
without breach of our proprietary rights. In addition, the laws of some foreign
countries do not protect proprietary rights to as great an extent as do the laws
of the United States. In addition, many of our products are licensed under
shrinkwrap license agreements that are not signed by licensees. The law
governing the enforceability of shrinkwrap license agreement is not settled in
most jurisdictions. There can be no guarantee that we would achieve success in
enforcing one or more shrinkwrap license agreements if we sought to do so in a
court of law.
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WE LICENSE CERTAIN TECHNOLOGIES FROM THIRD PARTIES.
We license from third parties, generally on a non-exclusive basis, certain
technologies used in our products. The termination of any such licenses, or the
failure of the third-party licensors to maintain adequately or update their
products, could result in delay in our shipment of certain of our products while
we seek to implement technology offered by alternative sources, and any required
replacement licenses could prove costly. While it may be necessary or desirable
in the future to obtain other licenses relating to one or more of our products
or relating to current or future technologies, we cannot assure that we will be
successful in doing so on commercially reasonable terms or at all.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WOULD HARM OUR BUSINESS.
Although we do not believe that we are infringing the intellectual property
rights of others, claims of infringement are becoming increasingly common as the
software industry develops and legal protections, including patents, are applied
to software products. Litigation may be necessary to protect our proprietary
technology, and third parties may assert infringement claims against us with
respect to their proprietary rights. Any claims or litigation can be
time-consuming and expensive regardless of their merit. Infringement claims
against us can cause product release delays, require us to redesign our products
or require us to enter into royalty or license agreements, which agreements may
not be available on terms acceptable to us or at all.
PRODUCT DEFECTS COULD RESULT IN LOSS OR DELAY IN MARKET ACCEPTANCE OF OUR
PRODUCTS.
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. We
cannot assure that, despite testing by us and testing and use by current and
potential customers, errors will not be found in new products for which we begin
commercial shipments or, if discovered, that we will successfully correct such
errors in a timely manner or at all. The occurrence of errors and failures in
our products could result in loss of or delay in market acceptance of our
products, and alleviating such errors and failures could require significant
expenditure of capital and other resources by us.
WE MAY NOT HAVE SUFFICIENT PROTECTION AGAINST PRODUCT LIABILITY CLAIMS.
Since our products are used by our customers to predict future network,
system and application problems and avoid failures of the network to support
critical business functions, design defects, software errors, misuse of our
products, incorrect data from network elements or other potential problems
within or out of our control that may arise from the use of our products could
result in financial or other damages to our customers. We do not maintain
product liability insurance. Although our license agreements with our customers
typically contain provisions designed to limit our exposure to potential claims
as well as any liabilities arising from such claims, such provisions may not
effectively protect us against such claims and the liability and costs
associated therewith. We provide warranties for our products for a period of
time (currently three months) after purchase. Our license agreements generally
do not permit product returns by the customer, and product returns for fiscal
2000, 1999 and 1998 represented less than 1.0% of total revenues during each of
such periods. We cannot assure that product returns will not increase as a
percentage of total revenues in future periods.
WE RELY ON STRATEGIC PARTNERS AND OTHER EVOLVING DISTRIBUTION CHANNELS.
Our distribution strategy is to develop multiple distribution channels,
including sales through:
- strategic marketing partners, such as Cisco Systems;
- value added resellers, such as Empowered Networks;
- telecommunications carriers, such as MCI WorldCom;
- OEMs, such as Network Associates Inc.; and
- independent software vendors and international distributors.
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We have developed a number of these relationships and intend to continue to
develop new "channel partner" relationships. Our success will depend in large
part on our development of these additional distribution relationships and on
the performance and success of these third parties, particularly
telecommunications carriers and other network service providers. We have
recently established many of our channel partner relationships. Accordingly, we
cannot predict the extent to which our channel partners will be successful in
marketing our products. We generally expect that our agreements with our channel
partners may be terminated by either party without cause. None of our channel
partners are required to purchase minimum quantities of our products and none of
these agreements contain exclusive distribution arrangements. We may:
- fail to attract important and effective channel partners;
- fail to penetrate the market segments of our channel partners; or
- lose any of our channel partners, as a result of competitive products
offered by other companies, products developed internally by these channel
partners or otherwise.
WE MAY FAIL TO MANAGE SUCCESSFULLY OUR GROWTH.
We have experienced significant growth in our sales and operations and in
the complexity of our products and product distribution channels. We have
increased and are continuing to increase the size of our sales force and
coverage territories. Furthermore, we have established and are continuing to
establish additional distribution channels through third party relationships.
Our growth, coupled with the rapid evolution of our markets, has placed, and is
likely to continue to place, significant strains on our administrative,
operational and financial resources and increase demands on our internal
systems, procedures and controls.
OUR SUCCESS DEPENDS ON OUR RETENTION OF KEY PERSONNEL.
Our performance depends substantially on the performance of our key
technical and senior management personnel, none of whom is bound by an
employment agreement. We may lose the services of any of such persons. We do not
maintain key person life insurance policies on any of our employees. Our success
depends on our continuing ability to identify, hire, train, motivate and retain
highly qualified management, technical, and sales and marketing personnel,
including recently hired officers and other employees. We experience intense
competition for such personnel. We cannot assure that we will successfully
attract, assimilate or retain highly qualified technical, managerial or sales
and marketing personnel in the future.
OUR FAILURE TO EXPAND INTO INTERNATIONAL MARKETS COULD HARM OUR BUSINESS.
We intend to continue to expand our operations outside of the United States
and enter additional international markets, primarily through the establishment
of additional reseller arrangements. We expect to commit additional time and
development resources to customizing our products and services for selected
international markets and to developing international sales and support
channels. We cannot assure that such efforts will be successful.
We face certain difficulties and risks inherent in doing business
internationally, including, but not limited to:
- costs of customizing products and services for international markets;
- dependence on independent resellers;
- multiple and conflicting regulations;
- exchange controls;
- longer payment cycles;
- unexpected changes in regulatory requirements;
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- import and export restrictions and tariffs;
- difficulties in staffing and managing international operations;
- greater difficulty or delay in accounts receivable collection;
- potentially adverse tax consequences;
- the burden of complying with a variety of laws outside the United States;
- the impact of possible recessionary environments in economies outside the
United States; and
- political and economic instability.
Our successful expansion into certain countries will require additional
modification of our products, particularly national language support. Our
current export sales are denominated in United States dollars and we currently
expect to largely continue this practice as we expand internationally. To the
extent that international sales continue to be denominated in U.S. dollars, an
increase in the value of the United States dollar relative to other currencies
could make our products and services more expensive and, therefore, potentially
less competitive in international markets. To the extent that future
international sales are denominated in foreign currency, our operating results
will be subject to risks associated with foreign currency fluctuation. We would
consider entering into forward exchange contracts or otherwise engaging in
hedging activities. To date, as all export sales are denominated in U.S.
dollars, we have not entered into any such contracts or engaged in any such
activities. As we increase our international sales, seasonal fluctuations
resulting from lower sales that typically occur during the summer months in
Europe and other parts of the world may affect our total revenues.
OUR COMMON STOCK PRICE COULD EXPERIENCE SIGNIFICANT VOLATILITY.
We completed an initial public offering of our common stock during October
1997. The market price of our common stock may be highly volatile and could be
subject to wide fluctuations in response to:
- variations in results of operations;
- announcements of technological innovations or new products by us or our
competitors;
- changes in financial estimates by securities analysts; or
- other events or factors.
In addition, the financial markets have experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of such companies or have resulted from the failure
of the operating results of such companies to meet market expectations in a
particular quarter. Broad market fluctuations or any failure of our operating
results in a particular quarter to meet market expectations may adversely affect
the market price of our common stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of our attention
and resources.
WE MAY NEED FUTURE CAPITAL FUNDING.
We plan to continue to expend substantial funds on the continued
development, sales and marketing of the eHealth(TM) product family. We cannot
assure that our existing capital resources, the proceeds from our initial public
offering during October 1997 and any funds that may be generated from future
operations together will be sufficient to finance our future operations or that
other sources of funding will be available on terms acceptable to us, if at all.
In addition, future sales of substantial amounts of our securities in the public
market could adversely affect prevailing market prices and could impair our
future ability to raise capital through the sale of our securities.
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ITEM 2. PROPERTIES
Concord's corporate office and principal facilities are located in
Marlboro, Massachusetts. In March 2000 we signed a 7 year operating lease for
our principal operating facilities. Aggregate rental payments under the lease
will be $17.4 million. This facility accommodates finance, administration and
operations, research and development, customer support and marketing. We also
lease, on a short-term basis, sales office space in Atlanta, GA, Tustin, CA,
Dallas, TX, Stafford, TX, Plymouth, MI, Barrington, IL, Eden Prairie, MN,
Seattle, WA, Vienna, VA, Point Pleasant, NJ, Boca Raton, FL, London, England,
Munich, Germany, Paris, France, the Netherlands, Australia and Singapore.
ITEM 3. LEGAL PROCEEDINGS
Concord is not a party to any litigation that we believe could have a
material adverse effect on our business, results of operations and financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Concord effected its initial public offering on October 24, 1997 at a price
of $14.00 per share. Since that date, Concord's Common Stock has traded on the
Nasdaq National Market under the symbol CCRD. The following table sets forth,
for the period indicated, the high and low sales prices for the Common Stock,
all as reported by the Nasdaq National Market.
PERIOD High Low
------- -------
Fiscal 1998:
First Quarter.......... $ 30.38 $ 14.81
Second Quarter......... 29.38 21.25
Third Quarter.......... 46.25 24.38
Fourth Quarter......... 57.38 28.13
Fiscal Year.................. $ 57.38 $ 14.81
Fiscal 1999:
First Quarter.......... $ 69.75 $ 42.25
Second Quarter......... 58.50 29.63
Third Quarter.......... 62.13 32.56
Fourth Quarter......... 65.38 37.38
Fiscal Year.................. $ 69.75 $ 29.63
Fiscal 2000:
First Quarter.......... $ 57.81 $ 32.56
Second Quarter......... 42.00 20.25
Third Quarter.......... 45.00 20.88
Fourth Quarter......... 26.50 6.25
Fiscal Year.................. $ 57.81 $ 6.25
As of March 1, 2001, Concord had approximately 7,707 holders of our common
stock.
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DIVIDEND POLICY
We currently anticipate that we will retain all future earnings for use in
our business and we do not anticipate that it will pay any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
future earnings, operations, capital requirements and the general financial
condition of the Company, general business conditions and contractual
restrictions on payment of dividends, if any.
