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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, 1999
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)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sale price of the Company's common stock on
March 8, 2000, as reported on the Nasdaq National Market was approximately
$645,302,040.
The number of shares outstanding of Common Stock as of March 8, 2000 was
16,132,551.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K Reference
Portions of the Annual Report to Stockholders Part II,Item 7
for the fiscal year ended December 31, 1999.
Portions of the Registrant's Proxy Statement Part III
for its Annual Meeting of Stockholders to be
held on April 25, 2000.
THIS DOCUMENT CONTAINS 40 PAGES.
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THE EXHIBIT INDEX IS ON PAGE 37 .
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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. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not limited
to, the factors discussed elsewhere in this Form 10-K under the heading "Risk
Factors."
ITEM 1. BUSINESS
INTRODUCTION
Concord develops, markets and supports next-generation performance
management solutions. With the recent acquisitions of Empire Technologies and
FirstSense Software, Concord offers the only integrated performance management
solution spanning systems, applications, services and networks. By successfully
managing performance across all of these key areas, Concord's products 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.
By providing a global view of application, system and network performance,
the Company's products enable traditional corporate enterprises and companies
engaged in e-commerce to effectively manage the service levels 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, internet access (ISP's), web hosting,
application services (ASP's) and outsourcing services use the Company's products
to manage the provision of those services to their end user customers. The
Company's eHealth product family consists of a set of solutions that identify
application and business process response time and availability problems and
provide information about the underlying causes of those problems within
particular applications, servers, networks or services being provided by an ISP,
Carrier or ASP. The Company's software-only solutions provide instrumentation to
gather critical application and system information but also retrieve vital
network statistics from a wide range of network devices and operating systems.
Extensive analysis is performed on the data and statistics are gathered and
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 effect the availability, response
time, performance and capacity of the services they are required to provide.
The Company's target market has and will continue to be large and
medium-size corporate users, e-commerce companies and service providers
responsible for the management of several thousand to millions of client, server
and network devices running multiple critical business applications
simultaneously. The Company markets to these potential customers through its own
sales force, sales agents, value added resellers, network service providers,
including telecommunication carriers, and OEMs. As of December 31, 1999, the
Company had over 1,600 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, Delta Air Lines, Deutsche Telekom, Fleet
Financial, Frontier Communications, Fuji Film, Global One, Goodyear, GTE,
Harvard Business School, Lloyds of London, Maxnet, McDonald's, MCI Worldcom,
Mercedes-Benz, Mindspring, NATO, New York Times, Pacific Bell, Pepsi, Qwest,
Siemens, Siris, Sprint, Telecom Italia, Toys 'R' Us, Tufts, U S West, Inc., U.S.
Customs, US Internetworking, Visa International, Wang Global and Wiltel.
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INDUSTRY BACKGROUND
The rapid emergence of e-business applications, such as business to business
and business to consumer electronic commerce and enterprise resource planning
systems that extend outside of the traditional corporate environment to
suppliers and partners 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 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 high level of services required in
this new environment, businesses continue to expand their internal computer
networks but also contract with an ever increasing number of service provider
companies providing a host of different solutions and services from bandwidth to
outsourcing. These changes in the market have increased the complexity,
difficulty and importance of managing the performance of the services and
underlying applications and infrastructure required to deliver those services.
Since customers are now interacting directly with these systems, there is much
less tolerance for poor service. In addition, the problem of management has
become more difficult given the multitude of entities, applications, systems and
physical networks involved in any one transaction.
The technical complexity of providing for high levels of automation,
aggregation, instrumentation and scalability over many critical applications and
many thousands of clients, systems and network elements has made comprehensive
performance management solutions difficult to develop and deliver. Any
comprehensive solution must be able to provide an integrated performance
management system across a set of business processes and 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 like Cisco, Lucent and Nortel. Other performance management
solutions that are currently available are either point solutions that attempt
to compete in a 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 do not provide
the comprehensive solution required for the management of e-business
environments. 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 enhance the technical
management of a discreet area like a network, a set of computers or a particular
application and are useful in isolating and correcting problems after such
problems have been identified, these solutions are not able to determine the
effect problems have on real users and assess which component of the overall
e-business environment, the application, the systems, the network or the
services being offered by the service providers 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 has combined its core capabilities in network performance management
with the new systems and application performance management products from Empire
Technologies and FirstSense Software to deliver a set of best of breed products
that can be integrated to provide a comprehensive performance management
solution. Concord's product line, eHealth is a family of turnkey, automated,
scaleable, Web-based performance management solutions for critical applications,
systems, services and networks that combine sophisticated data collection or
agent technologies with Concord's industry leading data retrieval and analysis
engine to provide real-time and historical data in an intuitive, informative and
user-friendly graphical format. The Company's products are currently capable of
simultaneously retrieving data, performing analysis and reporting on that data
for up to 80,000 elements per console or workstation. During 2000, Concord plans
to introduce a new version of eHealth that will dramatically improve on its
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current scalability. This new version is being designed for very large end-user
and large service provider customers.
The Company's eHealth product family provides organizations with the
following benefits: (i) automated management across the IT infrastructure -
provides information automatically in real-time and in historical reports to all
levels of IT technical and management staffs about the performance of
applications, as seen by the end-user, the underlying systems running those
applications and the network infrastructure; (ii) 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; (iii) alignment of IT or Service Provider operations with Customer
business goals - provides a total view into the end-to-end performance and
availability of the end-user or customer environment so that the IT or Service
Provider organization can deliver services based on the business needs of that
end-user or customer; (iv) effective resource management - allows IT management
to cost-effectively deploy personnel and equipment resources across the
organization; and (v) service provider management - provides the e-business or
IT entity with a tool to effectively manage the performance of their service
providers.
In providing these benefits, the Company's eHealth product family
incorporates the following features:
FULLY AUTOMATED, TURNKEY IMPLEMENTATION. The Company's products provide
turnkey solutions for fully automated performance management. Installation can
be accomplished in a few hours for most products and for certain products
installation can occur over the Web. Once installed the Company's products can
provide real time information or historical reports on critical areas such as
(i) important trends and changes for application response times, system and
network availability and 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
collect data from heterogeneous sources. The Company's products are easily
scaled to meet the demands for performance management as an organization's
e-business infrastructure expands. eHealth provides managers with the ability to
purchase add-on software licenses or additional agent software as needed.
MULTI-LEVEL REPORTING. The Company's eHealth product family generates a
comprehensive package of graphical reports that provide information and analyses
on a wide variety of pre-programmed parameters. Information is provided for use
at multiple levels of management, from a general overview of capacity,
availability and response time for chief information officers to a detailed
analysis of specific transactions, server components, network equipment
components, network bandwidth components and network services.
BROAD TECHNOLOGY COVERAGE. The Company's eHealth product family provides
performance management across a broad spectrum of industry standard applications
like Microsoft Exchange, Lotus Notes, ERP systems from SAP, Baan and Peoplesoft,
industry standard operating systems like Unix, Windows, Windows NT and Linux and
industry standard networking technologies like ATM, Frame Relay and IP.
PRODUCTS AND TECHNOLOGY
Each of the applications in the eHealth product line, Network Health,
Application Health, and System Health includes a fixed license fee and a
variable fee based on network elements, servers or clients. The following are
the Company's products:
NETWORK HEALTH - NETWORK HEALTH IS THE FOUNDATION OF THE EHEALTH FAMILY. The
Network Health platform automatically locates devices on the network, identifies
MIB variables, polls devices, and stores data in a relational database. After
the data has been analyzed, Network Health automatically generates
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multiple reports, which can be retrieved from the network console or via the
Web. Network Health software operates continuously to provide full-time data
gathering and on demand reporting. Network Health reports show the effects of
usage and serve as a basis for agreeing to and understanding service levels,
proactively addressing potential network failures, managing bandwidth and
capacity, identifying security violations and understanding the usage patterns
of the network and the network's various elements.
The critical technology components in the Network Health architecture are
the polling engine, the MIB translation file, the database and group filter, and
the reporting engine. Each of these components is device independent, and thus
can function on any type of network device or segment irrespective of the
network equipment vendor or technology. These components automate the functions
of locating the appropriate devices for polling, gathering only the appropriate
variables and data from those devices, and converting the data into canonical
format which facilitates analysis. The distributed nature of the product allows
for the product components and the user to be located at any location within the
organization. Through the use of sophisticated algorithms and heuristics, the
gathered data can be analyzed to make predictions of upcoming problems
throughout the network. The report viewing components within the reporting
engine allow the rendering and display of multiple views and reports in a
graphical fashion for Web output, print output or integration level output to
other products. By focusing on the issues of capacity, errors, service levels
and utilization, Network Health's manner of reporting provides a common model,
which covers a broad spectrum of network elements and technologies.
