<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the quarterly period ended September 30, 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 OF PRINCIPAL EXECUTIVE OFFICES)
----------------
INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS
FOR THE PAST 90 DAYS;
YES X NO
16,466,233 SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE, WERE
OUTSTANDING AS OF NOVEMBER 1, 2000.
THIS DOCUMENT CONTAINS 25 PAGES.
THE EXHIBIT INDEX IS ON PAGE 24.
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CONCORD COMMUNICATIONS, INC.
FORM 10-Q, SEPTEMBER 30, 2000
CONTENTS
Item Number Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance sheets:
September 30, 2000 and December 31, 1999 3
Statements of income:
Three and nine months ended September 30, 2000
and September 30, 1999 4
Statements of cash flows:
Nine months ended September 30, 2000 and
September 30, 1999 5
Notes to financial statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
EXHIBIT INDEX 24
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash, cash equivalents and marketable securities $ 57,949,433 $ 63,569,201
Accounts receivable, net of allowance of approximately
$1,294,000 and $971,000 in 2000 and 1999, respectively 19,993,202 13,976,929
Prepaid expenses and other current assets 1,780,138 1,191,147
------------ ------------
Total current assets 79,722,773 78,737,277
------------ ------------
Equipment and Improvements, at cost:
Equipment 14,875,070 9,024,983
Leasehold improvements 5,767,672 3,110,369
------------ ------------
20,642,742 12,135,352
Less-- Accumulated depreciation and amortization 7,209,353 4,085,950
------------ ------------
13,433,389 8,049,402
------------ ------------
Deferred Tax Asset 3,000,000 3,000,000
------------ ------------
$ 96,156,162 $ 89,786,679
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ - $ 898,462
Accounts payable 3,720,605 4,940,420
Accrued expenses 7,834,124 7,423,907
Deferred revenue 15,493,095 10,261,334
------------ ------------
Total current liabilities 27,047,824 23,524,123
------------ ------------
Long-term debt, less current portion - 2,064,004
Redeemable preferred stock:
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
------------ ------------
Common Stock, $0.01 par value:
Authorized--50,000,000 shares
Issued and outstanding--16,370,664 and 14,809,533 shares,
in 2000 and 1999 respectively 163,706 148,095
Additional paid-in capital 95,672,507 81,922,240
Deferred compensation (2,925,562) (3,557,794)
Accumulated other comprehensive income (790,528) (1,386,125)
Accumulated deficit (23,011,785) (24,650,881)
------------ ------------
Total stockholders' equity 69,108,338 52,475,535
------------ ------------
$ 96,156,162 $ 89,786,679
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
License revenues $17,514,786 $ 14,178,523 $ 49,875,324 $38,385,490
Service revenues 5,873,824 4,440,235 15,592,033 10,566,990
----------- ------------ ------------ -----------
Total revenues 23,388,610 18,618,758 65,467,357 48,952,480
Cost of Revenues 3,882,222 2,345,620 8,884,291 6,130,424
----------- ------------ ------------ -----------
Gross profit 19,506,388 16,273,138 56,583,066 42,822,056
Operating Expenses:
Research and development 5,116,687 3,780,380 14,587,693 10,182,846
Sales and marketing 11,591,202 7,276,287 31,417,074 20,886,632
General and administrative 2,172,194 1,359,156 5,323,585 3,574,537
Stock-based compensation 163,061 846,930 632,232 1,533,256
Acquisition-related charges - - 4,268,435 -
----------- ------------ ------------ -----------
Total operating expenses 19,043,144 13,262,753 56,229,019 36,177,271
----------- ------------ ------------ -----------
Operating income 463,244 3,010,385 354,047 6,644,785
Other income, net 723,765 704,922 2,275,139 2,169,952
----------- ------------ ------------ -----------
Income before income taxes 1,187,009 3,715,307 2,629,186 8,814,737
Provision for income taxes 286,853 1,678,101 702,083 4,258,617
----------- ------------ ------------ -----------
Income before extraordinary items 900,156 2,037,206 1,927,103 4,556,120
Extraordinary loss in early
retirement of debt - - (288,010) -
----------- ------------ ------------ -----------
Net Income 900,156 2,037,206 1,639,093 4,556,120
Accretion of redeemable preferred stock - 31,419 - 93,667