USE OF PROCEEDS
On October 16, 1997, Concord commenced an initial public offering ("IPO") of
2,900,000 shares of common stock, par value $.01 per share, pursuant to the
Company's final prospectus dated October 15, 1997 (the "Prospectus"). The
Prospectus was contained in the Company's Registration Statement on Form S-1,
which was declared effective by the Securities and Exchange Commission (SEC File
No. 333-33227) on October 15, 1997. Of the 2,900,000 shares of Common Stock
registered, 2,300,000 shares were offered and sold by the Company and 600,000
shares were offered and sold by certain stockholders of the Company. As part of
the IPO, the Company granted the several underwriters an overallotment option to
purchase up to an additional 435,000 shares of Common Stock (the "Underwriters'
Option"). The IPO closed on October 21, 1997 upon the sale of 2,900,000 shares
of Common Stock to the underwriters. The managing underwriters for the IPO were
Nationsbanc Montgomery Securities Inc., BancAmerica Roberston Stephens and
Wessels, Arnold and Henderson, L.L.C. (the "Representatives"). On October 24,
1997, the Representatives, on behalf of the several underwriters, exercised the
Underwriters' Option, purchasing 435,000 additional shares of Common Stock from
the Company. The aggregate offering price of the IPO to the public was
$40,600,000 (exclusive of the Underwriters' Option), with proceeds to the
Company and selling shareholders, after deduction of the underwriting discount,
of $29,946,000 (before deducting offering expenses payable by the Company) and
$7,812,000 respectively. The aggregate offering price of the Underwriters'
Option exercised was $6,090,000, with proceeds to the Company, after deduction
of the underwriting discount, of $5,663,700 (before deducting offering expenses
payable by the Company). The aggregate amount of expenses incurred by the
Company in connection with the issuance and distribution of the shares of Common
Stock offered and sold in the IPO were approximately $3.6 million, including
$2.7 million in underwriting discounts and commissions and $950,000 in other
offering expenses.
None of the expenses paid by the Company in connection with the IPO or the
exercise of the Underwriters' Option were paid, directly or indirectly, to
directors, officers, persons owning ten percent or more of the Company's equity
securities, or affiliates of the Company.
The net proceeds to the Company from the IPO, after deducting underwriting
discounts and commissions and other offering expenses were approximately $34.7
million. To date, the Company has not utilized any of the net proceeds from the
IPO. The Company has invested all such net proceeds primarily in US treasury
obligations and other interest bearing investment grade securities. None of the
net proceeds from the IPO were used to pay, directly or indirectly, directors,
officers, persons owning ten percent or more of the Company's equity securities,
or affiliates of the Company.
ISSUANCE OF SECURITIES
On October 29, 1999, the Company completed a merger with Empire
Technologies, Inc. Concord issued an aggregate of 815,248 shares of Concord
Common Stock to the stockholders of Empire in the Merger in a private placement
transaction pursuant to Section 4(2) under the Securities Act of 1933. A Form
S-3 Registration Statement to cover the resale of the securities issued in this
merger was declared effective by the Securities and Exchange Commission.
On February 4, 2000, the Company completed a merger with FirstSense
Software, Inc. The Company issued an aggregate of 1,940,000 shares of Concord
Common Stock to the stockholders of FirstSense in the Merger in a private
placement transaction pursuant to Section 4(2) under the Securities Act of 1933.
A Form S-3 Registration Statement to cover the resale of the securities issued
in the merger was declared effective by the Securities and Exchange Commission.
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ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data) Fiscal Year Ended
---------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 28,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License revenue .......................................... $ 69,464 $ 53,924 $ 35,048 $ 18,455 $ 8,172
Services revenue ......................................... 22,020 14,896 6,921 2,421 1,162
-------- -------- -------- -------- --------
Total revenues .................................... 91,484 68,820 41,969 20,876 9,334
Cost of revenues ................................................ 13,101 8,502 4,884 2,947 1,973
-------- -------- -------- -------- --------
Gross profit .................................................... 78,383 60,318 37,085 17,929 7,361
-------- -------- -------- -------- --------
Operating expenses:
Research and development ................................. 21,102 14,432 9,880 5,929 4,009
Sales and marketing ...................................... 42,996 29,442 19,885 10,325 7,040
General and administrative ............................... 8,113 5,337 3,595 2,363 1,177
Asset impairment charge (Note 13) ........................ 2,337 -- -- -- --
Stock-based compensation (Note 3) ........................ 812 3,039 1,126 64 --
Acquisition-related charges (Note 3) ..................... 4,300 551 -- -- --
-------- -------- -------- -------- --------
Total operating expenses .......................... 79,660 52,801 34,486 18,681 12,226
-------- -------- -------- -------- --------
Operating (loss) income ......................................... (1,277) 7,517 2,599 (752) (4,865)
Other income, net ............................................... 3,066 2,964 2,515 367 43
-------- -------- -------- -------- --------
Income (loss) before income taxes ................ 1,789 10,481 5,114 (385) (4,822)
Provision (benefit) for income taxes ............................ 447 4,286 (986) (174) --
-------- -------- -------- -------- --------
Income (loss) before extraordinary items ........................ 1,342 6,195 6,100 (211) (4,822)
Extraordinary items - expense (Note 4)........................... (216) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ............................................... $ 1,126 $ 6,195 $ 6,100 $ (211) $ (4,822)
======== ======== ======== ======== ========
Accretion of redeemable preferred stock ......................... -- 125 120 44 --
-------- -------- -------- -------- --------
Net income (loss) available to common shareholders .............. $ 1,126 $ 6,070 $ 5,980 $ (255) $ (4,822)
======== ======== ======== ======== ========
Pro forma provision for income taxes on
Subchapter S-Corporation income .......................... -- 146 41 -- --
-------- -------- -------- -------- --------
Pro forma net income ............................................ $ 1,126 $ 5,924 $ 5,939 $ (255) $ (4,822)
======== ======== ======== ======== ========
Net income (loss) per common and potential common share:
Basic ..................................................... $ 0.07 $ 0.42 $ 0.44 $ (0.07) $ (3.06)
Diluted ................................................... $ 0.07 $ 0.36 $ 0.37 $ (0.07) $ (3.06)
Pro forma diluted ......................................... $ 0.07 $ 0.35 $ 0.37 $ (0.02) $ (0.50)
Weighted average common and potential common shares outstanding:
Basic ..................................................... 16,144 14,395 13,570 3,896 1,576
Diluted ................................................... 16,746 16,722 16,200 3,896 1,576
Pro forma diluted ......................................... 16,746 16,722 16,200 10,473 9,684
(in thousands) Fiscal Year Ended
-----------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 28,
-------- -------- -------- -------- --------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............... $ 63,251 $ 63,569 $ 56,619 $ 40,081 $ 1,664
Working capital (deficit)............... 54,131 55,213 47,913 36,465 (1,387)
Total assets............................ 102,276 89,787 67,981 46,745 5,584
Long-term debt, net of current portion.. -- 2,064 242 189 668
Redeemable convertible preferred stock.. -- 11,723 11,598 5,471 14,478
Total stockholders' equity (deficit).... 70,746 52,476 41,213 33,389 (15,035)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Concord develops, markets and supports next-generation fault,
availability and performance management solutions, offering the only integrated
management solution spanning systems, applications and networks in real time
with historical context. Managing fault, availability and performance across all
of these key areas, Concord's products ensure effective management of the
internet infrastructure. This end-to-end view of the internet infrastructure in
real time, with historical context, provides the critical insights needed to
power day-to-day business operations for some of today's most successful
corporations and service providers worldwide.
Concord does not provide forecasts of its future financial performance.
From time to time, however, the information provided by Concord or statements
made by our employees may contain forward looking statements. In particular,
some statements contained in this Annual Report and Concord's Form 10-K for the
fiscal year ended December 31, 2000, are not historical statements (including,
but not limited to, statements concerning the plan and objectives of management;
increases in sales and marketing, research and development and general and
administrative expenses (domestically and internationally), Concord's ability to
use deferred tax assets, Concord's success in competing in international
markets, Concord's expected future profitability and Concord's expected
liquidity and capital resources). This document contains forward looking
statements. Any statements contained herein that do not describe historical
facts are forward looking statements. The Company makes such forward looking
statements under the provisions of the "safe harbor" section of the Private
Securities Litigation Reform Act of 1995.
The forward looking statements contained herein are based on current
expectations, but are subject to a number of risks and uncertainties. The facts
that could cause actual results to differ materially from current expectations
include the following: risks of intellectual property rights and litigation,
risks in technology development and commercialization, risks in product
development and market acceptance of and demand for the Company's products,
risks of downturns in economic conditions generally, and in the software,
networking and telecommunications industries specifically, risks associated with
competition and competitive pricing pressures, risks associated with
international sales, risks associated with the Company's recent acquisitions and
other risks detailed in the Company's filings with the Securities and Exchange
Commission.
On February 4, 2000, the Company completed its acquisition of all of the
capital stock of FirstSense Software, Inc., a Delaware corporation
("FirstSense"). The Company accounted for the transaction as a pooling of
interests in accordance with Accounting Principles Board (APB) Opinion No. 16,
Accounting for Business Combinations. As required by APB No. 16, the Company
restated all of its financial statements to reflect the combined results of both
entities for all periods presented. All transactions between the two companies
have been eliminated in the combined results. FirstSense is a provider of
applications performance and service level management software designed for
distributed applications, including packaged, custom and e-business
applications.
REVENUES
Concord's revenues consist of software license revenues and service
revenues. Software license revenues are recognized in accordance with the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 97-2, Software Revenue Recognition, as modified by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions. Under SOP 97-2, software license revenues are recognized upon
execution of a contract and delivery of software, provided that the license fee
is fixed and determinable, no significant production, modification or
customization of the software is required and collection is considered probable
by management. Service revenues are recognized as the services are performed.
Maintenance revenues are derived from customer support agreements generally
entered into in connection with initial license sales and subsequent renewals.
Maintenance revenues are recognized ratably over the term of the maintenance
period. Payments for maintenance fees are generally made in advance.
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INTERNATIONAL REVENUES
Concord recognized $27.4 million, $12.0 million and $7.5 million of
revenues from international locations in 2000, 1999 and 1998, representing
30.0%, 17.5% and 17.8% of total revenues, respectively. Our revenues from
international locations were primarily generated from customers located in
Europe. Revenues from customers located in Europe accounted for 18.9%, 13.2% and
13.3% of total revenues in 2000, 1999 and 1998, respectively. The continued
increase in revenues from international locations as a percentage of total
revenues is primarily the result of Concord's expansion of its operations
outside the United States, which has included both the hiring of additional
personnel as well as the establishment of additional reseller relation-ships. We
believe that continued growth and profitability will require further expansion
of our sales, marketing and customer service functions in international markets.
We expect to commit additional time and development resources to customizing our
products and services for selected international markets.
TOTAL REVENUES
Total revenues were $91.5 million, $68.8 million and $42.0 million in
2000, 1999 and 1998, respectively, representing increases of 32.9% from 1999 to
2000 and 64.0% from 1998 to 1999.
LICENSE REVENUES
Concord's license revenues are derived from the licensing of software
products. License revenues were $69.5 million, $53.9 million and $35.0 million,
in 2000, 1999 and 1998, respectively, representing increases of 28.8% from 1999
to 2000 and 53.9% from 1998 to 1999. License revenues accounted for 75.9%, 78.4%
and 83.5% of total revenues in 2000, 1999 and 1998, respectively. The increase
in license revenues in absolute dollars resulted from increased penetration of
the international markets, increased sales to new customers and additional sales
to existing customers for new products and upgrades of existing licenses. The
decrease in license revenues as a percent of total revenues was the result of a
significant increase in service revenues due to larger service opportunities in
the installed customer base. There were no price increases for products during
2000.
SERVICE REVENUES
Concord's service revenues consist of fees for maintenance, training and
professional services. Service revenues were $22.0 million, $14.9 million and
$6.9 million in 2000, 1999 and 1998, respectively, representing increases of
47.8% from 1999 to 2000 and 115.2% from 1998 to 1999. Service revenues accounted
for 24.1%, 21.6% and 16.5% of total revenues in 2000, 1999 and 1998,
respectively. The increase in service revenues was attributable to an increase
in the number of customers and the resulting demand for services by these
customers.