The following modules are available within the Network Health product line:
Network Health -- Frame Relay
Network Health -- Router/Switch
Network Health -- Traffic Accountant
Network Health -- Server
Network Health -- Service Level Reporting
Network Health -- Remote Access
Network Health -- ATM
APPLICATION HEALTH - Application Health provides a comprehensive solution
for the management of service and application response management. With
Application Health, large enterprises or service providers can effectively
measure and manage the availability of critical e-business applications and
services from several perspectives including the network infrastructure, the
systems or servers, or the client. Through the use of industry leading agent
technologies like those from Empire Technologies, FirstSense Software or Cisco,
Application Health offers visibility into business transactions and services. It
can both measure and report on performance trends and also provide a snapshot
into the overall performance of business critical applications. Application
Health can currently provide this capability for most industry standard ERP
applications (e.g., SAP, Baan, Peoplesoft) and industry standard communications
software products like Exchange and Notes. In addition, Application Health
provides a unique capability that allows an e-business to measure response time
and availability performance for non-standard "home-grown" applications.
SYSTEM HEALTH - System Health provides a set of solutions that allow an
e-business to manage large groups of servers and systems, including Web servers,
across all major operating system and server vendor environments. System Health
provides real time alarm notification of problems and automatic restart of
failed processes critical to the day-to-day functioning of an e-business, an IT
organization, a Web-hosting company or an Application Service Provider. System
Health provides critical information on which applications are consuming the
greatest CPU or memory resources.
CUSTOMER SERVICE
The post-sales support organization is responsible for providing ongoing
technical support and training for the Company's customers. For an annual fee, a
customer will receive telephone and email support, as well as new releases of
the Company's products. The Company has also begun offering 24 x 7 support
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coverage to customers for an additional fee. The Company offers a toll-free
customer support line to customers. Support personnel answer the technical
support calls and generally provide same-day responses to questions that cannot
be resolved during the initial call. All calls are logged, opened, tracked, and
closed with daily updates to the customer, Concord's sales teams and Concord's
executive management team. At December 31, 1999, the Company employed 17
technical post-sales support personnel. In addition, Concord also had 17
professional service and training personnel which provide services to its
customers on a per fee basis.
SALES AND MARKETING
The Company markets its products in the United States to organizations with
large and medium-size networks, as well as network service providers which
include telecommunications carriers, ISPs, systems integrators and outsourcers
primarily through a direct sales force, sales agents and through value added
resellers (VARs). Internationally, the Company markets primarily through
distributors. Additionally, the Company has entered into joint marketing and
joint development arrangements with a number of companies.
At December 31, 1999, the Company had 23 North America sales teams each
comprised of one direct sales person and one or two technical support people
targeting the following four geographic regions: East, Central, West and
Federal. The Company had 7 International sales teams also comprised of one
direct sales person and one or two technical support people targeting the
following three geographic regions: EMEA, Asia/Pacific and South America. In
addition, the Company employs 21 sales and technical management personnel to the
sales teams. At December 31, 1999 the Company utilized 26 North America VARs and
27 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. The Company
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.
At December 31, 1999, the Company had relationships with over 100 network
service providers. The network service providers offer the Company's products as
part of their service offerings. At December 31, 1999, the Company also had
several joint marketing and development partners, including ADC
Telecommunications, Ascend Communications, Inc., Cabletron Systems, Inc., Cisco
Systems, Inc., Fore Systems, Inc., Ganymede, Lucent Technologies, Inc., NetScout
Systems, Inc., Newbridge Networks Corporation, Nortel Networks, Paradyne,
Response Networks, Shomiti and Visual Networks, Inc. that work with the
Company's direct sales force. The Company also has a professional services
referral program aimed at its key network consulting partners. Under this
program, the Company will provide professional services through these partners
directly to its customers.
At December 31, 1999, the Company employed 21 marketing personnel who
position, promote and market the Company's products. These individuals are
engaged in a variety of activities, including direct marketing, public
relations, tradeshows, advertising, Internet postings, and seminars. At December
31, 1999, the Company employed 98 sales personnel, consisting of 11 management
personnel, 30 sales persons, 37 technical support persons, 19 inside sales
persons and one administrative person.
PRODUCT DEVELOPMENT
Management believes that the Company's future success depends in large part
on its ability to continue to enhance existing products and develop new products
that maintain technological competitiveness and deliver value to existing and
new customers. The Company has made and intends to continue to make substantial
investments in product development. Extensive product development input is
obtained through customers and the Company's monitoring of end user needs and
changes in the marketplace.
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The Company introduced the initial version of Network Health focused at the
LAN and WAN environments in the first quarter of 1995. During 1996, the Company
introduced three additional versions of Network Health -- Frame Relay,
Router/Switch and Traffic Accountant. During 1997, the Company introduced two
additional versions of Network Health -- Server and Service Level Reporting.
During 1998, the Company introduced two additional versions of Network Health --
ATM and Remote Access. During 1999, the Company introduced one additional
version of Network Health -- Response, which is now incorporated into the
Application Health product. The Company is now developing new releases of
Network Health, System Health and Application Health.
The Company's total expenses for research and development for the years
1999, 1998 and 1997 were $11.4 million, $7.6 million and $4.9 million,
respectively. The Company anticipates that it will continue to commit
substantial resources to research and development in the future and that product
development expenses may increase in absolute dollars in future periods. To
date, the Company's development efforts have not resulted in any capitalized
software development costs. As of December 31, 1999, the Company's product
development organization consisted of 81 people.
COMPETITION
The market for the Company's products is highly competitive and subject to
rapid technological change. Although the Company has experienced limited
competition to date from products with comparable capabilities, the Company
expects competition to increase in the future. The Company currently competes
principally on the basis of: (i) the breadth of its products' features; (ii) the
automated, scaleable, and cost effective nature of its products; and (iii) the
Company's knowledge, expertise and service ability gained from years of close
interaction with customers. While the Company believes that it currently
competes favorably overall with respect to these factors, there can be no
assurance that the Company will be able to continue to do so.
The Company competes or may compete directly or indirectly with the
following categories of companies: (i) report toolset vendors, such as Desktalk
Systems, Inc.; (ii) large, well established networking OEMs such as
International Business Machines Corporation, Lucent Technologies,
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 (v) enterprise management software, framework and platform
providers such as BMC Software and Computer Associates. 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 the Company's
customers may not attempt to develop competing products internally or that one
or more of the companies Concord has developed relationships with, such as the
network management platform developers and probe vendors, will not try to
develop a product that competes more directly with eHealth.
Many of the Company's current and prospective competitors have significantly
greater financial, selling and marketing, technical and other resources than the
Company. As a result, these competitors may be able to devote greater resources
to the development, promotion, sale and support of their products than the
Company. Moreover, these companies may introduce additional products that are
competitive with or better than those of the Company or may enter into strategic
relationships to offer better products than those currently offered by the
Company. There can be no assurance that the Company's products would effectively
compete with such new products.
To remain competitive, the Company must continue to invest in research and
development, selling and marketing, and customer service and support. In
addition, as the Company enters new markets and utilizes different distribution
channels, the technical requirements and levels and bases of competition may be
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different than those experienced in the Company's current market. There can be
no assurance that the Company will be able to successfully compete against
either current or potential competitors in the future.
PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other contractual provisions to
establish, maintain and protect its proprietary rights in its products. The
Company has five issued U.S. patents, five pending U.S. patent applications and
various foreign counterparts. There can be no assurance that patents which have
been or may be issued will not be challenged, invalidated or circumvented, or
any rights thereunder will provide protection of the Company's intellectual
property rights. The Company believes that, because of the rapid pace of
technological change in the software and data communications industries, the
legal intellectual property protection for its products is a less significant
factor in the Company's success than the knowledge, abilities and experience of
the Company's employees, the frequency of its product enhancements, the
effectiveness of its marketing activities and the timeliness and quality of its
support services. Certain technologies used in the Company's products are
licensed from third parties, including the database technology employed in the
Company's Network Health product family. Such third-party licenses are generally
non-exclusive, royalty based licenses. With respect to the database technology,
the Company is obligated to make minimum fixed price payments to the extent that
the royalty under such license does not exceed a certain minimum threshold. The
termination of any such licenses, or the failure of the third-party licensors to
adequately maintain or update their products, could result in delay in the
Company's ability to ship certain of its products while it seeks to implement
technology offered by alternative sources, and any required replacement licenses
could prove costly. While it may be necessary or desirable in the future to
obtain other licenses relating to one or more of the Company's products or
relating to current or future technologies, there can be no assurance that the
Company will be able to do so on commercially reasonable terms or at all.
EMPLOYEES
As of December 31, 1999, the Company had a total of 281 employees, all but
17 of whom were based in the United States. Of the total, 81 were in research
and development, 43 were in customer service, 98 were in sales, 21 were in
marketing, and 38 were in finance, administration and operations. The Company's
future performance depends in significant part upon the continued service of its
key engineering, technical support and sales personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in attracting or retaining such personnel in the future. None of the
Company's employees are represented by a labor union or are subject to a
collective bargaining agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
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ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of December 31, 1999
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John A. Blaeser...................................... 58 Chief Executive Officer, President and Director
Kevin J. Conklin..................................... 46 Sr. Vice President, Marketing
Ferdinand Engel...................................... 51 Sr. Vice President, Engineering
Gary E. Haroian...................................... 48 Sr. Vice President, Finance and Administration,
Chief Financial Officer, Clerk and Treasurer
Daniel D. Phillips, Jr............................... 45 Sr. Vice President, Worldwide Sales
</TABLE>
Set forth below is certain information relating to each executive officer's
business experience:
John A. Blaeser has been Chief Executive Officer and President of the
Company since January 1, 1996 and a Director of the Company since 1985. Prior to
joining the Company, from 1991 until 1996, Mr. Blaeser was Managing General
Partner of EG&G Venture Management, a venture capital firm.