----------- ------------ ------------ -----------
Net income applicable to common stockholders $ 900,156 $ 2,005,787 $ 1,639,093 $ 4,462,453
=========== ============ ============ ===========
Net income per common and potential
common share:
Basic $ 0.06 $ 0.14 $ 0.10 $ 0.31
=========== ============ ============ ===========
Diluted $ 0.05 $ 0.12 $ 0.10 $ 0.26
=========== ============ ============ ===========
Weighted average common and potential
common shares outstanding:
Basic 16,358,289 14,672,855 16,027,204 14,590,443
=========== ============ ============ ===========
Diluted
16,781,328 16,861,486 16,584,995 16,925,322
=========== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,639,093 $ 4,556,120
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,123,403 1,534,030
Stock-based compensation 632,232 1,533,256
Deferred tax provision - (937,383)
Changes in current assets and liabilities:
Accounts receivable (6,016,273) (5,555,878)
Prepaid expenses and other current assets (588,991) (338,179)
Accounts payable (1,219,815) (8,218)
Accounts expenses 410,217 2,388,496
Deferred revenue 5,231,761 2,330,659
------------ ------------
Net cash provided by operating activities 3,211,627 5,502,903
------------ ------------
Cash Flows from Investing Activities:
Purchases of equipment and improvements (8,507,689) (5,286,732)
Net proceeds from (investments in) marketable
securities 2,511,674 (18,720,753)
------------ ------------
Net cash used in investing activities (5,996,015) (24,007,485)
------------ ------------
Cash Flows from Financing Activities:
(Repayments of) Proceeds from bank borrowings (2,962,466) 3,435,411
Distribution to shareholders - (1,398,000)
Proceeds from issuance of common stock - 125,285
Proceeds from shares issued in connection with
employee stock plans and warrants exercised 2,042,860 7,736,878
------------ ------------
Net cash (used in) provided by financing
activities (919,606) 9,899,574
------------ ------------
Net Decrease in Cash and Cash Equivalents (3,703,994) (8,605,008)
Cash and Cash Equivalents, beginning of period 10,629,528 17,381,097
------------ ------------
Cash and Cash Equivalents, end of period $ 6,925,534 $ 8,776,089
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 33,592 $ 78,353
============ ============
Cash paid for taxes $ 558,770 $ -
============ ============
Supplemental Disclosure of Noncash Transactions:
Accretion of dividends on preferred stock $ - $ 93,667
============ ============
Conversion of redeemable convertible preferred stock
to common stock $ 11,723,017 $ -
============ ============
Unrealized (loss) gain on available-for-sale securities $ 595,597 $ (1,025,412)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FORM 10-Q, SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. INTERIM FINANCIAL STATEMENTS
The accompanying financial statements have been presented by Concord
Communications, Inc. (the "Company") without audit (except that the balance
sheet information as of December 31, 1999 has been derived from audited
financial statements) in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to Form
10-Q and Regulation S-X pertaining to interim financial statements. Accordingly,
these interim financial statements do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. The financial statements reflect all adjustments and accruals which
management considers necessary for a fair presentation of financial position as
of September 30, 2000 and December 31, 1999, and results of operations for the
three and nine months ended September 30, 2000 and 1999. The results for the
interim periods presented are not necessarily indicative of results to be
expected for any future period. The financial statements should be read in
conjunction with the audited financial statements and the notes thereto included
in the Company's 1999 Annual Report on Form 10-K filed with the Securities and
Exchange Commission in March 2000 (as such audited financial statements were
restated by the Company pursuant to Accounting Principles Board (APB) Opinion
No. 16 to give retroactive effect to the merger of F Acquisition Corp, a wholly
subsidiary of the Company, and FirstSense Software, Inc. on Current Report on
Form 8-K/A, dated April 25, 2000 and filed with the Securities and Exchange
Commission on May 3, 2000).