COST OF REVENUES
Cost of revenues includes expenses associated with royalty costs,
production, fulfillment and product documentation, along with personnel costs
associated with providing customer support in connection with maintenance,
training and professional services contracts. Royalty costs are composed of
third party software costs. Cost of revenues were $13.1 million, $8.5 million
and $4.9 million in 2000, 1999 and 1998, respectively, representing increases of
54.1% from 1999 to 2000 and 73.5% from 1998 to 1999. Cost of revenues accounted
for 14.3%, 12.4% and 11.6% of total revenues in 2000, 1999 and 1998,
respectively, resulting in gross margins of 85.7%, 87.6% and 88.4% in each
respective period. The increase in cost of revenues, as well as the decrease in
the gross margin percentages, was primarily the result of increased spending for
customer support to be more responsive to growing customer needs.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of personnel costs
associated with software development. Research and development expenses were
$21.1 million, $14.4 million and $9.9 million in 2000, 1999 and 1998,
respectively, representing an increase of 46.2% from 1999 to 2000 and 46.1% from
1998 to 1999. Research and development expenses accounted for 23.1%, 21.0% and
23.5% of total
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revenues in 2000, 1999 and 1998, respectively. The increase in absolute dollars
was primarily due to increased headcount in research and development from 97 to
128 people from 1999 to 2000 and 77 to 97 people from 1998 to 1999. We
anticipate that we will continue to commit substantial resources to research and
development in the future and that product development expenses may increase in
absolute dollars in future periods.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of salaries, commissions
to sales personnel and agents, travel, tradeshow participation, public relations
and other promotional expenses. Sales and marketing expenses were $43.0 million,
$29.4 million and $19.9 million in 2000, 1999 and 1998, respectively,
representing an increase of 46.0% from 1999 to 2000 and 48.0% from 1998 to 1999.
Sales and marketing expenses accounted for 47.0%, 42.8% and 47.4% of total
revenues in 2000, 1999 and 1998, respectively. The increase in absolute dollars
was primarily the result of increased headcount to continue to build the direct
sales force along with strong channel partners to penetrate the market.
Additionally, the costs to market a multi-product, multi-market solution set are
higher than the prior single product, single market solution sold in prior
years. Headcount in sales and marketing at the end of 2000, 1999 and 1998 was
163, 134 and 83 people, respectively. We anticipate that we will continue to
commit substantial resources to sales and marketing in the future and that these
expenses may increase in absolute dollars in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of salaries for
financial, accounting, legal, business development, administrative and
management personnel. General and administrative expenses were $8.1 million,
$5.3 million and $3.6 million in 2000, 1999 and 1998, respectively, representing
an increase of 52.0% from 1999 to 2000 and 46.5% from 1998 to 1999. General and
administrative expenses accounted for 8.9%, 7.8% and 8.7% of total revenues in
2000, 1999 and 1998, respectively. The increase in absolute dollars reflects an
increased number of general and administrative personnel and an increase of
costs in general support areas, such as human resources, finance and legal
services, which will enable Concord to scale its infrastructure in anticipation
of future growth.
ASSET IMPAIRMENT EXPENSE
Concord acquired a $3 million interest in Broadband Investment Group
(Broadband) in September 2000 in exchange for our products and services. In
November 2000, Broadband publicly announced that it was ceasing operations and
liquidating its remaining assets following its inability to raise additional
capital due to unfavorable market conditions. As a result, Concord recorded a
charge for approximately $2.3 million to write off its investment in Broadband.
The remainder of the carrying value of its Broadband investment was reversed
against the related deferred revenue for services not yet rendered.
ACQUISITION-RELATED EXPENSES
Acquisition-related expenses incurred in 2000 included accounting, legal
and investment banking fees associated with the acquisition of FirstSense
Software, Inc. Similar expenses were incurred in 1999 for the acquisition of
Empire Technologies, Inc. These acquisition-related expenses were approximately
$4.3 million and $551,000 in 2000 and 1999, respectively, and they accounted for
4.7% and 0.8% of total revenue in 2000 and 1999, respectively.
OTHER INCOME (EXPENSE), NET
Other income consists of interest earned on funds available for
investment net of interest expense in connection with the financing of capital
equipment. Concord realized net other income of $3.1 million, $3.0 million and
$2.5 million, respectively, in 2000, 1999 and 1998.
INCOME TAXES
The difference between the expected combined federal and state tax rate
of approximately 40% and Concord's effective tax rate in 2000 relates primarily
to the use of currently generated tax credits, favorable
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tax rates on international sales and previously unrecognized net operating loss
carryforwards, partially offset by non-deductible acquisition costs. The 1999
effective tax rate approximates the combined statutory rate. The difference in
1998 relates primarily to the use of substantially all of Concord's unrestricted
net operating loss carryforwards and the reduction of the related valuation
allowance. In addition, we received a tax benefit of approximately $469,000,
$4.9 million and $500,000 pursuant to the exercise of employee stock options in
2000, 1999 and 1998, respectively. We recorded this benefit as a component of
additional paid-in capital.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
The Company recognized an extraordinary loss of $216,000 (net of the
related tax benefit of $72,000) in 2000 related to the early extinguishment of
certain debt that the Company assumed as a part of the First-Sense acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Concord has financed its operations primarily through the sale of equity
securities and a credit line for equipment purchases. Concord had working
capital of $54.1 million at December 31, 2000.
Net cash provided by operating activities was $8.2 million, $11.5
million and $11.2 million in 2000, 1999 and 1998, respectively. Cash, cash
equivalents and marketable securities were $63.3 million, $63.6 million and
$56.6 million in 2000, 1999 and 1998, respectively. Deferred revenues increased
for the year ended December 31, 2000 by $7.0 million due to an increase in
overall sales activity; $5.1 million of this increase came from deferred
maintenance contracts and $1.9 million was the result of service and software
license sales with remaining contingencies such as completion of services,
product acceptance and credit worthiness.
Investing activities consisted of the acquisition of property and
equipment, most notably computer and networking equipment to support the growing
employee base and corporate infrastructure and also investments in marketable
securities. Concord manages its market risk on its marketable securities by
selecting investment grade securities with the highest credit ratings of
relatively short duration that trade in highly liquid markets.
Financing activities consisted primarily of the issuance of common stock
and exercise of options during 2000, 1999 and 1998 and the repayment of
subordinated debt of FirstSense, following the acquisition of this company.
Pursuant to the Tax Reform Act of 1986, the utilization of net operating
loss (NOL) carryforwards for tax purposes may be subject to an annual limitation
if a cumulative change of ownership of more than 50% occurs over a three-year
period. As a result of our 1995 preferred stock financings, such a change in
ownership has occurred. As a result of this ownership change, the use of the NOL
carryforwards will be limited. We have determined that our initial public
offering did not cause another ownership change. In addition, NOL carryforwards
acquired as a result of the FirstSense acquisition are also restricted as a
result of a prior ownership change of FirstSense. Concord has deferred tax
assets of approximately $14,914,000 composed primarily of NOL carryforwards and
research and development credits. We have partially reserved for these deferred
tax assets by recording a valuation allowance of $11,414,000. The net tax asset
is based on our estimate of the NOL carryforwards we expect to use in the next
two years; all other tax assets have been fully reserved.
Pursuant to paragraphs 20 to 25 of Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes, Concord considered both
positive and negative evidence in assessing the need for a valuation allowance
at December 31, 1998 and 1999. The factors that weighed most heavily on our
decision to record a valuation allowance were (i) the substantial restrictions
on the use of certain of its existing NOL and credit carryforwards and (ii) the
uncertainty of future profitability.
As a result of our ownership change described above, the future use of
approximately $6,577,000 of our NOL carryforwards are limited to only $330,000
per year; the substantial majority of such NOL carry-
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forwards will expire before they can be used. The FirstSense NOL carryforwards
are limited to $4.2 million per year. Pursuant to the provisions of SFAS No.
109, we used all of our remaining unrestricted NOL and credit carryforwards in
computing the 1998 tax provision. As part of the restatement of our 1999
financial statements to reflect the FirstSense acquisition, we determined that
approximately $3.0 million of valuation allowance previously recorded by
FirstSense prior to the acquisition was not necessary, given our estimates of
future taxable income. Accordingly, pursuant to SFAS No. 109, we recorded an
asset and reduced our provision for income taxes in the period in which such NOL
carryforwards were generated by FirstSense. We are also subject to rapid
technological change, competition from substantially larger competitors, a
limited family of products and other related risks.
As a result, we found the evidence described above to be the most
reliable objective evidence available in determining that a valuation allowance
against our tax assets would be necessary.
Concord's NOL deferred tax asset includes approximately $3,750,000
pertaining to the benefit associated with the exercise and subsequent
disqualifying disposition of incentive stock options by our employees. When and
if we realize this asset, the resulting change in the valuation allowance will
be credited directly to additional paid-in capital, pursuant to the provisions
of SFAS No. 109.
Concord received a tax benefit of approximately $469,000, $4.9 million
and $500,000 in 2000, 1999 and 1998, respectively, pursuant to the exercise of
employee stock options. We recorded this benefit as a component of additional
paid-in capital.
As of December 31, 2000, Concord's principal sources of liquidity
included cash and marketable securities. We believe that our current cash and
marketable securities and cash provided by future operations will be sufficient
to meet our working capital and anticipated capital expenditure requirements for
the next 12 months. Although operating activities may provide cash in certain
periods, to the extent Concord experiences growth in the future, our operating
and investing activities may require significant cash. Consequently, any such
future growth may require Concord to obtain additional equity or debt financing.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS AND DERIVATIVE
COMMODITY INSTRUMENTS.
Concord does not invest in derivative financial instruments, other
financial instruments or derivative commodity instruments for which fair value
disclosure would be required under Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
All of our investments are in investment grade securities with high credit
ratings of relatively short duration that trade in highly liquid markets and are
carried at fair value on our books. Accordingly, Concord has no quantitative
information concerning the market risk of participating in such investments.
PRIMARY MARKET RISK EXPOSURES.
Concord's primary market risk exposure is in the area of interest rate
risk. Our investment portfolio of cash equivalents is subject to interest rate
fluctuations, but we believe this risk is immaterial due to the short-term
nature of these investments. Substantially all of our business outside the
United States is conducted in U.S. dollar-denominated transactions, whereas our
operating expenses in our international branches are denominated in local
currency. We have no foreign exchange contracts, option contracts or other
foreign hedging arrangements. We believe that the operating expenses of our
foreign operations are immaterial, and therefore any associated market risk is
unlikely to have a material adverse effect on our business, results of
operations or financial condition.
Concord's current export sales are denominated in United States
dollars. To the extent that international sales continue to be denominated in
United States dollars, an increase in the value of United
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States dollar relative to other currencies could make our products and services
more expensive and, therefore, potentially less competitive in international
markets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Concord's financial statements together with the related notes and the
report of Arthur Andersen LLP and KPMG LLP, independent accountants, are set
forth beginning on page F-1 of Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information under the captions "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" as set forth in the Concord's
Proxy Statement for its annual stockholders' meeting to be held April 25, 2001
is incorporated herein by reference.