Kevin J. Conklin has been Senior Vice President of Marketing of the Company
since September 1999 and Vice President of Marketing of the Company since March
1994. Prior to joining Concord, Mr. Conklin was Vice President of Product
Marketing and Development at Artel Communications from June 1993 until joining
Concord in March 1994, and from July 1991 to June 1993 Mr. Conklin served as
Director of Marketing at Artel Communications.
Ferdinand Engel has been Senior Vice President of Engineering of the Company
since September 1999 and Vice President of Engineering of the Company since
1989. Prior to joining Concord, Mr. Engel was Vice President of Engineering for
Technology Concepts at Bell Atlantic.
Gary E. Haroian has been Senior Vice President of Finance and Administration
and Chief Financial Officer of the Company since September 1999 and Vice
President of Finance and Administration and Chief Financial Officer of the
Company since February 1997. Mr. Haroian also serves as Clerk and Treasurer of
the Company. Prior to joining the Company, Mr. Haroian was President and Chief
Executive Officer of Stratus Computer. At Stratus, Mr. Haroian held the
positions of Controller from 1983 until 1985, Vice President and Chief Financial
Officer from 1985 until 1991, Vice President of Corporate Operations, from 1991
until 1993, Executive Vice President from 1993 until 1994, and President and
Chief Operating Officer from 1994 until 1996.
Daniel D. Phillips, Jr. has been Senior Vice President of Worldwide Sales of
the Company since September 1999 and Vice President of Worldwide Sales of the
Company since May 1994. Prior to joining Concord, Mr. Phillips was Vice
President of Worldwide Sales of Epoch Systems. While at Epoch Systems from
September 1989 until May 1994, Mr. Phillips also held the positions of Vice
President of International and OEM Operations, and Director of International
Operations.
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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.
We do not provide forecasts of our future financial performance. From time
to time, however, 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;
expenses associated with Year 2000; 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.
WE HAVE A LIMITED OPERATING HISTORY. OUR FUTURE OPERATING RESULTS ARE UNCERTAIN.
We changed our focus to network management software in 1991 and commercially
introduced our first Network Health product in 1995. Accordingly, we have only a
limited operating history in the network performance management market upon
which an evaluation of 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. As of December 31, 1999, we had accumulated net losses of $11.0
million. Our limited operating history and our dependence on a single product
family in an emerging market make the prediction of future results of operations
difficult or impossible, and 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
9
<PAGE> 11
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 net operating loss and credit carryforwards in 1998. Accordingly,
we recorded a tax provision of $532,600 during 1998 and $5.6 million during
1999. 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;
- - 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 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, and 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
10
<PAGE> 12
- - 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 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 properly assess and address the needs of this market.
OUR SUCCESS IS DEPENDENT UPON SALES TO TELECOMMUNICATIONS CARRIERS.
A significant portion of our revenues are, and likely will continue to be,
attributable to sales of 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 PRODUCT FAMILY IS CRITICAL TO OUR SUCCESS.
We currently derive substantially all of our revenues from our eHealth
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 eHealth 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.
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<PAGE> 13
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.
Network Health's analysis and reporting, as well as the quality of its reports,
depends upon Network Health's 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 Network Health with
these devices which, in turn, could affect Network Health's 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 eHealth is difficult to estimate. We cannot assure
that:
- - we will successfully develop and market enhancements to eHealth 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 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.
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<PAGE> 14
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 assurance 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;
- - 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 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 six issued U.S. patents, seven 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
13
<PAGE> 15
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.
Certain technologies used by our products are licensed from third parties,
generally on a non-exclusive basis. The termination of any such licenses, or the
failure of the third-party licensors to adequately maintain or update their
products, could result in delay in 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 after commencement
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
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 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.
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<PAGE> 16
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 Communications Corporation;
- - OEMs, such as Lucent Technologies, 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 SUCCESSFULLY MANAGE 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.
15
<PAGE> 17
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 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 SYSTEMS ARE SUBJECT TO YEAR 2000 COMPLIANCE FAILURES.
We were aware of the issues associated with the programming code in
existing computer systems and software products as the millennium (Year 2000)
approached. We set up a task force consisting of the Director of IT and
Operations, the Manager of System Applications and representative personnel from
each functional area. This task force addressed the Year 2000 issue in the
following categories:
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<PAGE> 18
- - the Network Health product;
- - internal business computer systems and software applications;
- - internal systems other than computer hardware and software; and
- - systems of our external suppliers and service providers.
We also assessed our Year 2000 associated costs, risks and potential
contingency plans. Despite our efforts with respect to the Year 2000 issue, we
cannot assure that we would not suffer upon the failure of our products, our
internal systems and applications or the systems of our third party suppliers
and service providers to properly operate or manage data beyond 1999.
We believe that we have identified and resolved all our Year 2000 issues. We
realize, however, that it may not be possible to determine, at this time, with
complete certainty that all Year 2000 problems affecting us were corrected. As a
result, we could experience a significant number of operational inconveniences
and inefficiencies that may divert our time and attention from our ordinary
business activities.
OUR COMMON STOCK PRICE COULD EXPERIENCE SIGNIFICANT VOLATILITY.
We completed an initial public offering of our common stock during October
of 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 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
The Company's corporate office and principal facility is located in
Marlboro, Massachusetts. In March, 1999 the Company signed a 7 year operating
lease for its principal operating facilities. Aggregate rental payments under
the lease will be $12.0 million. This facility accommodates finance,
administration and operations, research and development, customer support and
marketing. The Company also leases, 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, Hamburg, Germany, Paris, France, the Netherlands, Australia and
Singapore. Following the abandonment of the Company's existing corporate office
space, the Company recorded a third quarter charge of $700,000, representing the
remaining lease commitment, less expected sublease income.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on the business, results of operations and financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company effected its initial public offering on October 24, 1997 at a
price of $14.00 per share. Since that date, the Company'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 closing sales prices for
the Common Stock, all as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
October 16, 1997 - December 31, 1997 $ 23.25 $ 15.75
Fiscal 1998:
First Quarter...................................... $ 28.75 $ 15.13
Second Quarter..................................... 29.38 21.25
Third Quarter...................................... 45.13 26.00
Fourth Quarter..................................... 56.75 31.25
Fiscal Year............................................ 56.75 15.13
Fiscal 1999:
First Quarter...................................... $ 68.25 $ 43.75
Second Quarter..................................... 58.00 36.56
Third Quarter...................................... 56.75 34.75
Fourth Quarter..................................... 64.00 38.00
Fiscal Year............................................ 68.25 34.75
</TABLE>
As of March 8, 2000, there were approximately 239 stockholders of record of
the Company's Common Stock.
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DIVIDEND POLICY
The Company currently anticipates that it will retain all future earnings
for use in its business and does not anticipate that it will pay any cash
dividends in the foreseeable future. The payment of any future dividends will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements and the
general financial condition of the Company, general business conditions and
contractual restrictions on payment of dividends, if any.