2. NET INCOME PER SHARE
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, effective December 15, 1997. SFAS
No. 128 establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock or potential common
stock. The dilutive effect of potential common shares for the three and nine
months periods ended September 30, 2000 and September 30, 1999, consisting of
outstanding stock options and redeemable preferred stock, is determined using
the treasury method. Calculations of basic and diluted net income per common
share and potential common share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income available to common stockholders ....... $ 900,156 $ 2,005,787 $ 1,639,093 $ 4,462,453
=========== =========== =========== ===========
Weighted average common shares outstanding 16,358,289 14,672,855 16,027,204 14,590,443
Potential common shares pursuant to stock options
and warrants ................................... 423,039 945,736 557,791 1,091,984
Potential common shares pursuant to conversion of
redeemable preferred stock ..................... - 1,242,895 - 1,242,895
----------- ----------- ----------- -----------
Diluted weighted average shares ................... 16,781,328 16,861,486 16,584,995 16,925,322
=========== =========== =========== ===========
Basic net income per common share ................. $ 0.06 $ 0.14 $ 0.10 $ 0.31
=========== =========== =========== ===========
Diluted net income per common
and potential common share ..................... $ 0.05 $ 0.12 $ 0.10 $ 0.26
=========== =========== =========== ===========
</TABLE>
For the three months ended September 30, 2000 and 1999, options to purchase
1,823,967 and 813,671 common shares, respectively, were outstanding but not
included in the diluted weighted average common share calculation as the effect
would have been antidilutive. For the nine months ended September 30, 2000 and
1999, options to purchase 1,824,669 and 700,434 common shares, respectively,
were outstanding but not included in the diluted weighted average common share
calculation as the effect would have been antidilutive.
6
<PAGE> 7
3. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30, 2000
and 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income $ 900,156 $2,037,206 $1,639,093 $4,556,120
Unrealized gain (loss) on
marketable securities 543,097 (142,262) 595,597 (1,025,412)
---------- ---------- ---------- ----------
Comprehensive income $1,444,353 $1,894,944 $2,234,690 $3,530,708
========== ========== ========== ==========
</TABLE>
4. TAX PROVISION
The Company has recorded a tax provision of $286,853 in the three months
ended September 30, 2000, based on its expected tax rate for 2000, computed in
accordance with SFAS No. 109, Accounting for Income Taxes. The Company has
recorded a tax provision of $702,083 in the nine months ended September 30,
2000. The Company's 2000 effective tax rate includes the effect of the
anticipated reversal of a valuation allowance on deferred tax assets recorded by
FirstSense Software, Inc. prior to its acquisition by the Company and research
and development credits expected to be earned during the year.
5. ACQUISITIONS
On February 4, 2000, the Company consummated a transaction pursuant to which it
acquired FirstSense Software, Inc. ("FirstSense"). Under the terms of the
agreement, the shareholders and option holders of FirstSense received an
aggregate of 1,940,000 equivalent Concord shares to effect the business
combination. The transaction is being accounted for as a pooling of interests.
Accordingly, all prior period financial statements presented have been restated
to reflect the combination of the respective companies, as required by APB
Opinion No. 16, "Accounting for Business Combinations". All inter-company
transactions have been eliminated as a result of the business combination. As a
part of the transaction, the Company incurred direct, acquisition-related
charges of approximately $4,300,000. All of such costs have been charged to
operations in fiscal 2000 upon consummation of the FirstSense acquisition in
February 2000.
7
<PAGE> 8
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, SEPTEMBER 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Concord develops, markets and supports next-generation performance
management solutions. With the acquisitions of Empire Technologies, Inc. in
October 1999 and FirstSense Software, Inc. in February 2000, Concord offers the
only integrated performance management solution spanning systems, applications
and networks. By successfully managing performance across all of these key
areas, Concord's products help ensure effective e-business. This end-to-end
performance view provides the critical insights needed to power day-to-day
business and e-commerce operations for some of today's most successful
corporations and service providers worldwide.