Our executive officers and their ages as of December 31, 2000 are as
follows:
NAME AGE POSITION
John A. Blaeser..... 59 Chief Executive Officer, President and Director
Melissa H. Cruz .... 38 Executive Vice President, Business Services
Chief Financial Officer, Clerk and Treasurer
Kevin J. Conklin.... 47 Executive Vice President, Business Development
Ferdinand Engel..... 52 Executive Vice President, Engineering and
Chief Technology Officer
John Hamilton....... 48 Executive Vice President, Worldwide Sales and
Technical Services
Ellen Kokos......... 48 Executive Vice President, Marketing
Set forth below is certain information relating to each executive
officer's business experience:
John A. Blaeser has been Concord's Chief Executive Officer and President
since January 1996 and a director of Concord since 1985. Prior to joining
Concord, from 1991 until 1996, Mr. Blaeser was Managing General Partner of EG&G
Venture Management, a venture capital firm.
Melissa H. Cruz has been Concord's Executive Vice President, Business
Services and Chief Financial Officer since April 2000, Vice President Finance
from January 2000 until April, 2000, Director of Finance from August 1998 until
January 2000 and Manager, Financial Planning from August 1997 until August 1998.
Prior to joining Concord, Ms. Cruz was Director of Finance at SeaChange
International, Inc. from November 1996 to August 1997, International Controller
at Bay Networks, Inc. from November 1993 to July 1996 and from December 1984 to
November 1993, Ms. Cruz held a variety of financial management roles at Digital
Equipment Corporation.
Kevin J. Conklin has been Concord's Executive Vice President, Business
Development since April 2000, Senior Vice President of Marketing from September
1999 until April 2000 and Vice President of Marketing of Concord from March 1994
until September 1999. Prior to joining Concord, Mr. Conklin was Vice President
of Product Marketing and Development at Artel Communications, Inc. from June
1993 until joining Concord in March 1994, and from July 1991 to June 1993 Mr.
Conklin served as Director of Marketing at Artel Communications.
Ferdinand Engel has been Concord's Executive Vice President of Engineering
and Chief Technology Officer since April 2000, Senior Vice President of
Engineering of Concord from September 1999 until April 2000 and Vice President
of Engineering of Concord from 1989 until September 1999. Prior to joining
Concord, Mr. Engel was Vice President of Engineering for Technology Concepts at
Bell Atlantic Corp.
John Hamilton has been Concord's Executive Vice President of International
Sales and Technical Service since November 2000, Vice President of Worldwide
Sales from April 2000 until November 2000, Vice President North American Sales
from September 1999 until April 2000 and National Sales Director from July 1997
until September 1999. Prior to joining Concord, Mr. Hamilton was Area Vice
President at FTP Software, Inc. from February 1996 until July 1997 and from
February 1995 until February 1996, Mr. Hamilton was the national sales manager
for Oxford & Associates, Inc. He also held various management positions at EMC
Corporation, Stratus Corporation and International Business Machines
Corporation.
Ellen Kokos has been Concord's Executive Vice President, Marketing since
January 2001. Prior to joining Concord, Ms. Kokos was Vice President at Epicon,
Inc. from November 1998 until September 2000. From July 1996 until September
1997, Ms. Kokos was Vice President, Marketing at Agile Networks, a subsidiary of
Lucent Technologies. In 1995, Ms. Kokos was Corporate Vice President, Marketing
at Chipcom prior to its acquisition by 3COM Corporation. Ms. Kokos also held
executive positions at Digital Equipment Corporation, Novell, Inc. and Sun
Microsystems, Inc.
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ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" as set forth
in the Company's Proxy Statement for its annual stockholders' meeting to be held
April 25, 2001 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Securities Ownership of Certain
Beneficial Owners and Management" as set forth in Concord's Proxy Statement for
its annual stockholders' meeting to be held April 25, 2001 is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
1. Consolidated Financial Statements: Page Number
Reports of Independent Public Accountants F-1
Consolidated Balance Sheets:
December 31, 2000 and December 31, 1999 F-3
Consolidated Statements of Income:
Years ended December 31, 2000, December 31, 1999 and December 31, 1998 F-4
Consolidated Statements of Stockholders' Equity:
Years ended December 31, 2000, December 31, 1999 and December 31, 1998 F-5
Consolidated Statements of Cash Flows:
Years ended December 31, 2000, December 31, 1999 and December 31, 1998 F-6
Notes to the Consolidated Financial Statements F-7
2. Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Included in Item 11 of Notes to the Consolidated Financial
Statements
3. Exhibits:
See Index to Exhibits. The Exhibits listed in the accompanying
Index to Exhibits are filed or incorporated by reference as part
of this report.
(b) Reports on Form 8-K:
None.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Concord Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Concord
Communications, Inc. (a Massachusetts corporation) as of December 31, 2000 and
December 31, 1999, and the related consolidated statements of income,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 2000. 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 did not audit the
financial statements of FirstSense Software, Inc., a company acquired during
2000 in a transaction accounted for as a pooling of interests, as discussed in
Note 3(b). Such statements are included in the consolidated financial statements
of Concord Communications, Inc. and reflect total assets of 6% as of December
31, 1999 and total revenues of 2% and 1%, respectively, for each of the two
years in the period ended December 31, 1999, of the related consolidated totals.
These statements were audited by other auditors whose report has been furnished
to us and our opinion, insofar as it relates to amounts included for FirstSense
Software, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Concord Communications, Inc. as of December 31, 2000
and December 31, 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 19, 2001
F-1
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
FirstSense Software, Inc.:
We have audited the balance sheet of FirstSense Software, Inc. as of December
31, 1999 and the related statements of operations, stockholders' (deficit)
equity, and cash flows for the years ended December 31, 1999 and 1998 (not
presented herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FirstSense Software, Inc. as of
December 31, 1999 and the results of its operations and its cash flows for the
years ended December 31, 1999 and 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
April 5, 2000
F-2
32
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2000 1999
------------ ------------
ASSETS
Current Assets:
Cash, cash equivalents and marketable securities ........................... $ 63,251,427 $ 63,569,201
Accounts receivable, net of allowance of $1,525,965
and $971,490 in 2000 and 1999, respectively .............................. 20,000,193 13,976,929
Prepaid expenses and other current assets .................................. 2,409,350 1,191,147
------------ ------------
Total current assets ................................................... 85,660,970 78,737,277
------------ ------------
Equipment and Improvements, at cost:
Equipment .................................................................. 16,085,465 9,024,983
Leasehold improvements ..................................................... 6,080,105 3,110,369
------------ ------------
22,165,570 12,135,352
Less -- Accumulated depreciation and amortization .......................... 9,140,170 4,085,950
------------ ------------
13,025,400 8,049,402
------------ ------------
Deferred Tax Asset ............................................................. 3,500,000 3,000,000
Other Long-Term Assets ......................................................... 89,689 --
------------ ------------
Total long-term assets ................................................. 3,589,689 3,000,000
------------ ------------
$102,276,059 $ 89,786,679
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt .......................................... $ -- $ 898,462
Accounts payable ........................................................... 3,117,627 2,120,418
Accrued expenses ........................................................... 11,108,921 10,243,909
Deferred revenue ........................................................... 17,303,928 10,261,334
------------ ------------
Total current liabilities .............................................. 31,530,476 23,524,123
------------ ------------
Long-term debt, less current portion ....................................... -- 2,064,004
------------ ------------
Commitments and Contingencies (Note 8)
Redeemable Preferred Stock (Note 6):
Series A Redeemable Convertible Preferred Stock, $0.01 par value;
5,500,000 shares authorized; 5,471,465 shares issued and outstanding
at December 31, 1999 (aggregate liquidation value $5,471,465) .......... -- 4,744,115
Series B Redeemable Convertible Preferred Stock, $0.01 par value;
2,920,000 shares authorized and 2,800,000 issued and outstanding at
December 31, 1999 (aggregate liquidation value $7,000,000) ............. -- 6,978,902
------------ ------------
Total redeemable preferred stock ........................................... -- 11,723,017
------------ ------------
Stockholders' Equity:
Common Stock, $0.01 par value:
Authorized -- 50,000,000 shares
Issued and outstanding -- 16,554,944 and
14,809,533 shares at December 31, 2000
and 1999, respectively .................................................... 165,549 148,095
Additional paid-in capital ................................................. 95,479,340 81,922,240
Deferred compensation ...................................................... (1,509,880) (3,557,794)
Accumulated other comprehensive income (loss) .............................. 135,159 (1,386,125)
Accumulated deficit ........................................................ (23,524,585) (24,650,881)
------------ ------------
Total stockholders' equity ............................................. 70,745,583 52,475,535
------------ ------------
$102,276,059 $ 89,786,679
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
33
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues:
License revenues ....................................................... $ 69,463,790 $ 53,924,271 $ 35,047,711
Service revenues ....................................................... 22,020,064 14,896,175 6,920,723
------------ ------------ ------------
Total revenues ................................................... 91,483,854 68,820,446 41,968,434
Cost of Revenues ............................................................ 13,101,272 8,502,291 4,883,811
------------ ------------ ------------
Gross profit ..................................................... 78,382,582 60,318,155 37,084,623
------------ ------------ ------------
Operating Expenses:
Research and development ............................................... 21,101,448 14,432,334 9,879,812
Sales and marketing .................................................... 42,996,124 29,442,304 19,884,752
General and administrative ............................................. 8,113,239 5,336,912 3,595,052
Asset impairment charge (Note 13) ...................................... 2,336,465 -- --
Stock-based compensation (Note 5) ...................................... 812,333 3,038,796 1,126,156
Acquisition-related charges (Note 3) .................................. 4,300,000 550,601 --
------------ ------------ ------------
Total operating expenses ......................................... 79,659,609 52,800,947 34,485,772
------------ ------------ ------------
Operating (loss) income ...................................... (1,277,027) 7,517,208 2,598,851
------------ ------------ ------------
Other Income (Expense):
Interest income ....................................................... 3,066,333 3,136,026 2,611,289
Interest expense ...................................................... -- (39,560) (514)
Other expense ......................................................... -- (132,809) (95,211)
------------ ------------ ------------
Total other income, net .......................................... 3,066,333 2,963,657 2,515,564
------------ ------------ ------------
Income before income taxes ...................................... 1,789,306 10,480,865 5,114,415
Provision for (benefit from) income taxes ................................... 447,000 4,285,509 (985,822)
Income before extraordinary items ........................................... 1,342,306 6,195,356 6,100,237
Extraordinary loss on early extinguishment of debt, net of tax
benefit of $72,000 (Note 4) .............................................. (216,010) -- --
------------ ------------ ------------
Net income .................................................................. $ 1,126,296 $ 6,195,356 $ 6,100,237
============ ============ ============
Accretion of redeemable preferred stock ..................................... -- 125,285 120,420
------------ ------------ ------------
Net income applicable to common stockholders ................................ $ 1,126,296 $ 6,070,071 $ 5,979,817
============ ============ ============
Pro forma provision for income taxes on
Subchapter S-Corporation income (unaudited) ............................. -- 146,325 41,400
------------ ------------ ------------