USE OF PROCEEDS
On October 16, 1997, the Company commenced an initial public offering
("IPO") of 2,900,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company pursuant to the Company's final prospectus dated
October 15, 1997 (the "Prospectus"). The Prospectus was contained in the
Company's Registration Statement on Form S-1, which was declared effective by
the Securities and Exchange Commission (SEC File No. 333-33227) on October 15,
1997. Of the 2,900,000 shares of Common Stock offered, 2,300,000 shares were
offered and sold by the Company and 600,000 shares were offered and sold by
certain stockholders of the Company. As part of the IPO, the Company granted the
several underwriters an overallotment option to purchase up to an additional
435,000 shares of Common Stock (the "Underwriters' Option"). The IPO closed on
October 21, 1997 upon the sale of 2,900,000 shares of Common Stock to the
underwriters. On October 24, 1997, the Representatives, on behalf of the several
underwriters, exercised the Underwriters' Option, purchasing 435,000 additional
shares of Common Stock from the Company. The aggregate offering price of the IPO
to the public was $40,600,000 (exclusive of the Underwriters' Option), with
proceeds to the Company and selling shareholders, after deduction of the
underwriting discount, of $29,946,000 (before deducting offering expenses
payable by the Company) and $7,812,000 respectively. The 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. The
Company plans to file 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 will issue the
shares in a private placement transaction pursuant to Section 4(2) under the
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Securities Act of 1933. The Company is obligated to file a Form S-3 Registration
Statement to cover the resale of the securities issued in the merger.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 28, Dec. 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License revenues........................ $ 52,708 $ 34,597 $ 18,455 $ 8,172 $ 3,565
Service revenues........................ 14,635 6,860 2,225 1,162 912
-------- -------- -------- -------- -------
Total revenues...................... 67,343 41,457 20,680 9,334 4,477
Cost of revenues............................ 8,086 4,676 2,925 1,973 1,170
------ ------ -------- -------- -------
Gross profit................................ 59,257 36,781 17,755 7,361 3,307
-------- -------- -------- -------- -------
Operating expenses:
Research and development................ 11,409 7,387 5,069 4,009 2,413
Sales and marketing..................... 25,687 17,522 10,173 7,040 3,694
General and administrative.............. 3,679 2,802 2,058 1,177 1,000
Stock-based compensation (Note 3)....... 2,549 1,001 -- -- --
General and administrative.............. 551 -- -- -- --
-------- -------- -------- -------- -------
Total operating expenses............ 43,875 28,712 17,300 12,226 7,107
-------- -------- -------- -------- -------
Operating income (loss)..................... 15,382 8,069 455 (4,865) (3,800)
Other income (expense), net................. 3,117 2,290 305 43 80
--------- --------- --------- --------- --------
Income (loss) before income taxes... $ 18,499 $ 10,359 $ 760 $ (4,822) $(3,720)
Provision for income taxes........ 5,593 533 -- -- --
--------- --------- --------- --------- --------
Net income (loss)........................... $ 12,906 $ 9,826 $ 760 $ (4,822) $(3,720)
========= ========= ========= ========= ========
Pro forma provision for income taxes on
Subchapter S-Corporation income (unaudited) 146 41 -- -- --
--------- --------- --------- --------- --------
Pro forma net income (unaudited) ........... $ 12,760 $ 9,785 $ 760 $ (4,822) $(3,720)
========= ========= ========= ========= ========
Net income (loss) per common and potential common share:
Basic................................... $ 0.91 $ 0.73 $ 0.20 $ (3.06) $ (2.38)
Diluted................................. 0.85 0.66 0.06 (3.06) (2.38)
Pro forma diluted....................... 0.85 0.66 0.06 (0.50) (0.70)
Weighted average common and potential common shares
outstanding:
Basic................................... 14,161 13,457 3,885 1,576 1,561
Diluted................................. 15,139 14,892 12,134 1,576 1,561
Pro forma diluted....................... 15,139 14,892 12,134 9,684 5,322
Fiscal Year Ended
-----------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 28, Dec. 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 62,044 $ 51,249 $ 36,898 $ 1,664 $ 4,397
Working capital (deficit)............. 55,442 43,978 33,356 (1,387) 3,316
Total assets.......................... 84,405 59,923 43,014 5,584 6,729
Long-term debt, net of current portion -- 1,001 189 668 --
Redeemable convertible preferred stock -- -- -- 14,478 13,616
Total stockholders' equity (deficit).. 63,051 45,751 35,249 (15,035) (9,126)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing under the caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1999
Annual Report to Stockholders is incorporated herein by reference.
20
<PAGE> 22
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements together with the related notes and the
report of Arthur Andersen LLP, independent accountants, are set forth beginning
on page F-1 of Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information under the captions "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" as set forth in the Company's
proxy statement for its annual stockholders' meeting to be held April 25, 2000
is incorporated herein by reference.
The information concerning officers is included in Part I, Item 1A under the
caption "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" as set forth in
the Company's proxy statement for its annual stockholders' meeting to be held
April 25, 2000 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Securities Ownership of Certain
Beneficial Owners and Management" as set forth in the Company's proxy statement
for its annual stockholders' meeting to be held April 25, 2000 is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
21
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) The following documents are filed as part of this Form:
<S> <C>
1. Financial Statements: Page Number
Report of Independent Public Accountants F-1
Balance Sheets:
December 31, 1999 and December 31, 1998 F-2
Statements of Income:
Years ended December 31, 1999, December 31, 1998 and December 31, 1997 F-3
Statements of Stockholders' Equity:
Years ended December 31, 1999, December 31, 1998 and December 31, 1997 F-4
Statements of Cash Flows:
Years ended December 31, 1999, December 31, 1998 and December 31, 1997 F-5
Notes to the Financial Statements F-6
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Included in Item 9 of Notes to the Financial Statements
3. Exhibits:
See Index to Exhibits. The Exhibits listed in the accompanying Index to
Exhibits are filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K:
Form 8-K was filed on November 12, 1999 for disclosure of the merger
with Empire Technologies, Inc.
Form 8-K was filed on January 26, 2000 for disclosure of the
execution of the merger with FirstSense Software, Inc.
Form 8-K was filed on February 10, 2000 for the disclosure of the
consummation of the merger with FirstSense Software, Inc.
Form 8-K was filed on February 29, 2000 for the disclosure of the
1999 audited consolidated financial statements and management's
discussion and analysis of financial condition and results of
operations related thereto.
</TABLE>
22
<PAGE> 24
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, 1999 and
December 31, 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 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 provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Concord Communications, Inc. as
of December 31, 1999 and December 31, 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in United
States.
Arthur Andersen LLP
Boston, Massachusetts
January 17, 2000
F-1
<PAGE> 25
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash, cash equivalents and marketable securities...... $ 62,044,141 $ 51,248,773
Accounts receivable, net of allowance of approximately
$930,000 and $450,000 in 1999 and 1998,
respectively........................................ 13,465,999 5,391,723
Prepaid expenses and other current assets............. 1,286,070 509,805
---------- ----------
Total current assets.............................. 76,796,210 57,150,301
Equipment and Improvements, at cost:
Equipment............................................. 7,897,533 3,792,080
Leasehold improvements................................ 3,005,915 388,894
---------- ----------
10,903,448 4,180,974
Less-- Accumulated depreciation and amortization...... 3,294,551 1,407,430
---------- ----------
7,608,897 2,773,544
---------- ----------
$ 84,405,107 $ 59,923,845
========== ==========
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................... $ 4,542,644 $ 3,599,636
Accrued expenses...................................... 6,885,827 5,087,984
Deferred revenue...................................... 9,925,297 5,485,585
---------- ----------
Total current liabilities......................... 21,353,768 14,173,205
---------- ----------
Commitments and Contingencies (Note 8)
Stockholders' Equity
Preferred Stock, $.01 par value --
Authorized -- 1,000,000 shares
Issued and outstanding-- None...................... -- --
Common stock, $.01 par value--
Authorized -- 50,000,000 shares
Issued and outstanding -- 14,406,192 and 13,040,374
shares, in 1999 and 1998 respectively.............. 144,062 130,405
Additional paid-in capital............................ 77,799,827 69,998,035
Deferred compensation................................. (53,221) (101,189)
Accumulated other comprehensive income................ (1,386,125) 149,606
Accumulated deficit................................... (13,453,204) (24,426,217)
---------- ----------
Total stockholders' equity ....................... 63,051,339 45,750,640
---------- ----------
$ 84,405,107 $ 59,923,845
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<PAGE> 26
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------
December 31, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
License revenues............. $52,707,905 $34,597,958 $18,454,613
Service revenues............. 14,635,150 6,859,394 2,225,287
---------- ---------- ----------
Total revenues.......... 67,343,055 41,457,352 20,679,900
Cost of Revenues.................. 8,085,987 4,676,335 2,925,169
---------- ---------- ----------
Gross profit............ 59,257,068 36,781,017 17,754,731
---------- ---------- ----------
Operating Expenses:
Research and development..... 11,409,464 7,386,706 5,068,489
Sales and marketing.......... 25,687,262 17,522,653 10,173,182
General and administrative... 3,678,544 2,802,023 2,058,402
Stock-based compensation
(Note 3).................... 2,549,000 1,001,000 --
Acquisition-related charges
(Note 3).................... 550,601 -- --
---------- ---------- ----------
Total operating expenses..... 43,874,871 28,712,382 17,300,073