The information we provide or statements made by our employees may contain
forward looking statements. In particular, some statements contained in this
Form 10-Q and the Company's Annual Report and Form 10-K, for the fiscal year
ended December 31, 1999, are not historical statements (including, but not
limited to, statements concerning the plans and objectives of management;
increases in sales and marketing, research and development and general and
administrative expenses; statements related to acquisitions and the integration
of acquired companies; and our 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. 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 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 our 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 integration of acquired products and other risks detailed in the our
filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as percentages of the Company's total revenue:
<TABLE>
<CAPTION>
UNAUDITED THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- -----------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 30, 30, 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License revenues 74.9% 76.2% 76.2% 78.4%
Service revenues 25.1% 23.8% 23.8% 21.6%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of Revenues 16.6% 12.6% 13.6% 12.5%
----- ----- ----- -----
Gross profit 83.4% 87.4% 86.4% 87.5%
Operating Expenses:
Research and development 21.9% 20.3% 22.3% 20.8%
Sales and marketing 49.6% 39.1% 48.0% 42.7%
General and administrative 9.3% 7.3% 8.1% 7.3%
Stock-based compensation 0.7% 4.5% 1.0% 3.1%
Acquisition-related charges 0.0% 0.0% 6.5% 0.0%
----- ----- ----- -----
Income from Operations 2.0% 16.2% 0.5% 13.6%
Other income, net 3.1% 3.8% 3.5% 4.4%
----- ----- ----- -----
Income before taxes 5.1% 20.0% 4.0% 18.0%
Provision for income taxes 1.3% 9.1% 1.1% 8.7%
----- ----- ----- -----
Net Income before extraordinary items 3.8% 10.9% 2.9% 9.3%
Extraordinary Items 0.0% 0.0% (0.4)% 0.0%
----- ----- ----- -----
Net Income after extraordinary items 3.8% 10.9% 2.5% 9.3%
Accretion of redeemable preferred stock 0.0% 0.2% 0.0% 0.2%
----- ----- ----- -----
Net Income available to common stockholders 3.8% 10.8% 2.5% 9.1%
----- ----- ----- -----
</TABLE>
8
<PAGE> 9
REVENUES. 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. 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.
International Revenues. The Company recognized $7.4 million and $3.1
million of revenues from international locations in the three months ended
September 30, 2000 and 1999, representing 31.5% and 16.7% of total revenues,
respectively. The Company recognized $19.4 million and $8.8 million of revenues
from international locations in the nine months ended September 30, 2000 and
1999, representing 29.7% and 17.9% of total revenues, respectively. The
Company's revenues from international locations were primarily generated from
customers located in Europe. Revenues from customers located in Europe accounted
for 16.8% and 13.1% of total revenues in the three months ended September 30,
2000 and 1999, respectively. Revenues from customers located in Europe accounted
for 16.0% and 14.5% of total revenues in the nine months ended September 30,
2000 and 1999, respectively.
The increase in revenues from international locations is primarily the result of
the Company's expansion of its operations outside the United States, which has
included the establishment of additional reseller agreements and the hiring of
additional personnel. The Company believes that further expansion of its sales
in international markets will be required to ensure future growth and
profitability. The Company expects to commit additional time and development
resources in order to customize its products and services for selected
international markets.
TOTAL REVENUES. The Company's total revenues increased 25.6% to $23.4
million in the three months ended September 30, 2000 from $18.6 million in the
three months ended September 30, 1999. The Company's total revenues increased
33.7% to $65.5 million in the nine months ended September 30, 2000 from $49.0
million in the nine months ended September 30, 1999.
LICENSE REVENUES. The Company's license revenues, which are derived from
the licensing of software products, increased 23.5% to $17.5 million, or 74.9%
of total revenues, in the three months ended September 30, 2000 from $14.2
million, or 76.2% of total revenues, in the three months ended September 30,
1999. License revenues increased 29.9% to $49.9 million, or 76.2% of total
revenues, in the nine months ended September 30, 2000 from $38.4 million, or
78.4% of total revenues, in the nine months ended September 30, 1999. The
increase in license revenues resulted from increased sales to new customers and
additional sales of new products and upgrades to existing customers.
SERVICE REVENUES. The Company's service revenues, which consist of fees for
maintenance, training and professional services, increased 32.3% to $5.9
million, or 25.1% of total revenues, in the three months ended September 30,
2000 from $4.4 million, or 23.8% of total revenues, in the three months ended
September 30, 1999. Service revenues increased 47.6% to $15.6 million, or 23.8%
of total revenues, in the nine months ended September 30, 2000 from $10.6
million, or 21.6% of total revenues, in the nine months ended September 30,
1999. The increase in service revenues was attributed to an increase of the
Company's customer base and the resulting demand for services from that base.