Pro forma net income (unaudited) ............................................ $ 1,126,296 $ 5,923,746 $ 5,938,417
============ ============ ============
Net income per common and potential common share:
Basic ................................................................. $ 0.07 $ 0.42 $ 0.44
============ ============ ============
Diluted ................................................................ $ 0.07 $ 0.36 $ 0.37
============ ============ ============
Pro forma diluted (unaudited) .......................................... $ 0.07 $ 0.35 $ 0.37
============ ============ ============
Weighted average common and potential common shares outstanding:
Basic .................................................................. 16,143,867 14,395,339 13,569,640
============ ============ ============
Diluted ................................................................ 16,745,742 16,722,140 16,199,651
============ ============ ============
Pro forma diluted (unaudited) .......................................... 16,745,742 16,722,140 16,199,651
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
34
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
----------------------
ADDITIONAL
NUMBER $.01 PAID-IN DEFERRED
OF SHARES PAR VALUE CAPITAL COMPENSATION
---------- --------- ------------ ------------
BALANCE, DECEMBER 31, 1997 12,501,019 $125,010 $68,168,994 $ (328,595)
Shares issued in connection with
employee stock plans 1,021,421 10,214 1,495,575 --
Accretion of dividends on
Preferred stock -- -- (120,420) --
Tax benefit associated with employee
Stock options -- -- 500,000 --
Deferred compensation related to
grants of stock options and -- -- 484,500 (484,500)
restricted stock
Amortization of deferred compensation
related to grants of stock options -- -- -- 125,156
Unrealized gains on available-for- sale
securities -- -- -- --
Distribution to shareholders -- -- -- --
Net income -- -- -- --
----------- -------- ----------- -----------
Comprehensive Income
BALANCE, DECEMBER 31, 1998 13,522,440 135,224 70,528,649 (687,939)
Shares issued in connection with
employee stock plans 1,287,093 12,871 2,844,365 --
Accretion of dividends on preferred
stock -- -- (125,285) --
Tax benefit associated with employee
stock options -- -- 4,900,000 --
Deferred compensation related to
grants of stock options and -- -- 3,417,025 (3,417,025)
restricted stock
Amortization of deferred compensation
related to grants of stock options -- -- -- 547,170
Issuance of warrants -- -- 357,486 --
Unrealized gains on available-for-
Sale securities -- -- -- --
Distribution to shareholders -- -- -- --
Net income -- -- -- --
----------- -------- ----------- -----------
Comprehensive Income
BALANCE, DECEMBER 31, 1999 14,809,533 148,095 81,922,240 (3,557,794)
Shares issued in connection with
employee stock plans 474,762 4,748 2,193,416 --
Conversion of redeemable preferred stock 1,252,616 12,526 11,710,491 --
Exercise of warrants 18,033 180 419,820 --
Tax benefit associated with employee
stock options -- -- 468,954 --
Deferred compensation related to
grants of stock options and -- -- (1,235,581) 1,235,581
restricted stock
Amortization of deferred compensation
related to grants of stock options -- -- -- 812,333
Unrealized gains on available-for-
sale securities -- -- -- --
Net income -- -- -- --
----------- -------- ----------- -----------
Comprehensive Income
BALANCE, DECEMBER 31, 2000 16,554,944 $165,549 $95,479,340 $(1,509,880)
=========== ======== =========== ===========
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE COMPREHENSIVE
DEFICIT INCOME TOTAL INCOME
------------- ------------- ----------- -------------
BALANCE, DECEMBER 31, 1997 $(33,505,297) $ 19,750 $34,479,862 --
Shares issued in connection with
employee stock plans -- -- 1,505,789 --
Accretion of dividends on
Preferred stock -- -- (120,420) --
Tax benefit associated with employee
Stock options -- -- 500,000 --
Deferred compensation related to
grants of stock options and -- -- -- --
restricted stock
Amortization of deferred compensation
related to grants of stock options -- -- 125,156 --
Unrealized gains on available-for- sale
securities -- 129,856 129,856 --
Distribution to shareholders (1,507,938) -- (1,507,938) --
Net income 6,100,237 -- 6,100,237 6,100,237
------------ ----------- ----------- -----------
Comprehensive Income 6,230,093
BALANCE, DECEMBER 31, 1998 (28,912,998) 149,606 41,212,542 --
Shares issued in connection with
employee stock plans -- -- 2,857,236 --
Accretion of dividends on preferred
stock -- -- (125,285) --
Tax benefit associated with employee
stock options -- -- 4,900,000 --
Deferred compensation related to
grants of stock options and -- -- -- --
restricted stock
Amortization of deferred compensation
related to grants of stock options -- -- 547,170 --
Issuance of warrants -- -- 357,486 --
Unrealized gains on available-for-
Sale securities -- (1,535,731) (1,535,731) (1,535,731)
Distribution to shareholders (1,933,239) -- (1,933,239) --
Net income 6,195,356 -- 6,195,356 6,195,356
------------ ----------- ----------- -----------
Comprehensive Income 4,659,625
BALANCE, DECEMBER 31, 1999 (24,650,881) (1,386,125) 52,475,535 _
Shares issued in connection with
employee stock plans -- -- 2,198,164 --
Conversion of redeemable preferred stock -- -- 11,723,017 --
Exercise of warrants 420,000
Tax benefit associated with employee
stock options -- -- 468,954 --
Deferred compensation related to
grants of stock options and -- -- -- --
restricted stock
Amortization of deferred compensation
related to grants of stock options -- -- 812,333 --
Unrealized gains on available-for-
sale securities -- 1,521,284 1,521,284 1,521,284
Net income 1,126,296 -- 1,126,296 1,126,296
------------ ----------- ----------- -----------
Comprehensive Income $ 2,647,580
===========
BALANCE, DECEMBER 31, 2000 $(23,524,585) $ 135,159 $70,745,583
============ =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
35
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash Flows from Operating Activities:
Net income ................................................... $ 1,126,296 $ 6,195,356 $ 6,100,237
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization .......................... 5,104,220 2,280,469 967,223
Gain on sale of fixed assets ........................... -- -- (6,720)
Stock-based compensation ............................... 812,333 547,170 125,156
Amortization of debt issuance costs .................... -- 59,502 --
Deferred tax benefit ................................... (500,000) (1,307,194) (1,518,422)
Changes in current assets and liabilities:
Accounts receivable .................................... (6,023,264) (8,339,081) (1,844,907)
Prepaid expenses and other currents assets ............. (1,218,203) (725,395) (297,234)
Accounts payable ....................................... 997,209 1,120,144 1,878,711
Accrued expenses ....................................... 865,012 2,073,466 2,040,316
Deferred revenue ....................................... 7,042,594 4,740,055 3,286,601
Tax benefit associated with exercise of options ....... 468,954 4,900,000 500,000
------------ ------------ ------------
Net cash provided by operating activities ............ 8,675,151 11,544,492 11,230,961
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of equipment and improvements ...................... (10,080,218) (6,883,305) (2,270,586)
Proceeds received on sale of fixed assets .................... -- -- 15,000
Change in other assets ....................................... (89,689) -- --
Net sales (purchases)of investments in marketable securities . 1,934,795 (15,237,724) (10,296,851)
------------ ------------ ------------
Net cash used in investing activities ................ (8,235,112) (22,121,029) (12,552,437)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds form bank borrowings ................................ -- 3,120,736 362,346
Repayments of bank borrowings ................................ (2,962,466) (219,765) (30,195)
Distribution to shareholders ................................. -- (1,933,239) (1,507,938)
Proceeds from issuance of common stock and
redeemable preferred stock ................................. 2,198,164 2,857,236 8,478,789
Proceeds from exercise of warrants ........................... 420,000 -- --
------------ ------------ ------------
Net cash (used in) provided by financing activities .. (344,302) 3,842,968 7,303,002
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents ............... 95,737 (6,751,569) 5,981,526
Cash and Cash Equivalents, beginning of year ................. 10,629,528 17,381,097 11,399,571
------------ ------------ ------------
Cash and Cash Equivalents, end of year ....................... $ 10,725,265 $ 10,629,528 $ 17,381,097
============ ============ ============
Supplemental Disclosure of Cash Flow information:
Cash paid for interest ....................................... $ 19,810 $ 93,848 $ 28,135
============ ============ ============
Cash paid for taxes .......................................... $ 819,295 $ 341,837 $ 46,159
============ ============ ============
Supplemental Disclosure of Noncash Transactions:
Deferred compensation related to grants of stock options ..... $ (1,235,581) $ 3,417,025 $ 484,500
============ ============ ============
Conversions of redeemable convertible preferred stock
to common stock ........................................... $ 11,723,017 $ -- $ --
============ ============ ============
Unrealized gain (loss) on available-for-sale securities ...... $ 1,521,284 $ (1,535,731) $ 129,856
============ ============ ============
Retirement of fully depreciated fixed assets ................. $ -- $ -- $ 4,330,000
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
36
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Concord Communications, Inc. (the Company or Concord) is primarily engaged
in the development and sale of next-generation fault, availability and
performance management solutions to companies principally in the United States,
Europe, Latin America and Asia Pacific.
The Company is subject to the risks associated with emerging,
technology-oriented companies. Primary among these risks are competition from
substitute products and the ability to successfully develop and market the
Company's current and future products.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Cash, Cash Equivalents and Marketable Securities
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company has classified its marketable securities as
available-for-sale and recorded them at fair value, with the unrealized gains
and losses reported as a separate component of stockholders' equity. The Company
considers highly liquid investments, purchased with an original maturity of 90
days or less, to be cash equivalents. Cash and cash equivalents are $10,725,265
and $10,629,528 at December 31, 2000 and 1999, respectively.
(c) Revenue Recognition
The Company's revenues consist of software license revenues and service
revenues. Software license revenues are recognized in accordance with the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 97-2, Software Revenue Recognition, as modified by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition with respect to Certain
Transactions. Under SOP 97-2, software license revenues are recognized upon
execution of a contract and delivery of software, provided that the license fee
is fixed and determinable, no significant production, modification or
customization of the software is required and collection is considered probable
by management. Revenues under multiple element arrangements, which typically
include software products and maintenance sold together, are allocated to each
element using the residual method in accordance with 98-9. Service revenues are
recognized as the services are performed. Maintenance revenues are derived from
customer support agreements generally entered into in connection with initial
license sales and subsequent renewals. Maintenance revenues are recognized
ratably over the term of the maintenance period. Payments for maintenance fees
are generally made in advance.
(d) Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation is provided
for on a straight-line basis over the useful lives of the assets, which are
estimated to be three to five years for all assets except leasehold
improvements, which are amortized over the life of the lease.
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
37
(f) Concentration of Credit Risk and Significant Customers
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet or
concentration of credit risk exposure such as foreign exchange contracts, option
contracts or other foreign hedging arrangements. The Company maintains its cash,
cash equivalents and marketable securities with established financial
institutions. The Company does not believe it has accounts receivable collection
risk in excess of existing reserves. For the years ended December 31, 2000, 1999
and 1998, no individual customer accounted for more than 10% of revenue or
accounts receivable.
(g) Derivative Instruments
The Company does not have any derivative financial instruments that require
accounting or disclosure under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.
(h) Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year's presentation.
(i) Software Development Costs
SFAS No. 86, Accounting for the Costs of Computer Software to be sold,
Leased or Otherwise Marketed, requires the capitalization of certain computer
software development costs incurred after technological feasibility is
established. The Company believes that once technological feasibility of a
software product has been established, the additional development costs incurred
to bring the product to a commercially acceptable level are not significant.
There were no capitalized software development costs at December 31, 2000 or
1999.