---------- ---------- ----------
Operating income........ 15,382,197 8,068,635 454,658
---------- ---------- ----------
Other Income (Expense):
Interest income.............. 3,136,026 2,355,816 428,253
Interest expense............. -- (514) (126,836)
Other........................ (19,268) (65,251) 4,248
---------- ---------- ----------
Total other income, net. 3,116,758 2,290,051 305,665
---------- ---------- ----------
Income before income taxes 18,498,955 10,358,686 760,323
Provision for income taxes........ 5,592,703 532,600 --
---------- ---------- ----------
Net income........................ $12,906,252 $ 9,826,086 $ 760,323 $
========== ========== ==========
Pro forma provision for income taxes
on Subchapter S-Corporation income
(unaudited) .................... 146,325 41,400 --
---------- ---------- ----------
Pro forma net income (unaudited).. $12,759,927 $ 9,784,686 $ 760,323
========== =========== ==========
Net income per common and potential
common share:
Basic $ 0.91 $ 0.73 $ 0.20
========== =========== ==========
Diluted $ 0.85 $ 0.66 $ 0.06
========== =========== ==========
Pro forma diluted (unaudited) $ 0.85 $ 0.66 $ 0.06
========== =========== ==========
Weighted average common and
potential common shares outstanding:
Basic 14,160,755 13,457,495 3,884,915
========== =========== ==========
Diluted 15,139,325 14,892,238 12,134,727
========== =========== ==========
Pro forma diluted (unaudited) 15,139,325 14,892,238 12,134,727
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE> 27
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
-------------------- Unrealized Accumulated
Additional Deferred Gain On Other
Number $.01 Paid-In Compen- Marketable Accumulated Comprehensive Comprehensive
of Shares Par Value Capital sation Securities Deficit Income Total Income
--------- --------- ---------- -------- ---------- ----------- ------------- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER
28, 1996... 844,482 $8,445 $18,156,951 -- -- $(32,943,433) -- $(14,778,037) --
Issuance of common
stock, net of
issuance costs of
$ 955,359 2,735,000 27,350 34,626,991 -- -- -- -- 34,654,341 --
Accretion of divi-
dends on
preferred stock.... -- -- -- -- -- (441,557) -- (441,557) --
Conversion of
redeemable
convertible pre-
ferred stock to
common stock....... 8,108,258 81,083 14,838,203 -- -- -- -- 14,919,286 --
Exercise of stock
options............ 331,448 3,315 188,594 -- -- -- -- 191,909 --
Deferred compen-
sation related
to grants of
stock options..... -- -- 191,875 (191,875) -- -- -- -- --
Amortization of
deferred compen-
sation related
to grants of
stock options..... -- -- -- 42,718 -- -- -- 42,718 --
Unrealized gains
on available-for-
sale securities... -- -- -- -- 19,750 -- 19,750 19,750 19,750
Distribution to
shareholders...... -- -- -- -- -- (119,698) -- (119,698) --
Net income........ -- -- -- -- -- 760,323 -- 760,323 760,323
--------- --------- --------- -------- --------- --------- -------- --------- ---------
Comprehensive
Income 19,750 780,073
BALANCE, DECEMBER
31, 1997.......... 12,019,188 120,193 68,002,614 (149,157) 19,750 (32,744,365) -- 35,249,035 --
Shares issued in
connection with
employee stock
plans............. 1,021,186 10,212 1,495,421 -- -- -- -- 1,505,633 --
Tax benefit
associated with
employee stock
options........... -- -- 500,000 -- -- -- -- 500,000 --
Amortization of de-
ferred compen-
sation related to
grants of stock
options........... -- -- -- 47,968 -- -- -- 47,968 --
Unrealized gains
on available-for-
sale securities... -- -- -- -- 129,856 -- 129,856 129,856 129,856
Distribution to
shareholders....... -- -- -- -- (1,507,938) -- (1,507,938) --
Net income........ -- -- -- -- -- 9,826,086 -- 9,826,086 9,826,086
--------- --------- --------- -------- --------- --------- -------- --------- ---------
Comprehensive
Income 149,606 9,955,942
BALANCE, DECEMBER
31, 1998.......... 13,040,374 130,405 69,998,035 (101,189) 149,606 (24,426,217) -- 45,750,640 --
Shares issued in
connection with
employee stock
plans............. 1,365,818 13,657 2,901,792 -- -- -- -- 2,915,449 --
Tax benefit
associated with
employee stock
options........... -- -- 4,900,000 -- -- -- -- 4,900,000 --
Amortization of
deferred comp-
ensation related
to grants of
stock options..... -- -- -- 47,968 -- -- -- 47,968 --
Unrealized gains
on available-for-
sale securities... -- -- -- -- (1,535,731) -- (1,535,731) (1,535,731) (1,535,731)
Distribution to
shareholders....... -- -- -- -- -- (1,933,239) -- (1,933,239) --
Net income........ -- -- -- -- -- 12,906,252 -- 12,906,252 12,906,252
--------- --------- ----------- -------- ----------- ------------ -------- ----------- -----------
Comprehensive
Income $(1,386,125) $11,372,521
=========== ===========
BALANCE, DECEMBER
31, 1999.......... 14,406,192 $ 144,062 $77,799,827 $(53,221) $(1,386,125) $(13,453,204) $63,051,339
========== ========= =========== ======== =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE> 28
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income................................... $12,906,252 $ 9,826,026 $ 760,323
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 1,935,089 756,669 591,798
Unrealized (loss) gain on available-for-sale
securities.............................. (1,535,731) 129,856 19,750
Changes in current assets and liabilities:
Accounts receivable..................... (8,074,276) (1,640,779) (1,423,916)
Prepaid expenses and other current assets (776,265) (227,495) (132,769)
Accounts payable........................ 943,008 1,787,061 207,536
Accrued expenses........................ 6,697,843 2,351,472 1,306,493
Deferred revenue........................ 4,439,712 3,132,156 1,001,678
---------- ---------- ----------
Net cash provided by operating activities 16,535,632 16,114,966 2,330,893
---------- ---------- ----------
Cash Flows from Investing Activities:
Purchases of equipment and improvements........ (6,722,474) (1,891,606) (1,119,863)
Purchases of investments in marketable
securities................................. (252,350,710) (53,139,637) (116,402,905)
Sales of investments in marketable securities.. 238,648,717 42,712,930 87,741,538
----------- ----------- -----------
Net cash used in investing activities. (20,424,467) (12,318,313) (29,781,230)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from bank borrowings.................. -- -- 583,707
Repayments of bank borrowings.................. -- -- (1,508,209)
Distribution to shareholders................... (1,933,239) (1,507,938) (119,698)
Proceeds from issuance of common stock......... -- -- 34,654,341
Proceeds from shares issued in connection
with employee stock plans.................... 2,915,449 1,505,633 191,909
----------- ----------- -----------
Net cash provided by (used in) financing
activities.................. 982,210 (2,305) 33,802,050
----------- ----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (2,906,625) 3,794,348 6,351,713
Cash and Cash Equivalents, beginning of year..... 12,011,093 8,216,745 1,865,032
----------- ----------- -----------
Cash and Cash Equivalents, end of year........... $ 9,104,468 $12,011,093 $ 8,216,745
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest......................... $ -- $ -- $ 126,836
=========== =========== ===========
Cash paid for taxes............................ $ 341,837 $ 46,159 $ 1,539
=========== =========== ===========
Supplemental Disclosure of Noncash Transactions:
Accretion of dividends on preferred stock...... $ -- $ -- $ 441,557
=========== =========== ===========
Deferred compensation related to
grants of stock options...................... $ -- $ -- $ 191,875
=========== =========== ===========
Conversion of redeemable convertible
preferred stock to common stock.............. $ -- $ -- $14,919,286
=========== =========== ===========
Unrealized (loss) gain on available-for-sale
securities................................... $(1,535,731) $ 129,856 $ 19,750
=========== =========== ===========
Tax benefit associated with employee
stock options................................ $ 4,900,000 $ 500,000 $ --
=========== =========== ===========
Retirement of fully depreciated fixed assets... $ -- $ 4,330,000 $ --
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE> 29
CONCORD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Concord Communications, Inc. (the Company or Concord) is primarily engaged
in the development and sale of next-generation performance management solutions
to companies principally in the United States and Europe.
The Company is subject to the risks associated with emerging,
technology-oriented companies. Primary among these risks are competition from
substitute products and the ability to successfully develop and market the
Company's current and future products.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and all 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 cash equivalents and marketable
securities as available-for-sale and recorded them at fair value, with the
unrealized gains and losses reported as a separate component of stockholders'
equity. The Company considers cash and highly liquid investments, purchased with
an original maturity of 90 days or less, to be cash and cash equivalents. Cash
and cash equivalents are $9,104,468 and $12,011,093 at December 31, 1999 and
December 31, 1998, 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") No. 97-2, Software Revenue Recognition, as modified by SOP 98-9,
Modification of SOP 97-2,Software Revenue Recognition with respect to Certain
Transactions. 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.
(d) Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation is provided
for on a straight-line basis over the useful lives of the assets, which are
estimated to be three to five years for all assets except leasehold
improvements, which are amortized over the life of the lease.
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(f) Concentration of Credit Risk and Significant Customers
F-6
<PAGE> 30
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentration
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. The Company maintains its cash, cash equivalent
and marketable securities with established financial institutions. The Company
does not believe it has accounts receivable collection risk in excess of
existing reserves. For the years ended December 31, 1999, December 31, 1998 and
December 31, 1997, no individual customer accounted for more than 10% of revenue
or accounts receivable.
(g) Software Development Costs
SFAS No. 86, Accounting for the Costs of Computer Software to be sold,
Leased or Otherwise Marketed, requires the capitalization of certain computer
software development costs incurred after technological feasibility is
established. The Company believes that once technological feasibility of a
software product has been established, the additional development costs incurred
to bring the product to a commercially acceptable level are not significant.
There were no capitalized software development costs at December 31, 1999 or
December 31, 1998.