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 service contracts. Royalty costs are
composed of third party software costs. Cost of revenues increased 65.5% to $3.9
million, or 16.6% of total revenues, in the three months ended September 30,
2000 from $2.3 million, or 12.6% of total revenues, in the three months ended
September 30, 1999, resulting in gross margins of 83.4% and 87.4% in each
respective period. Cost of revenues increased 44.9% to $8.9 million, or 13.6% of
total revenues, in the nine months ended September 30, 2000 from $6.1 million,
or 12.5% of total revenues, in the nine months ended September 30, 1999,
resulting in gross margins of 86.4% and 87.5% in each respective period. The
increase in cost of revenues as a percent of sales was driven by the increased
spending in customer service that is required to support and service a growing
customer base.
9
<PAGE> 10
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of personnel costs associated with software development.
Research and development expenses increased 35.3% to $5.1 million, or 21.9% of
total revenues, in the three months ended September 30, 2000 from $3.8 million,
or 20.3% of total revenues, in the three months ended September 30, 1999.
Research and development expenses increased 43.3% to $14.6 million, or 22.3% of
total revenues, in the nine months ended September 30, 2000 from $10.2 million,
or 20.8% of total revenues, in the nine months ended September 30, 1999. The
increase in absolute dollars in research and development expenses was primarily
due to the use of outside contractors for consulting and recruiting along with
increased headcount in research and development to 129 from 87 for the period
from September 30, 1999 to September 30, 2000. The Company anticipates that
product development expenses may increase in absolute dollars in future periods
as it will continue to commit substantial resources to research and development
in the future.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of salaries, commissions to sales personnel and agents, travel,
tradeshow participation, public relations, advertising and other promotional
expenses. Sales and marketing expenses increased 59.3% to $11.6 million, or
49.6% of total revenues, in the three months ended September 30, 2000 from $7.3
million, or 39.1% of total revenues, in the three months ended September 30,
1999. Sales and marketing expenses increased 50.4% to $31.4 million, or 48.0% of
total revenues, in the nine months ended September 30, 2000 from $20.9 million,
or 42.7% of total revenues, in the nine months ended September 30, 1999. The
increase in absolute dollars was primarily the result of increased headcount to
continue to build the direct sales force along with additional marketing and
promotional activities to penetrate the market. Headcount in sales and marketing
increased to 154 from 117 people from September 30, 1999 to September 30, 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries for financial, administrative and management
personnel and related travel expenses, as well as legal and accounting expenses.
General and administrative expenses increased 59.8% to $2.2 million, or 9.3% of
total revenues, in the three months ended September 30, 2000 from $1.4 million,
or 7.3% of total revenues, in the three months ended September 30, 1999. General
and administrative expenses increased 48.9% to $5.3 million, or 8.1% of total
revenues, in the nine months ended September 30, 2000 from $3.6 million, or 7.3%
of total revenues, in the nine months ended September 30, 1999. The increase in
absolute dollars is associated with an increase of costs in general support
areas, such as human resources, finance and legal services, which will enable
the Company to scale its infrastructure in anticipation of future growth.
Headcount in general and administrative functions increased to 39 from 34 people
from September 30, 1999 to September 30, 2000.
OTHER INCOME. Other income consists of interest earned on funds available
for investment net of interest paid in connection with an outstanding term loan.
The Company had net other income of $724,000 for the three months ended
September 30, 2000 and net other income of $705,000 for the three months ended
September 30, 1999. The Company had net other income of $2.3 million for the
nine months ended September 30, 2000 and net other income of $2.2 million for
the nine months ended September 30, 1999. The increase in net other income is
attributed to the investment of cashflows from the Company's operations.
TAX INCOME. The effective tax rate for 2000 is estimated at 30%.