(j) Net Income per Share
The Company computes earnings per share following the provisions of SFAS
No. 128, Earnings per Share. SFAS No. 128 establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. The dilutive effect of potential common
shares in 2000, in 1999 and 1998, consisting of outstanding stock options and
warrants and convertible preferred stock (in 2000 and 1999) is determined using
the treasury method and the if-converted method, respectively, in accordance
with SFAS No. 128. Pro forma diluted net income per common and potential common
share assumes earnings from Empire Technologies, Inc., an acquired Subchapter
S-Corporation accounted for as a pooling-of-interests (Note 3), were taxed at
the Company's effective tax rate.
F-8
38
Calculations of basic, diluted and pro forma diluted net income per common
share and potential common share are as follows:
Year Ended December 31,
2000 1999 1998
----------- ----------- -----------
Net income applicable to common stockholders ..................... $ 1,126,296 $ 6,070,071 $ 5,979,817
----------- ----------- -----------
Pro forma provision for income taxes on Subchapter
S-Corporation income (unaudited) ........................... -- 146,325 41,400
----------- ----------- -----------
Pro forma net income (unaudited) ................................ $ 1,126,296 $ 5,923,746 $ 5,938,417
=========== =========== ===========
Weighted average common shares outstanding ....................... 16,143,867 14,395,339 13,569,640
Potential common shares pursuant to stock options ................ 498,301 1,083,906 1,492,317
Potential common shares pursuant to conversion of
Redeemable convertible preferred stock ......................... 103,574 1,242,895 1,137,694
----------- ----------- -----------
Diluted and pro forma diluted (unaudited) weighted average shares 16,745,742 16,722,140 16,199,651
=========== =========== ===========
Basic net income per common share ................................ $ 0.07 $ 0.42 $ 0.44
=========== =========== ===========
Diluted net income per common and potential common share ......... $ 0.07 $ 0.36 $ 0.37
=========== =========== ===========
Pro forma diluted net income per common and potential common share $ 0.07 $ 0.35 $ 0.37
=========== =========== ===========
The extraordinary loss in 2000 (Note 4) reduced basic, diluted and pro
forma income by $0.01.
Diluted weighted average shares outstanding do not include 1,880,310,
738,801 and 41,632 common equivalent shares for the years ended December 31,
2000, 1999 and 1998, respectively, as their effect would have been antidilutive.
(2) MARKETABLE SECURITIES
It is the Company's intent to maintain a liquid investment portfolio to
support current operations and to take advantage of investment opportunities;
therefore, all marketable securities are considered to be available-for-sale and
are classified as current assets. The amortized cost, unrealized gains (losses)
and fair value of marketable securities available-for-sale as of December 31,
2000 with maturity dates from January 1, 2001 through October 17, 2007, are as
follows:
Amortized Unrealized Gains Fair
Cost (Losses) Value
----------- ---------------- -----------
US government and municipal obligations .................. $29,700,805 $ 163,644 $29,864,449
Foreign government obligations ........................... 1,027,063 27,342 1,054,405
Corporate bonds and notes ................................ 24,186,700 (55,827) 24,130,873
----------- ---------------- -----------
54,914,568 135,159 55,049,727
Less: Cash equivalents ................................... 2,523,565 -- 2,523,565
----------- ---------------- -----------
Available-for-sale marketable securities ................. $52,391,003 $ 135,159 $52,526,162
=========== ================ ===========
F-9
39
The amortized cost, unrealized gains (losses) and fair value of marketable
securities available-for-sale as of December 31, 1999 with maturity dates from
January 1, 2000 through April 20, 2004, are as follows:
Amortized Unrealized Gains Fair
Cost (Losses) Value
------------ ---------------- -----------
US government and municipal obligations .......... $ 18,121,819 $ (699,459) $17,422,360
Corporate bonds and notes ........................ 39,164,353 (686,666) 38,477,687
------------ ------------ -----------
57,286,172 (1,386,125) 55,900,047
Less: Cash equivalents ........................... 2,960,374 -- 2,960,374
------------ ------------ -----------
Available-for-sale marketable securities ......... $ 54,325,798 $ (1,386,125) $52,939,673
============ ============ ===========
(3) ACQUISITIONS
(a) Empire Technologies, Inc.
On October 29, 1999, the Company issued 815,248 shares of common stock for
all of the issued and outstanding shares of Empire Technologies, Inc. ("Empire")
in a transaction accounted for as a pooling-of-interests. Accordingly, all
prior-period financial statements presented have been restated as required by
Accounting Principles Board (APB) Opinion No. 16, Accounting for Business
Combinations. All intercompany transactions have been eliminated as a part of
the restatement.
As a part of the transaction, the Company incurred direct,
acquisition-related charges of approximately $551,000. All of such costs were
expensed upon the completion of the Empire acquisition. Also, as part of the
transaction, the Company assumed an obligation related to Empire's existing
stock appreciation rights plan. Pursuant to the terms of the only grant under
this plan, the Company settled this obligation in cash within 30 days of
closing. The expense relating to the grant was recognized from the date of grant
through the date of settlement.
(b) FirstSense Software, Inc.
On February 4, 2000, the Company completed the acquisition of FirstSense
Software, Inc. (FirstSense). Under the terms of the agreement, the shareholders
and option holders received an aggregate of 1,940,000 Company shares to effect
the business combination. The transaction has been accounted for as a pooling of
interests. Accordingly, all prior-period financial statements presented have
been restated as required by APB Opinion No. 16. All inter-company transactions
have been eliminated as a result of the business combination.
As part of the transaction, Company incurred direct, acquisition-related
charges of approximately $4,300,000. All of such costs were expensed in fiscal
2000 upon the completion of the FirstSense acquisition.
Separate and combined results of the Company, Empire and FirstSense during the
periods preceding the merger were as follows:
Eliminations and
Concord Empire FirstSense adjustments Combined
----------- ---------- ----------- ---------------- -----------
1999
Net revenues $64,762,253 $2,713,962 $ 1,562,240 $ (218,009) $68,820,446
Net incomes (loss) applicable
to common stockholders 12,434,597 471,655 (8,101,318) 1,265,137 6,070,071
1998
Net revenues $39,481,330 $1,976,022 $ 511,082 $ -- $41,968,434
Net incomes (loss) applicable
to common stockholders 9,078,471 747,615 (5,364,691) 1,518,422 5,979,817
Intercompany eliminations represent transactions among the companies prior to
the combinations. As discussed in Note 7, the Company made an adjustment to
prior period results, in accordance with APB No. 16, to reflect changes to the
valuation reserve at FirstSense related to deferred tax assets.
F-10
40
(4) LINE OF CREDIT, TERM LOAN AND SUBORDINATED DEBENTURE
Prior to the Company's acquisition of FirstSense, FirstSense had a
revolving line of credit (the Revolving Loan) and a term loan (the Term Loan)
with a bank. At December 31, 1999 borrowings of $0 and $298,567 were outstanding
under the Revolver Loan and the Term Loan, respectively. Immediately following
the acquisition, the Company repaid all amounts due and the related agreements
terminated.
FirstSense also entered into a subordinated debt agreement with another
lender in July 1999. Under the terms of this agreement, FirstSense borrowed
$3,000,000 in 1999. FirstSense also granted the lender a warrant to purchase its
Series B Preferred Stock. FirstSense allocated $357,486 to the value of the
warrant, based on the relative fair value of the subordinated note and warrant
at the date of issuance. FirstSense was amortizing the resulting original
issuance discount over the life of the subordinated note. As of December 31,
1999, the unamortized original issue discount was $297,984. Immediately
following the acquisition, the Company repaid all amounts due under this
agreement; upon the early extinguishments of this debt, the Company recorded an
extraordinary loss of $216,000, net of related tax benefit of $72,000 in fiscal
2000.
Pursuant to the terms of the related warrant agreement, certain of the
warrant's terms did not become fixed until the Company's acquisition of
FirstSense. The Company applied the applicable provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, and determined that no further value
should be attributed to the warrant. Concurrent with the closing of the
acquisition, the warrant holder exercised the warrant.
(5) STOCK OPTION PLANS
The Company maintains several equity award plans (the Plans) under which it
may issue options to purchase up to 4,982,310 shares of common stock, of which
1,402,312 options are available for grant as of December 31, 2000. Incentive
stock options may be granted under the 1997 Stock Paln at an exercise price not
less than the fair market value per share of common stock on the date of grant,
as determined by the Board. The price per share relating to each nonqualified
option granted under the Plans shall not be less than the lesser of (i) the book
value per share of common stock as of the end of the Company's fiscal year
immediately preceding the date of grant or (ii) 50% of the fair market value per
share of common stock on the date of grant. Vesting of the options is determined
by the Board, and the options expire five to ten years from the date of grant.
In accordance with SFAS No. 123, the Company accounts for stock-based
compensation for employees under APB Opinion No. 25 and has elected the
disclosure-only alternative under SFAS No. 123 for options granted using the
Black-Scholes option pricing model prescribed by SFAS No. 123.
The weighted average fair value per share of options granted during 2000,
1999 and 1998 was $17.51, $44.24 and $25.85, respectively. The weighted average
assumptions are as follows:
Year ended December 31,
-----------------------------------------
2000 1999 1998
-------- -------- ---------
Risk-free interest rate 6% 6% 6%
Expected dividend yield 0% 0% 0%
Expected lives 7 years 7 years 7 years
Expected volatility 190% 82% 80%
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income (loss) and basic, diluted and pro forma
diluted net income (loss) per common and potential common share would have been
as follows:
F-11
41
Year ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net income applicable to common stockholders, as reported ............ $ 1,126,296 $ 6,070,071 $ 5,979,817
============ ============ ============
Net (loss) income applicable to common stockholders, pro forma ....... $(21,591,052) $(8,603,695) $ 2,577,125
============ =========== ============
Net income per share available to common
stockholders, as reported
Basic ........................................................... $ 0.07 $ 0.42 $ 0.44
============ ============ ============
Diluted ......................................................... $ 0.07 $ 0.36 $ 0.37
============ ============ ============
Pro forma diluted ............................................... $ 0.07 $ 0.35 $ 0.37
============ ============ ============
Net (loss) income per share available to common stockholders,
pro forma
Basic ........................................................... $ (1.34) $ (0.60) $ 0.19
============ ============ ============
Diluted ......................................................... $ (1.34) $ (0.60) $ 0.16
============ ============ ============
Pro forma diluted ............................................... $ (1.34) $ (0.60) $ 0.16
============ ============ ============
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
may not be representative of that to be expected in future years.
The following table summarizes information about options outstanding and
exercisable at December 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Weighted
Average Weighted Average Weighted Average
Range of Number Remaining Exercise Price Number Exercise Price
Exercise Price Outstanding Contractual Life per Share Outstanding per Share
-------------- ----------- ---------------- ---------------- ----------- ----------------
$0.10 - 4.10 245,025 5.65 $ 1.90 154,156 $ 1.74
4.53 - 6.69 795,648 6.23 6.65 17,436 5.96
6.90 - 21.56 527,552 6.38 18.35 154,616 18.37
21.63 - 26.19 473,114 6.57 24.31 122,388 23.64
26.44 - 35.50 158,031 7.01 31.00 18,433 32.87
35.75 - 36.91 632,091 6.67 36.90 209,778 36.90
37.25 - 52.38 252,046 6.75 44.89 57,809 46.20
52.63 - 52.63 453,992 6.03 52.63 220,764 52.63
53.00 - 62.03 38,499 6.68 56.65 13,853 55.98
64.25 - 64.25 4,000 6.18 64.25 1,749 64.25
----------- -----------
3,579,998 970,982
=========== ===========
F-12
42
The following table summarizes the activity under the stock options
plans for the three-year period ended December 31, 2000.