(h) 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 1999 and 1998 consisting of outstanding stock options and in 1997 consisting
of outstanding stock options and redeemable convertible preferred stock, is
determined using the treasury method and the if-converted method, respectively,
in accordance with SFAS No. 128. 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. Calculations of basic,
diluted and pro forma diluted net income per common share and potential common
share are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income............................ $ 12,906,252 $ 9,826,086 $ 760,323
-------------- -------------- --------------
Pro forma provision for income taxes on
Subchapter S-Corporation income (unaudited) 146,325 41,400 --
-------------- -------------- --------------
Pro forma net income (unaudited)...... $ 12,759,927 $ 9,784,686 $ 760,323
============== ============== ==============
Weighted average common shares
outstanding........................ 14,160,755 13,457,495 3,884,915
Potential common shares pursuant
to stock options................... 978,570 1,434,743 1,830,774
Potential common shares pursuant
to conversion of redeemable
convertible preferred stock........ -- -- 6,419,038
-------------- -------------- --------------
Diluted weighted average shares...... 15,139,325 14,892,238 12,134,727
============== ============== ==============
Basic net income per common share..... $ 0.91 $ 0.73 $ 0.20
============== ============== ==============
Diluted net income per common
and potential common share......... $ 0.85 $ 0.66 $ 0.06
============== ============== ==============
Pro forma diluted net income per
common and potential common share.. $ 0.85 $ 0.66 $ 0.06
============== ============== ==============
</TABLE>
Diluted weighted average shares outstanding do not include 722,572, 4,003
and 44,818 common equivalent shares for the years ended December 31, 1999, 1998
and 1997, respectively, as their effect would have been antidilutive.
F-7
<PAGE> 31
(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, 1999 with maturity dates from
January 1, 2000 through April 20, 2004, are as follows:
<TABLE>
<CAPTION>
Amortized Cost Unrealized Gains (Losses) Fair Value
-------------- ------------------------- ----------
<S> <C> <C> <C>
US government 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: Amounts classified as
cash equivalents 2,960,374 -- 2,960,374
-------------- -------------- --------------
Available-for-sale
marketable securities $ 54,325,798 $ (1,386,125) $ 52,939,673
============== ============== ==============
</TABLE>
The amortized cost, unrealized gains (losses) and fair value of marketable
securities available-for-sale as of December 31, 1998 with maturity dates from
January 1, 1999 through September 15, 2003, are as follows:
<TABLE>
<CAPTION>
Amortized Cost Unrealized Gains (Losses) Fair Value
-------------- ------------------------- ----------
<S> <C> <C> <C>
US government obligations $ 9,423,374 $ 11,559 $ 9,434,933
Corporate bonds and notes 31,949,720 138,047 32,087,767
-------------- -------------- --------------
41,373,094 149,606 41,522,700
Less: Amounts classified as
cash equivalents 2,285,020 -- 2,285,020
-------------- -------------- --------------
Available-for-sale
marketable securities $ 39,088,074 $ 149,606 $ 39,237,680
============== ============== ==============
</TABLE>
(3) ACQUISITION OF 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 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 have
been expensed. 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.
Separate and combined results of Concord and Empire during the periods preceding
the merger were as follows:
<TABLE>
<CAPTION>
Concord Empire Eliminations Combined
------- ------ ------------ --------
<S> <C> <C> <C> <C>
1999 (Through 10/29/1999)
Net Revenues $49,616,491 $2,713,962 (133,160) $52,197,293
Net Income 7,519,519 471,655 7,991,174
1998
Net Revenues $39,481,330 $1,976,022 $41,457,352
Net Income 9,078,471 747,615 9,826,086
1997
Net Revenues $19,569,594 $1,110,306 $20,679,900
Net Income 130,755 629,568 760,323
</TABLE>
F-8
<PAGE> 32
(4) STOCK OPTION PLANS
In 1995, the Company's Board of Directors (the Board) approved the 1995
Stock Plan, which provides for the granting of incentive stock options (ISOs)
and nonqualified stock options. Prior to the adoption of the 1995 Stock Plan,
the Board granted options under the 1982 Employee Incentive Stock Option Plan,
the 1986 Nonqualified Stock Option Plan and the 1986 Stock Plan. Following the
completion of the IPO, the Company adopted the 1997 Stock Plan, the 1997
Employee Stock Purchase Plan and the 1997 Nonemployee Director Stock Option
Plan. As amended, these plans allow for issuances of up to 2,500,000, 375,000
and 95,000 shares of common stock, respectively; the Company has reserved such
shares for future issuance.
Under the 1995 and 1997 Stock Plans (the Plans), the Company may issue
options to purchase up to 2,963,798 shares of common stock, of which 137,658
options are available for grant as of December 31, 1999. ISOs may be granted at
an exercise price not less than the fair market value per share of common stock
on the date of grant, as determined by the Board. The price per share relating
to each nonqualified option granted under the Plans shall not be less than the
lesser of (i) the book value per share of common stock as of the end of the
Company's fiscal year immediately preceding the date of grant or (ii) 50% of the
fair market value per share of common stock on the date of grant. Vesting of the
options is determined by the Board, and the options expire 8 years from the date
of grant. An employee may convert his or her unexercised ISOs into nonqualified
options at any time prior to the expiration of such ISOs.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which requires the measurement of
the fair value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to the financial statements. As permitted
by SFAS No. 123, the Company will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
has elected the disclosure-only alternative under SFAS No. 123 for options
granted using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The weighted average fair value per share of options granted during 1999, 1998
and 1997 was $45.27, $31.08 and $5.64, respectively. The weighted average
assumptions are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate.................. 6.0% 6.0% 5.1 - 6.0%
Expected dividend yield.................. -- -- --
Expected lives........................... 7 years 7 years 7 years
Expected volatility...................... 82% 80% 80%
</TABLE>
Had compensation cost for these plans been determined consistent with
SFAS No. 123, the Company's net income (loss) and basic, diluted and pro
forma diluted net income (loss) per common and potential common share would
have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income, as reported................................. $ 12,906,252 $ 9,826,086 $ 760,323
============= ============= =============
Net (loss) income, pro forma............................ $ (302,081) $ 7,007,947 $ 308,939
============= ============= =============
Net income per share, as reported
Basic................................................. $ 0.91 $ 0.73 $ 0.20
============= ============= =============
Diluted............................................... $ 0.85 $ 0.66 $ 0.06
============= ============= =============
Pro forma diluted..................................... $ 0.85 $ 0.66 $ 0.06
============= ============= =============
Net (loss) income per share, pro forma
Basic................................................. $ (0.02) $ 0.52 $ .08
============= ============= =============
Diluted............................................... $ (0.02) $ 0.47 $ .03
============= ============= =============
Pro forma diluted..................................... $ (0.02) $ 0.47 $ .03
============= ============= =============
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation may not be representative of that to be expected in future
years.
F-9
<PAGE> 33
The following table summarizes information about options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING EXERCISE PRICE NUMBER EXERCISE PRICE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PER SHARE OUTSTANDING PER SHARE
-------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .10 - 1.90 322,395 4.60 $ .93 127,168 $ .91
4.10 - 17.38 290,735 5.68 10.87 93,761 10.46
18.38 - 23.50 347,205 6.13 21.73 121,146 21.71
23.88 - 33.38 62,957 6.44 27.94 19,601 27.41
34.88 - 36.91 901,801 7.64 36.85 6,237 35.11
37.25 - 52.38 239,300 7.42 45.17 6,355 44.23
52.63 - 64.25 661,747 7.25 55.00 625 56.75
--------- -------
2,826,140 374,893
========= =======
</TABLE>
The following schedule summarizes the activity under the stock option plans
for the three-year period ended December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER PRICE
SHARES SHARE PER SHARE
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at December 28, 1996 1,704,342 $ .10 -- 1.90 $ .23
Granted................... 784,700 1.90 -- 21.88 7.29
Exercised................. (331,448) .10 -- 1.90 .58
Terminated................ (26,494) . 10 -- 8.50 2.56
--------- -------------- --------
Outstanding at December 31, 1997 2,131,100 .10 -- 21.88 2.76
Granted................... 563,750 17.06 -- 56.75 23.71
Exercised................. (984,473) .10 -- 21.38 .98
Terminated................ (36,588) . 10 -- 41.00 6.73
--------- -------------- --------
Outstanding at December 31, 1998 1,673,789 $ .10 -- 56.75 $ 10.79
========= ============== ========
Granted................... 1,781,555 17.06 -- 64.25 43.90
Exercised................. (532,684) .10 -- 44.38 3.81
Terminated................ (96,520) .10 -- 58.25 27.94
--------- -------------- --------
Outstanding at December 31, 1999 2,826,140 $ .10 -- 64.25 $ 32.53
========= ============== ========
Exercisable at December 31, 1999 374,893 $ .10 -- 64.25 $ 12.80
========= ============== ========
Exercisable at December 31, 1998 164,957 $ .10 -- 21.38 $ 4.73
========= ============== ========
Exercisable at December 31, 1997 517,816 $ .10 -- 1.90 $ .19
========= ============== ========
</TABLE>
In 1997, the Company granted one officer and one director options to
purchase in total 143,750 shares of common stock at an exercise price of $1.90
per share. At the date of grant, the estimated fair value per share of the
Company's common stock exceeded the exercise price of the options, and
accordingly, the Company has recorded deferred compensation of $191,875 related
to this difference at the date of grant. For the years ended December 31, 1999
and 1998, the Company has recorded compensation expense of $47,968 and $47,968,
respectively, related to these options grants.
The exercise price of all other options outstanding represents the fair
market value per share of common stock as of the date of grant.
(5) 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.