EXTRAORDINARY ITEMS. Following the acquisition of FirstSense, the Company
repaid the bank borrowings of FirstSense; this generated a loss of $288,010 due
to the early retirement of long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its operations, prior to its initial public offering,
primarily through the private sales of equity securities and a credit line for
equipment purchases. On October 24, 1997, the Company completed its initial
public offering yielding the Company net proceeds of approximately $34.7
million. The Company had working capital of $52.7 million at September 30, 2000.
Net cash provided by operating activities was $3.2 million and $5.5 million
for the nine months ended September 30, 2000 and 1999, respectively. Cash, cash
equivalents and marketable securities were $57.9 million and $63.6 million at
September 30, 2000 and 1999, respectively. The decrease in cash was a result of
acquisition-related charges and repayment of acquisition-related debt. Deferred
revenues increased for the nine months ended September 30, 2000 by $5.2 million
due to an increase in overall sales activity; the increase was primarily
generated from deferred maintenance contracts.
The Account Receivables balance for the period ending September 30, 2000 is
composed of cash and non-cash items, specifically $2.7 million in the form of an
equity investment in Broadband Investment Group.
Investing activities have consisted of the acquisition of property and
equipment, most notably computer and networking equipment to support the growing
employee base and corporate infrastructure and also investments in marketable
securities. The Company manages its market risk on its investment securities by
selecting investment grade securities with the highest credit ratings of
relatively short duration that trade in highly liquid markets. Financing
activities consisted primarily of the issuance of common stock and exercise of
options during the nine months ended September 30, 2000 and 1999 and from the
proceeds from borrowings on a subordinated debt financing by FirstSense.
Pursuant to the Tax Reform Act of 1986, the utilization of net operating
loss carryforwards for tax purposes may be subject to an annual limitation if a
cumulative change of ownership of more than 50% occurs over a three-year period.
As a result of the Company's
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1995 preferred stock financings, such a change in ownership has occurred. As a
result of this ownership change, the use of the net operating loss (NOL)
carryforwards is 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. The Company has deferred tax assets of
approximately $19.7 million composed primarily of net operating loss
carryforwards and research and development credits. The Company has partially
reserved for these deferred tax assets by recording a valuation allowance of
$16.7 million. 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. 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 carryforwards and (ii) the uncertainty of future
profitability.
As a result of the Company's ownership change described above, the future
use of approximately $10.9 million 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 restating
its 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 period 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 beginning on
page 12 and in the "Risk factors" section of the Company's Form 10-K, for the
fiscal year ended December 31, 1999. The Company's dependence on a single
product family in an emerging market makes the prediction of future results
difficult, if not impossible, especially in the highly competitive software
industry. 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 net operating loss deferred tax asset includes approximately
$3.4 million 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.
The Company received a tax benefit of approximately $4.9 million and
$500,000 in 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 Company's current export sales are denominated in United States
dollars. To the extent that international sales continue to be denominated in
United States dollars, an increase in the value of the United States dollar
relative to other currencies could make the Company's products and services more
expensive and, therefore, potentially less competitive in international markets.
As of September 30, 2000, the Company's principal sources of liquidity
included cash and marketable securities. The Company believes that its current
cash, marketable securities and cash provided by future operations will be
sufficient to meet its working capital and anticipated capital expenditure
requirements for the next 12 months. Although operating activities may provide
cash in certain periods, to the extent the Company experiences growth in the
future, its operating and investing activities may require significant cash.
Consequently, any such future growth may require the Company to obtain
additional equity or debt financing.
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RISK FACTORS
References in these risk factors to "we," "our" the "Company" 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 and general and administrative expenses; statements related to
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 can be
based. 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 and 1999. As
of December 31, 1999, we had accumulated net losses of $11.0 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 1999, 1998 and 1997, 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 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 $702,083 in the first nine months of 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.
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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 group 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 ability to anticipate and effectively adapt to developing markets and
rapidly changing technologies;
- changes in networking or communications technologies;
- our ability to attract, retain and motivate 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 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
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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 a significant portion of our revenues, and likely will continue
to, from the sales of our products to telecommunications carriers. 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.
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.
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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 will be recorded as
"poolings-of-interests" for accounting and financial reporting purposes, we
recorded the expenses of these acquisitions, which are 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
- 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.