Number of Price per Weighted Average
Shares Share Price per Share
--------- -------------- ----------------
Outstanding at December 31, 1997 2,221,900 $ 0.10 - 22.06 $ 2.68
Granted .................. 658,112 0.57 - 56.75 20.51
Exercised ................ (984,707) 0.10 - 21.38 0.98
Terminated ............... (49,126) 0.10 - 41.00 5.28
--------- -------------- ----------------
Outstanding at December 31,1998 1,846,179 $ 0.10 - 56.75 $ 9.87
========= ============== ================
Granted .................. 1,907,624 1.66 - 64.25 41.37
Exercised ................ (538,648) 0.10 - 44.38 3.79
Terminated ............... (112,971) 0.10 - 58.25 24.07
--------- -------------- ----------------
Outstanding at December 31,1999 3,102,184 $ 0.10 - 64.25 $ 29.78
========= ============== ================
Granted .................. 1,751,065 4.99 - 53.81 17.50
Exercised ................ (394,635) 0.10 - 36.38 3.53
Terminated ............... (878,616) 0.10 - 62.81 33.07
--------- -------------- ----------------
Outstanding at December 31, 2000 3,579,998 $ 0.10 - 64.25 $ 25.92
========= ============== ================
Exercisable at December 31, 2000 970,982 $ 0.10 - 64.25 $ 30.51
========= ============== ================
Exercisable at December 31, 1999 455,364 $ 0.10 - 56.75 $ 10.74
========= ============== ================
Exercisable at December 31, 1998 201,280 $ 0.10 - 19.46 $ 4.04
========= ============== ================
In 1997, the Company granted one officer and one director options to
purchase in total 143,750 shares of common stock at an exercise price of $1.90
per share. At the date of grant, the estimated fair value per share of the
Company's common stock exceeded the exercise price of the options and,
accordingly, the Company has recorded deferred compensation of $191,875 related
to this difference at the date of grant. Prior to the Company's acquisition of
FirstSense, FirstSense recorded deferred compensation of $150,274, $3,417,025
and $484,500 in 2000, 1999 and 1998 respectively, representing the difference
between the exercise price of stock options granted and the estimated fair
market value of the underlying common stock at the date of grant. The difference
is recorded as a reduction of stockholders' equity and is being amortized over
the vesting period of applicable options, typically four years. Including
amounts applicable to prior Company grants, the Company amortized $812,333,
$547,170 and $125,156 in 2000, 1999 and 1998, respectively.
The amortization of deferred compensation is recorded as an operating
expense. Additionally, the Company reversed $1,385,855 of deferred compensation
in 2000 due to the forfeiture of unvested stock options upon the termination of
certain employees.
The exercise price of all other options outstanding represents the fair
market value per share of common stock as of the date of grant.
(6) REDEEMABLE CONVERTIBLE PREFERRED STOCK
Prior to the combination with the Company, FirstSense had issued Series A
Redeemable Convertible Preferred Stock and Series B Redeemable Convertible
Preferred Stock. Concurrent with the acquisition of FirstSense by the Company
(Note 3), the Preferred Stockholders converted all of such shares into
FirstSense common stock; such common stock was then exchanged for 1,270,649
shares of the Company's common stock.
(7) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This standard requires, among other things,
recognition of future tax effects, measured by enacted tax rates, attributable
to deductible temporary differences between the financial statement and income
tax bases of assets and liabilities.
The approximate income tax effects of these temporary differences are as
follows:
F-13
43
December 31, December 31,
2000 1999
------------ ------------
Net operating loss and federal tax credit carryforwards $ 9,111,000 $ 13,121,000
Accruals not yet deductible for tax purposes .......... 2,157,000 2,472,000
Depreciation .......................................... 195,000 62,000
Deferred revenue ...................................... 1,716,000 1,695,000
Capitalized research and development expenses ......... 1,696,000 2,257,000
Other ................................................. 39,000 40,000
Valuation allowance ................................... (11,414,000) (16,647,000)
------------ ------------
$ 3,500,000 $ 3,000,000
============ ============
The Company has available net operating loss carryforwards of approximately
$16,837,000 and federal research and development tax credit carryforwards of
approximately $2,376,000 as of December 31, 2000 to reduce future income tax
liabilities. These carryforwards are subject to review and possible adjustment
by the appropriate taxing authorities and expire from 2001 through 2013 as
follows:
RESEARCH AND
NET OPERATING LOSS DEVELOPMENT TAX
FISCAL YEAR CARRYFORWARDS CREDIT CARRYFORWARDS
----------- ------------------ --------------------
2001........................................................... $ 2,870,104 $ 1,251,599
2002-2006...................................................... 1,368,704 149,619
2007-2013...................................................... 6,984,771 823,000
2014-2019...................................................... 5,613,061 152,274
------------ -----------
$ 16,836,640 $ 2,376,492
============ ===========
Pursuant to the Tax Reform Act of 1986, the utilization of net operating
loss (NOL) carryforwards for tax purposes may be subject to an annual limitation
if a cumulative change of ownership of more than 50% occurs over a three-year
period. As a result of the Company's 1995 preferred stock financings, such a
change in ownership has occurred. As a result of this ownership change, the use
of the NOL carryforwards will be limited. The Company has determined that its
initial public offering did not cause another ownership change. In addition, NOL
carryforwards acquired as a result of the FirstSense acquisition are also
restricted as a result of a prior ownership change of FirstSense. The Company
has deferred tax assets of approximately $14,914,000, the largest component of
which is composed primarily of NOL carryforwards and research and development
credits. The Company has partially reserved for these deferred tax assets by
recording a valuation allowance of $11,414,000. The net tax asset is based on
the Company's estimate of NOL carryforwards it expects to use in the next two
years; all other tax assets have been fully reserved.
Pursuant to paragraphs 20 to 25 of SFAS No. 109, the Company considered
both positive and negative evidence in assessing the need for a valuation
allowance at December 31, 1999 and 2000. The factors that weighed most heavily
on the Company's decision to record a valuation allowance were (i) the
substantial restrictions on the use of certain of its existing NOL and credit
carryforwards and (ii) the uncertainty of future profitability.
As a result of the Company's ownership change described above, the future
use of approximately $6,577,000 of the Company's NOL carryforwards are limited
to only $330,000 per year; the substantial majority of such NOL carryforwards
will expire before they can be used. The FirstSense NOL carryforwards are
limited to $4.2 million per year. Pursuant to the provisions of SFAS No. 109,
the Company used all of its remaining unrestricted NOL and credit carryforwards
in computing the 1998 tax provision. As a part of the restatement of the
Company's 1999 financial statements to reflect the FirstSense acquisition, the
Company determined that approximately $3.0 million of valuation allowance
previously recorded by FirstSense prior to the acquisition was not necessary,
given the Company's estimates of future taxable income. Accordingly, pursuant to
SFAS No. 109, the Company recorded an asset and reduced its provision for income
taxes in the periods in which such NOL carryforwards were generated by
FirstSense. The Company is also subject to rapid technological change,
competition from substantially larger competitors, a limited family of products
and other related risks, as more thoroughly described in the "Risk Factors"
section. As a result, the Company found the evidence described above to be the
most reliable objective evidence available in determining that a valuation
allowance against its tax assets would be necessary.
The Company's NOL deferred tax asset includes approximately $3,750,000
pertaining to the benefit associated with the exercise and subsequent
disqualifying disposition of incentive stock options by the Company's employees.
When and if the Company realizes this asset, the resulting change in the
valuation allowance will be credited directly to additional paid-in capital,
pursuant to the provisions of SFAS No. 109.
F-14
44
The Company received a tax benefit of approximately $469,000, $4.9 million
and $500,000 in 2000, 1999 and 1998, respectively, pursuant to the exercise of
employee stock options. The Company recorded this benefit as a component of
additional paid-in capital.
The Components of the Company's tax provision (benefit) are as follows:
Year ended December 31,
--------------------------------------
2000 1999 1998
--------- ----------- -----------
Current
Federal ............................ $ 730,000 $ 4,194,500 $ 399,450
State .............................. 145,000 1,398,203 133,150
--------- ----------- -----------
Total current ................... 875,000 5,592,703 532,600
--------- ----------- -----------
Deferred
Federal ............................ (375,000) (980,404) (1,138,815)
State .............................. (125,000) (326,790) (379,607)
--------- ----------- -----------
Total deferred .................. (500,000) (1,307,194) (1,518,422)
--------- ----------- -----------
Total income tax provision (benefit) .. $ 375,000 $ 4,285,509 $ (985,822)
========= =========== ===========
A reconciliation of the statutory federal tax rate to the Company's effective
rate is as follows:
Year ended December 31,
------------------------------
2000 1999 1998
------ ------ ------
Statutory rate ........................... 34.0% 34.0% 34.0%
State tax rate, net of federal benefit ... 4.7 4.6 4.0
Research and development tax credits ..... (76.3) (6.3) (18.2)
Benefit associated with the foreign
sales corporation ................. (18.7) (1.3) --
Untaxed S-Corporation earnings ........... -- (3.5) (1.9)
Non-deductible travel, meals and
Entertainment ..................... 8.7 2.3 19.5
Non-deductible transaction costs ......... 81.1 5.2 --
Change in valuation allowance ............ (15.7) (5.1) (58.6)
Other .................................... 7.2 11.0 1.9
------ ------ ------
25.0% 40.9% (19.3%)
====== ====== ======
F-15
45
(8) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases its facilities and certain equipment under lease
agreements expiring through June 2007. The Company's remaining lease commitments
for all leased facilities and equipment with an initial or remaining term of at
least one year are as follows:
AMOUNT
-------------
2001........................................... $ 3,776,018
2002........................................... 3,191,352
2003........................................... 3,203,714
2004........................................... 3,055,357
2005........................................... 2,944,028
Thereafter 2,337,604
-------------
$ 18,508,073
=============
Rent expense was approximately $2.8 million, $2.6 million and $549,000 for
the years ended December 31, 2000, 1999 and 1998, respectively.
(b) Royalties
The Company has entered into several software license agreements that
provide the Company with exclusive worldwide licenses to distribute or utilize
certain patented computer software. The Company is required to pay royalties on
all related sales. Under one software license agreement, as amended, the Company
was obligated to make minimum quarterly royalty payments from 1995 through 1999.
The minimum payments are noncancelable and nonrefundable, but any minimum
payments in excess of amounts due for actual license sales in any quarter may be
used as a credit against future royalty fees in excess of the specified minimum
payments. The minimum royalty payments were paid in full in 1999. Royalty
expense under royalty agreements was approximately $300,000, $1.0 million and
$665,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
(c) Legal Proceedings
From time to time, the Company may be exposed to litigation relating to its
products and operations. The Company is not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company's financial conditions or results of operations.