F-10
<PAGE> 34
The approximate income tax effects of these temporary differences are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
Net operating loss and federal tax credit carryforwards. $ 8,073,000 $ 12,719,000
Accruals not yet deductible for tax purposes............ 2,102,000 1,027,000
Depreciation............................................ 62,000 92,000
Deferred revenue........................................ 1,695,000 1,373,000
Capitalized research and development expenses........... 1,939,000 2,088,000
Valuation allowance..................................... (13,871,000) (17,299,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
The Company has available net operating loss carryforwards of approximately
$14,300,000 and federal research and development tax credit carryforwards of
approximately $2,225,000 as of December 31, 1999 to reduce future income tax
liabilities. These carryforwards are subject to review and possible adjustment
by the appropriate taxing authorities and expire from 1999 through 2013 as
follows:
<TABLE>
<CAPTION>
RESEARCH AND
NET OPERATING LOSS DEVELOPMENT TAX
FISCAL YEAR CARRYFORWARDS CREDIT CARRYFORWARDS
------------ ------------------ --------------------
<S> <C> <C>
2000......................................................... $ 3,659,000 $ --
2001......................................................... 2,870,000 1,252,000
2002-2006.................................................... 1,369,000 150,000
2007-2013.................................................... 6,367,000 823,000
----------- ----------
$14,265,000 $2,225,000
=========== ==========
</TABLE>
Pursuant to the Tax Reform Act of 1986, the utilization of net operating
loss carryforwards for tax purposes may be subject to an annual limitation if a
cumulative change of ownership of more than 50% occurs over a three-year period.
As a result of the Company's 1995 preferred stock financings, such a change in
ownership has occurred. As a result of this ownership change, the use of the net
operating loss carryforwards will be limited. The Company has determined that
its initial public offering did not cause another ownership change. The Company
has deferred tax assets of approximately $13.9 million comprised primarily of
net operating loss carryforwards and research and development credits. The
Company has fully reserved for these deferred tax assets by recording a
valuation allowance of $13.9 million, as the Company believes that it is more
likely than not that it will not be able to realize this asset.
Pursuant to paragraphs 20 to 25 of Statement of Financial Accounting
Standards No. 109, the Company 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 the Company's decision to record a full
valuation allowance were (i) the substantial restrictions on the use of its
existing net operation loss (NOL) carryforwards and (ii) the uncertainty of
future profitability.
As a result of the 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. 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. 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 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 full 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.
F-11
<PAGE> 35
The difference between the expected combined federal and state tax rate and
the Company's effective tax rate in 1999 relates primarily to the use of
currently-generated tax credits and tax assets acquired as a part of the Empire
acquisition (Note 3). The difference in 1998 and 1997 relates primarily to the
use of substantially all of the Company's unrestricted NOL carryforwards.
(6) COMMITMENTS AND CONTINGENCIES
(a) Leases
In March, 1999 the Company signed a 7 year operating lease for its principal
operating facilities. Following the abandonment of the Company's former office
space, the Company recorded a third quarter charge of $700,000, representing the
remaining lease commitment, less expected sublease income. The approximate
future minimum rental payments under both leases are as follows:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
2000.......................................... $ 1,773,000
2001.......................................... 2,321,000
2002.......................................... 2,327,000
2003.......................................... 2,036,000
2004.......................................... 2,073,000
Thereafter.................................... 3,218,000
-----------
$13,749,000
===========
</TABLE>
Rent expense was approximately $2.4 million, $464,000 and $346,000 for the
years ended December 31, 1999, December 31, 1998 and December 31, 1997,
respectively.
(b) Royalties
The Company has entered into several software license agreements that
provide the Company with exclusive worldwide licenses to distribute or utilize
certain patented computer software. The Company is required to pay royalties on
all related sales. Under one software license agreement, as amended, the Company
is obligated to make minimum quarterly royalty payments from 1995 through 1999.
The minimum payments 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 $1.0 million, $665,000 and
$903,000 for fiscal 1999, 1998 and 1997, respectively.
(c) Legal Proceedings
From time to time, the Company may be exposed to litigation relating to its
products and operations. The Company is not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company's financial conditions or results of operations.
(7) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Payroll and payroll-related................................. $1,932,735 $2,269,845
Royalties................................................... 569,656 412,656
Outside commissions......................................... 286,854 568,450
Customer deposits........................................... 142,224 254,340
Deferred rent............................................... 456,957 --
Loss on lease abandonment................................... 700,000 --
Other....................................................... 2,797,401 1,582,693
---------- ----------
$6,885,827 $5,087,984
========== ==========
</TABLE>
F-12
<PAGE> 36
(8) EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code covering all eligible employees, as defined. The Plan
allows for employees to defer a portion of their salary up to 15% of pretax
compensation. While the Company has the discretion to make contributions to the
plan, no such contributions were made in 1999, 1998 or 1997.
(9) VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts receivable
reserve account:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGES TO END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997.......................................... $ 210,116 $ 70,000 $ -- $ 280,116
1998.......................................... $ 280,116 $ 169,884 $ -- $ 450,000
1999.......................................... $ 450,000 $ 480,000 $ -- $ 930,000
</TABLE>
(10) SEGMENT REPORTING AND INTERNATIONAL INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information in the fiscal year ended December 31, 1998.
SFAS 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 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 how to allocate resources and assess
performance. The Company's chief decision making group, as defined under SFAS
131, is the Executive Management Committee. To date, the Executive Management
Committee has viewed the Company's operations as principally one segment,
software sales and associated services. As a result, the financial information
disclosed herein, materially represents all of the financial information related
to the Company's principal operating segment. Revenues from international
locations were $16.3 million, $7.3 million and $2.4 million in 1999, 1998 and
1997, respectively. The Company's revenues from international locations were
primarily generated from customers located in Europe. Revenues from customers
located in Europe accounted for 13.1%, 12.6% and 10.3% of total revenues in
1999, 1998 and 1997, respectively. No one country accounts for greater than 10%
of total revenues. Substantially all of the Company's assets are located in the
United States.
(11) SUBSEQUENT EVENT
On February 4, 2000 the Company completed a merger with privately-held
FirstSense Software. FirstSense is a provider of application and service
response management solutions. The Company has reserved for issuance in
connection with the merger, 1,940,000 shares of Concord's common stock. The
transaction is being accounted for as a pooling-of-interests.
F-13
<PAGE> 37
CONCORD COMMUNICATIONS, INC.
FORM 10-K, December 31, 1999
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 28th day of March, 2000.
Concord Communications, Inc.
/s/ Gary E. Haroian
--------------------------------------
Name: Gary E. Haroian
Title: Sr. Vice President of Finance
and Chief Financial Officer
(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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John A. Blaeser Chief Executive Officer, 03/28/00
--------------------------- President and Director
John A. Blaeser (Principal Executive Officer)
/s/ Gary E. Haroian Chief Financial Officer, Sr. Vice 03/28/00
--------------------------- President of Finance,
Gary E. Haroian Treasurer and Clerk
(Principal Financial and
Accounting Officer)
/s/ Frederick W.W. Bolander Director 03/28/00
---------------------------
Frederick W.W. Bolander
/s/ Richard M. Burnes, Jr. Director 03/28/00
---------------------------
Richard M. Burnes, Jr.
/s/ Robert C. Hawk Director 03/28/00
---------------------------
Robert C. Hawk
/s/ John Robert Held Director 03/28/00
---------------------------
John Robert Held
/s/ Deepak Kamra Director 03/28/00
---------------------------
Deepak Kamra
/s/ Robert M. Wadsworth Director 03/28/00
---------------------------
Robert M. Wadsworth
</TABLE>
<PAGE> 38
EXHIBIT INDEX
The following designated exhibits are either filed herewith or, where
information is provided under the SEC Document Reference heading corresponding
to such exhibit, incorporated by reference to such filing.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION SEC DOCUMENT REFERENCE
----------- ----------- ----------------------
<S> <C> <C>
3.01 Restated Articles of Organization of the Company 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
and Silicon Valley Bank dated April 3, 1997 Exhibit No. 10.01 to Registration Statement on Form S-1
(No. 333-33227)
10.02 Revolving Promissory Note made by the Company in
favor of Silicon Valley Bank Exhibit No. 10.02 to Registration Statement on Form S-1
(No. 333-33227)
10.03 Equipment Line of Credit Letter Agreement between the
Company and Fleet Bank dated as of June 9, 1997 Exhibit No. 10.03 to Registration Statement on Form S-1
(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 and March 1, 1999
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
Mutual Life Insurance Company dated March 17, 1994,
as amended on March 25,1997 Exhibit No. 10.09 to Registration Statement on Form S-1
(No. 333-33227)
10.11 First Amendment to Lease Agreement between the
Company and John Hancock Mutual Life Insurance Exhibit No. 10.10 to Registration Statement on Form S-1
Company dated March 25, 1997 (No. 333-33227)
10.12 Form of Indemnification Agreement for directors and
officers of the Company Exhibit No. 10.11 to Registration Statement on Form S-1
(No. 333-33227)
10.13 Restated Common Stock Registration Rights Agreement
between the Company and certain investors dated Exhibit No. 10.12 to Registration Statement on Form S-1
August 7, 1986 (No. 333-33227)
10.14 Amended and Restated Registration Rights Agreement
between the Company and certain investors dated Exhibit No. 10.13 to Registration Statement on Form S-1
December 28, 1995 (No. 333-33227)
10.15 Management Change in Control Agreement between the
Company and John A. Blaeser dated as of August 7, 1997 Exhibit No. 10.14 to Registration Statement on Form S-1
(No. 333-33227)
10.16 Management Change in Control Agreement between the
Company and Kevin J. Conklin dated as of July 23, 1997 Exhibit No. 10.15 to Registration Statement on Form S-1
(No. 333-33227)
10.17 Management Change in Control Agreement between the
Company and Ferdinand Engel dated as of July 23, 1997 Exhibit No. 10.16 to Registration Statement on Form S-1
(No. 333-33227)
10.18 Management Change in Control Agreement between the
Company and Gary E. Haroian dated as of July 23, 1997 Exhibit No. 10.17 to Registration Statement on Form S-1
(No. 333-33227)
10.19 Management Change in Control Agreement between the
Company and Daniel D. Phillips, Jr. dated as of July Exhibit No. 10.18 to Registration Statement on Form S-1
23, 1997 (No. 333-33227)
10.20 Stock Option Agreement dated January 1, 1996 between
the Company and John A. Blaeser Exhibit No. 10.19 to Registration Statement on Form S-1
(No. 333-33227)
10.21 Stock Option Agreement dated January 1, 1996 between
the Company and John A. Blaeser Exhibit No. 10.20 to Registration Statement on Form S-1
(No. 333-33227)
10.22 Letter Agreement between the Company and Silicon Valley Bank
dated March 25, 1996 together with the
Loan Modification Agreement dated November 14, 1996 Exhibit No. 10.21 to Registration Statement on Form S-1
(No. 333-33227)
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
* 13.01 Pages 17-22 of Registrant's 1999 Annual Report to
Stockholders
21.01 Subsidiaries of the Company
23.01 Consent of Arthur Andersen LLP
27.01 Financial Data Schedule
</TABLE>
* filed herewith
<PAGE> 1
EXHIBIT 10.06
CONCORD COMMUNICATIONS, INC.