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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 NETWORK 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 assure 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, our products are licensed under shrink wrap
license agreements that are not signed by licensees and therefore may not be
binding under the laws of certain jurisdictions.
WE LICENSE CERTAIN TECHNOLOGIES FROM THIRD PARTIES.
We license from third parties, generally on a non-exclusive basis, certain
technologies used by 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 we begin of
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
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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 1999, 1998 and 1997 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.
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.
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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;
- 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
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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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments. The Company does not invest in derivative
financial instruments, other financial instruments or derivative commodity
instruments for which fair value disclosure would be required under SFAS No.
107. All of the Company's 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 the Company's books. Accordingly, the
Company has no quantitative information concerning the market risk of
participating in such investments.
Primary Market Risk Exposures. The Company's primary market risk exposure
is in the area of interest rate risk. The Company's investment portfolio of cash
equivalents is subject to interest rate fluctuations, but the Company believes
this risk is immaterial due to the short-term nature of these investments.
Substantially all of the Company's business outside the United States is
conducted in U.S. dollar-denominated transactions, whereas the Company's
operating expenses in its international branches are denominated in local
currency. The Company has no foreign exchange contracts, option contracts or
other foreign hedging arrangements. The Company believes that the operating
expenses of its foreign operations are immaterial, and therefore any associated
market risk is unlikely to have a material adverse effect on the Company's
business, results of operations or financial condition.
20
<PAGE> 21
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, SEPTEMBER 30, 2000
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on the business, results of operations and financial
condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) 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. The
merger was accounted for as a pooling of interests. The Company has filed a Form
S-3 Registration Statement to cover the resale of the securities issued in the
merger.
On February 4, 2000, the Company completed a merger with FirstSense
Software, Inc. The Company has reserved for issuance in connection with the
merger, 1,940,000 shares of Concord Common Stock. The Company issued the shares
in a private placement transaction pursuant to Section 4(2) under the Securities
Act of 1933. The merger was accounted for as a pooling of interests. The Company
has filed a Form S-3 Registration Statement to cover the resale of the
securities issued in the merger.
(d) Use of Proceeds
On October 16, 1997, the Company commenced an initial public offering
("IPO") of 2,900,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company pursuant to the Company's final prospectus dated
October 15, 1997 (the "Prospectus"). The Prospectus was contained in the
Company's Registration Statement on Form S-1, which was declared effective by
the Securities and Exchange Commission (SEC File No. 333-33227) on October 15,
1997. Of the 2,900,000 shares of Common Stock offered, 2,300,000 shares were
offered and sold by the Company and 600,000 shares were offered and sold by
certain shareholders of the Company. As part of the IPO, the Company granted the
several underwriters an overallotment option to purchase up to an additional
435,000 shares of Common Stock (the "Underwriters' Option"). The IPO closed on
October 21, 1997 upon the sale of 2,900,000 shares of Common Stock to the
underwriters. On October 24, 1997, the Representatives, on behalf of the several
underwriters, exercised the Underwriters' Option, purchasing 435,000 additional
shares of Common Stock from the Company. The aggregate offering price of the
shares of Common stock in the IPO to the public was $40,600,000 (exclusive of
the Underwriters' Option), with proceeds to the Company and selling
shareholders, after deduction of the underwriting discount, of $29,946,000
(before deducting offering expenses payable by the Company) and $7,812,000
respectively. The aggregate offering price of the Underwriters' Option exercised
was $6,090,000, with proceeds to the Company, after deduction of the
underwriting discount, of $5,663,700 (before deducting offering expenses payable
by the Company). The aggregate amount of expenses incurred by the Company in
connection with the issuance and distribution of the shares of Common Stock
offered and sold in the IPO were approximately $3.6 million, including $2.7
million in underwriting discounts and commissions and $950,000 in other offering
expenses. The net proceeds to the Company from the IPO, after deducting
underwriting discounts and commissions and other offering expenses were
approximately $34.7 million. To date, the Company has not utilized any of the
net proceeds from the IPO. The Company has invested all such net proceeds
primarily in US treasury obligations and other interest bearing investment grade
securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
21
<PAGE> 22
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed in the accompanying Exhibit Index on page 24 are filed
or incorporated by reference as part of this Report.