(9) ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, December 31,
2000 1999
------------ ------------
Payroll and payroll-related......... $ 4,430,328 $ 3,181,908
Royalties........................... 152,433 569,656
Deferred rent....................... 1,139,231 456,957
Loss on lease abandonment........... 167,520 700,000
Marketing related accruals.......... 644,611 337,829
Other............................... 4,574,798 4,997,559
------------ ------------
$ 11,108,921 $ 10,243,909
============ ============
(10) EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code covering all eligible employees, as defined. The Plan
allows for employees to defer a portion of their salary up to 15% of pretax
compensation. The Company accrued a $200,000 discretionary contribution to the
plan in 2000; no such contributions were made in 1999 or 1998.
F-16
46
(11) VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts
receivable reserve account:
BALANCE AT BALANCE AT
BEGINNING CHARGES TO END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
---------- ---------- ---------- -----------
1998......... $ 280,116 $ 182,944 $ -- $ 463,060
1999......... $ 463,060 $ 508,430 $ -- $ 971,490
2000......... $ 971,490 $ 756,000 $ (201,525) $ 1,525,965
(12) SEGMENT REPORTING AND INTERNATIONAL INFORMATION
The Company follows the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders. SFAS No. 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making group, in
making decisions on how to allocate resources and assess performance. The
Company's chief decision making group, as defined under SFAS 131, is the
Executive Management Committee.
The following table presents the revenue by major geographical regions:
(in thousands) Year ended December 31,
--------------------------------------------
2000 1999 1998
-------- -------- ---------
United States....... $ 62,015 $ 54,924 $ 34,469
Europe.............. 17,290 9,084 5,582
Rest of the World... 12,179 4,812 1,918
-------- -------- ---------
Total............... $ 91,484 $ 68,820 $ 41,969
======== ======== =========
No one country, except the United States, accounts for greater than 10% of total
revenues. Substantially all of the Company's assets are located in the United
States.
The Company's reportable segments are determined by customer type: service
providers/telecommunications companies (SP/T) and enterprise. The accounting
policies of the segments are the same as those described in Note 1. The
Executive Management Committee evaluates segment performance based on revenue.
Accordingly, all expenses are considered corporate level activities and are not
allocated to segments. Also, the Executive Management Committee does not assign
assets to these segments.
The table presents the revenue by reportable segment:
(in thousands) Year ended December 31,
--------------------------------------------
2000 1999 1998
-------- -------- --------
SP/T......................... $ 40,219 $ 18,620 $ 11,248
Enterprise................... 51,265 50,200 30,721
-------- -------- --------
Total........................ $ 91,484 $ 68,820 $ 41,969
======== ======== ========
(13) ASSET IMPAIRMENT CHARGE
The Company acquired a $3 million equity interest in Broadband Investment
Group (Broadband) in September 2000 in exchange for Company products and
services. In November 2000, Broadband publicly announced that it was ceasing
operations and liquidating its remaining assets. As a result, Company recorded a
charge for approximately $2.3 million to write off its investment in Broadband
F-17
47
following its inability to raise additional capital due to unfavorable market
conditions. The remainder of the carrying value of Broadband's investments was
reversed against related deferred revenue for services not yet rendered.
(14) SUPPLEMENTAL FINANCIAL DISCLOSURE
Unaudited (in thousands, except per share amounts) Q1-00 Q2-00 Q3-00 Q4-00
-------- -------- -------- --------
Revenue.............................................. $ 19,268 $ 22,810 $ 23,389 $ 26,016
Gross profit......................................... 16,912 20,165 19,506 21,800
(Loss) income before extraordinary items............. (2,386) 3,828 1,187 (840)
Per common and potential common share:
Revenue ............................................. $ 1.25 $ 1.36 $ 1.39 $ 1.58
Gross profit......................................... 1.10 1.20 1.16 1.32
(Loss) income before extraordinary items............. (0.15) 0.23 0.07 (0.05)
Unaudited (in thousands, except per share amounts) Q1-99 Q2-99 Q3-99 Q4-99
-------- -------- -------- --------
Revenue.............................................. $ 14,408 $ 15,926 $ 18,619 $ 19,868
Gross profit......................................... 12,619 13,930 16,273 17,496
Income before extraordinary items.................... 1,096 1,423 2,037 1,639
Per common and potential common share:
Revenue.............................................. $ 0.85 $ 0.94 $ 1.10 $ 1.17
Gross profit......................................... 0.74 0.82 0.97 1.03
Income before extraordinary items.................... 0.06 0.08 0.12 0.10
F-18
48
CONCORD COMMUNICATIONS, INC.
FORM 10-K, December 31, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized this 21st day of March 2001.
Concord Communications, Inc.
/s/ Melissa H. Cruz
--------------------------------------------------
Name: Melissa H. Cruz
Title: Executive Vice President, Business Services
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 and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John A. Blaeser Chief Executive Officer, March 21, 2001
------------------------------- President and Director
JOHN A. BLAESER (Principal Executive Officer)
/s/ Melissa H. Cruz Executive Vice President, Business Services, March 21, 2001
------------------------------- Chief Financial Officer and Treasurer,
MELISSA H. CRUZ (Principal Financial and
Accounting Officer)
/s/ Frederick W.W. Bolander Director March 21, 2001
-------------------------------
FREDERICK W.W. BOLANDER
/s/ Richard M. Burnes, Jr Director March 21, 2001
-------------------------------
RICHARD M. BURNES, JR.
/s/ Robert C. Hawk Director March 21, 2001
-------------------------------
ROBERT C. HAWK
/s/ John Robert Held Director March 21, 2001
-------------------------------
JOHN ROBERT HELD
/s/ Deepak Kamra Director March 21, 2001
-------------------------------
DEEPAK KAMRA
/s/ Robert M. Wadsworth. Director March 21, 2001
-------------------------------
ROBERT M. WADSWORTH
49
EXHIBIT INDEX
The following designated exhibits are either filed herewith or, where
information is provided under the SEC Document Reference heading corresponding
to such exhibit, incorporated by reference to such filing.
EXHIBIT NO. DESCRIPTION SEC DOCUMENT REFERENCE
3.01 Restated Articles of Organization of the Company Exhibit No. 3.01 on Form 10-K, for the period ended
December 31, 1997
3.02 Restated By-laws of the Company Exhibit No. 3.02 on Form 10-K, for the period ended
December 31, 1998
10.01 Working Capital Loan Agreement between the Exhibit No. 10.01 to Registration Statement on Form S-1
Company and Silicon Valley Bank dated April 3, 1997 (No. 333-33227)
10.02 Revolving Promissory Note made by the Company in Exhibit No. 10.02 to Registration Statement on Form S-1
favor of Silicon Valley Bank (No. 333-33227)
10.03 Equipment Line of Credit Letter Agreement between Exhibit No. 10.03 to Registration Statement on Form S-1
the Company and Fleet Bank dated as of June 9, 1997 (No. 333-33227)
10.04 1995 Stock Plan of the Company Exhibit No. 10.04 to Registration Statement on Form S-1
(No. 333-33227)
10.05 1997 Stock Plan of the Company Exhibit No. 10.01 on Form 10-Q, for the period ended June
30, 1998
* 10.06 1997 Stock Plan of the Company, as amended on March
12, 1998, March 1, 1999, May 15, 1999 and
March 8, 2000
10.07 1997 Employee Stock Purchase Plan of the Company Exhibit No. 10.06 to Registration Statement on Form S-1
(No. 333-33227)
* 10.08 1997 Non-Employee Director Stock Option Plan of
the Company, as amended on March 8, 2000
10.09 The Profit Sharing/401(k) Plan of the Company Exhibit No. 10.08 to Registration Statement on Form S-1
(No. 333-33227)
10.10 Lease Agreement between the Company and John Exhibit No. 10.09 to Registration Statement on Form S-1
Hancock Mutual Life Insurance Company dated March (No. 333-33227)
17, 1994, as amended on March 25,1997
10.11 First Amendment to Lease Agreement between the Exhibit No. 10.10 to Registration Statement on Form S-1
Company and John Hancock Mutual Life Insurance (No. 333-33227)
Company dated March 25, 1997
10.12 Form of Indemnification Agreement for directors Exhibit No. 10.11 to Registration Statement on Form S-1
and officers of the Company (No. 333-33227)
10.13 Restated Common Stock Registration Rights Exhibit No. 10.12 to Registration Statement on Form S-1
Agreement between the Company and certain investors (No. 333-33227)
dated August 7, 1986
10.14 Amended and Restated Registration Rights Agreement Exhibit No. 10.13 to Registration Statement on Form S-1
between the Company and certain investors dated (No. 333-33227)
December 28, 1995
10.15 Management Change in Control Agreement between the Exhibit No. 10.14 to Registration Statement on Form S-1
Company and John A. Blaeser dated as of August 7, (No. 333-33227)
1997
10.16 Management Change in Control Agreement between the Exhibit No. 10.15 to Registration Statement on Form S-1
Company and Kevin J. Conklin dated as of July 23, (No. 333-33227)
1997
10.17 Management Change in Control Agreement between the Exhibit No. 10.16 to Registration Statement on Form S-1
Company and Ferdinand Engel dated as of July 23, (No. 333-33227)
1997
10.18 Management Change in Control Agreement between the Exhibit No. 10.17 to Registration Statement on Form S-1
Company and Gary E. Haroian, dated as of July 23, (No. 333-33227)
1997
10.19 Management Change in Control Agreement between the Exhibit No. 10.18 to Current Report on Form 10-Q filed on
Company and Melissa H. Cruz dated as of June 12, August 14, 2000
2000
10.20 Management Change in Control Agreement between the Exhibit No. 10.18 to Registration Statement on Form S-1
Company and Daniel D. Phillips, Jr. dated as of (No. 333-33227)
July 23, 1997
10.21 Stock Option Agreement dated January 1, 1996 Exhibit No. 10.19 to Registration Statement on Form S-1
between the Company and John A. Blaeser (No. 333-33227)
10.22 Stock Option Agreement dated January 1, 1996 Exhibit No. 10.20 to Registration Statement on Form S-1
between the Company and John A. Blaeser (No. 333-33227)
10.23 Letter Agreement between the Company and Silicon Exhibit No. 10.21 to Registration Statement on Form S-1
Valley Bank dated March 25, 1996 together with (No. 333-33227)
the Loan Modification Agreement dated November 14,
1996
10.24 Form of Shrink-Wrap License Exhibit No. 10.22 to Registration Statement on Form S-1
(No. 333-33227)
10.25 Agreement and Plan of Reorganization dated as of Exhibit No. 2.1 to Current Report on Form 8-K filed on
October 19, 1999 by and among Concord November 12, 1999
Communications, Inc., E Acquisition Corp., Empire
Technologies, Inc. and the stockholders of Empire
Technologies, Inc.
10.26 Agreement and Plan of Reorganization dated as of Exhibit No. 2.1 to Current Report on Form 8-K filed on
January 20, 2000 by and among Concord February 10, 2000
Communications, Inc., F Acquisition Corp., and
FirstSense Software, Inc.
10.27 Registration Rights Agreement dated as of February Exhibit No. 99.1 to Current Report on Form 8-K filed on
4, 2000 by and among Concord Communications, Inc. February 10, 2000
and Timothy Barrows, as Securityholder Agent
* 10.28 2000 Non-Executive Employee Equity Incentive Plan
* 21.01 Subsidiaries of the Company
* 23.01 Consent of Arthur Andersen LLP
* 23.02 Consent of KPMG LLP
* filed herewith