(b) Reports on Form 8-K
- Current Report on Form 8-K, dated February 4, 2000, was filed with the
Commission on February 10, 2000 to detail the acquisition of
FirstSense Software, Inc.
- Amendment No. 1 to the Current Report on Form 8-K, dated February 4,
2000, was filed with the Commission on April 19, 2000 for disclosure
of the Financial Statements of FirstSense Software, Inc. as of
December 31, 1999.
- Amendment No. 2 to the Current Report on Form 8-K, dated February 4,
2000, was filed with the Commission on April 21, 2000 to include a
Financial Data Schedule for Amendment No. 1.
- Current Report on Form 8-K, dated February 28, 2000, was filed with
the Commission on March 1, 2000 for disclosure of Consolidated
Financial Statements of the Company as of December 31, 1999.
- Current report on Form 8-K, dated April 25, 2000, was filed with the
Commission on May 1, 2000 to restate the Consolidated Financial
Statements of the Company pursuant to Accounting Principles Board No.
16 to give retroactive effect to the merger of F Acquisition Corp., a
wholly owned subsidiary of the Company., and FirstSense Software Inc.
- Amendment No. 1 of the Current Report on Form 8-K, dated April 25,
2000, was filed with the Commission on May 3, 2000 to include the
Independent Auditor's Report for FirstSense Software, Inc. and the
Consent of KPMG LLP as Exhibit to the Current Report.
22
<PAGE> 23
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, SEPTEMBER 30, 2000
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Concord Communications, Inc.
/s/ Melissa H. Cruz
----------------------------------
Date: November 14, 2000 Name: Melissa H. Cruz
Title: Executive Vice President of
Business Services and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
23
<PAGE> 24
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, SEPTEMBER 30, 2000
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION SEC DOCUMENT REFERENCE
------- ----------- ----------------------
<S> <C> <C>
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 Company Exhibit No. 10.01 to Registration Statement on Form S-1
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 the Exhibit No. 10.03 to Registration Statement on Form S-1
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 Exhibit No. 10.06 on Form 10-K, for the period ended
12, 1998 and March 1, 1999 December 31, 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 Exhibit No. 10.02 on Form 10-Q, for the period ended June
Company 30, 1998
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 Hancock Exhibit No. 10.09 to Registration Statement on Form S-1
Mutual Life Insurance Company dated March 17, 1994, (No. 333-33227) 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 and Exhibit No. 10.11 to Registration Statement on Form S-1
officers of the Company (No. 333-33227)
10.13 Restated Common Stock Registration Rights Agreement Exhibit No. 10.12 to Registration Statement on Form S-1
between the Company and certain investors dated (No. 333-33227)
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, 1997 (No. 333-33227)
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 (No. 333-33227)
23, 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, 1997 (No. 333-33227)
10.18 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, 2000 August 14, 2000
10.19 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 July (No. 333-33227)
23, 1997
10.20 Stock Option Agreement dated January 1, 1996 between Exhibit No. 10.19 to Registration Statement on Form S-1
the Company and John A. Blaeser (No.333-33227)
10.21 Stock Option Agreement dated January 1, 1996 between Exhibit No. 10.20 to Registration Statement on Form S-1
the Company and John A. Blaeser (No.333-33227)
10.22 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 the (No. 333-33227)
Loan Modification Agreement dated November 14, 1996
10.23 Form of Shrink-Wrap License Exhibit No. 10.22 to Registration Statement on Form S-1
(No. 333-33227)
10.24 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 Communications, November 12, 1999
Inc., E Acquisition Corp., Empire Technologies, Inc.
and the stockholders of Empire Technologies, Inc.
10.25 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 Communications, February 10, 2000
Inc., F Acquisition Corp., and FirstSense Software, Inc.
10.26 Registration Rights Agreement dated as of February 4, Exhibit No. 99.1 to Current Report on Form 8-K filed on
2000 by and among Concord Communications, Inc. and February 10, 2000
Timothy Barrows, as Securityholder Agent
*27.01 Financial Data Schedule
</TABLE>
* filed herewith
24