1997 STOCK PLAN
(AS AMENDED ON MARCH 12, 1998 AND MARCH 1, 1999)
1. PURPOSE; TERMINATION OF PRIOR PLAN. The purpose of the 1997 Stock Plan
(the "Plan") is to encourage key employees of Concord Communications, Inc. (the
"Company") and of any present or future parent or subsidiary of the Company
(collectively, "Related Corporations") and other individuals who render services
to the Company or a Related Corporation, by providing opportunities to
participate in the ownership of the Company and its future growth through (a)
the grant of options which qualify as "incentive stock options" ("ISOs") under
Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code");
(b) the grant of options which do not qualify as ISOs ("Non-Qualified Options");
(c) awards of stock in the Company ("Awards"); and (d) opportunities to make
direct purchases of stock in the Company ("Purchases"). Both ISOs and
Non-Qualified Options are referred to hereafter individually as an "Option" and
collectively as "Options." Options, Awards and authorizations to make Purchases
are referred to hereafter collectively as "Stock Rights." As used herein, the
terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary
corporation," respectively, as those terms are defined in Section 424 of the
Code. The Company's 1995 Stock Plan (the "1995 Stock Plan") is terminated
effective as of October 16, 1997 and henceforth, the Company shall make no
grants under the 1995 Stock Plan. The 1995 Stock Plan shall, however, continue
to govern all options, awards and other grants granted and outstanding under the
1995 Stock Plan.
2. ADMINISTRATION OF THE PLAN.
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be
administered by the Board of Directors of the Company (the "Board")
or, subject to paragraph 2(D) (relating to compliance with Section
162(m) of the Code), by a committee appointed by the Board of two or
more of its members (the "Committee"). Hereinafter, all references in
this Plan to the "Committee" shall mean the Board if no Committee has
been appointed. Subject to ratification of the grant or authorization
of each Stock Right by the Board (if so required by applicable state
law), and subject to the terms of the Plan, the Committee shall have
the authority to (i) determine to whom (from among the class of
employees eligible under paragraph 3 to receive ISOs) ISOs shall be
granted, and to whom (from among the class of individuals and entities
eligible under paragraph 3 to receive Non-Qualified Options and Awards
and to make Purchases) Non-Qualified Options, Awards and
authorizations to make Purchases may be granted; (ii) determine the
time or times at which Options or Awards shall be granted or Purchases
made; (iii) determine the purchase price of shares subject to each
Option or Purchase, which prices shall not be less than the minimum
price specified in paragraph 6; (iv) determine whether each Option
granted shall be an ISO or a Non-Qualified Option; (v) determine
(subject to paragraph 7) the time or times when each Option shall
become exercisable and the duration of the exercise period; (vi)
determine whether restrictions such as repurchase options are to be
imposed on shares subject to Options, Awards and Purchases and the
nature of such restrictions, if any; and (vii) interpret the Plan and
prescribe and rescind rules and regulations relating to it. If the
Committee determines to issue a Non-Qualified Option, it shall take
whatever actions it deems necessary, under Section 422 of the Code and
the regulations promulgated thereunder, to ensure that such Option is
not treated as an ISO. The interpretation and construction by the
Committee of any provisions of the Plan or of any Stock Right granted
under it shall be final unless otherwise determined by the Board. The
Committee may from time to time adopt such rules and regulations for
carrying out the Plan as it may deem best. No member of the Board or
of the Committee shall be liable for any action or determination made
in good faith with respect to the Plan or any Stock Right granted
under it.
B. COMMITTEE ACTIONS. The Committee may select one of its
members as its chairman, and shall hold meetings at such time and
places as it may determine. A majority of the Committee shall
constitute a quorum and acts of a majority of the members of the
Committee at a meeting at which a quorum is present, or acts reduced
to or approved in writing by all the members of the Committee (if
consistent with applicable state law), shall be the valid acts of the
Committee. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with
or without cause) and appoint new members
<PAGE> 2
in substitution therefor, fill vacancies however caused, or remove all
members of the Committee and thereafter directly administer the Plan.
C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Notwithstanding the
provisions of paragraph 2.A., no Stock Rights shall be granted to any
person who is, at the time of the proposed grant, a member of the
Board unless such grant is approved by a majority vote of the
disinterested members of the Board. All grants of Stock Rights to
members of the Board shall in all respects be made in accordance with
the provisions of this Plan applicable to other eligible persons.
Members of the Board who either (i) are eligible to receive grants of
Stock Rights pursuant to the Plan or (ii) have been granted Stock
Rights may vote on any matters affecting the administration of the
Plan or the grant of any Stock Rights pursuant to the Plan, except
that no such member shall act upon the granting to himself or herself
of Stock Rights, but any such member may be counted in determining the
existence of a quorum at any meeting of the Board during which action
is taken with respect to the granting to such member of Stock Rights.
Notwithstanding any other provision of this paragraph 2, in the event
the Company registers any class of any equity security pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), any grants to members of the Board of Options made at
any time from the effective date of such registration until six months
after the termination of such registration shall be made only by the
Board; provided, however, that if a majority of the Board is eligible
to participate in the Plan or in any other stock option or other stock
plan of the Company or any of its affiliates, or has been so eligible
at any time within the preceding year, any grant to directors of
Options must be made by, or only in accordance with the recommendation
of, a Committee consisting of three or more persons, who may but need
not be members of the Board or employees of the Company, appointed by
the Board but having full authority to act in the matter, none of whom
is eligible to participate in this Plan or any other stock option or
other stock plan of the Company or any of its affiliates, or has been
eligible at any time within the preceding year. The requirements
imposed by the preceding sentence shall also apply with respect to
grants to officers who are not also members of the Board. Once
appointed, the Committee shall continue to serve until otherwise
directed by the Board.
D. PERFORMANCE-BASED COMPENSATION. The Board, in its
discretion, may take such action as may be necessary to ensure that
Stock Rights granted under the Plan qualify as "qualified
performance-based compensation" within the meaning of Section 162(m)
of the Code and applicable regulations promulgated thereunder
("Performance-Based Compensation"). Such action may include, in the
Board's discretion, some or all of the following (i) if the Board
determines that Stock Rights granted under the Plan generally shall
constitute Performance-Based Compensation, the Plan shall be
administered, to the extent required for such Stock Rights to
constitute Performance-Based Compensation, by a Committee consisting
solely of two or more "outside directors" (as defined in applicable
regulations promulgated under Section 162(m) of the Code), (ii) if any
Non-Qualified Options with an exercise price less than the fair market
value per share of Common Stock are granted under the Plan and the
Board determines that such Options should constitute Performance-Based
Compensation, such options shall be made exercisable only upon the
attainment of a pre-established, objective performance goal
established by the Committee, and such grant shall be submitted for,
and shall be contingent upon shareholder approval and (iii) Stock
Rights granted under the Plan may be subject to such other terms and
conditions as are necessary for compensation recognized in connection
with the exercise or disposition of such Stock Right or the
disposition of Common Stock acquired pursuant to such Stock Right, to
constitute Performance-Based Compensation.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees
of the Company or any Related Corporation. Non-Qualified Options, Awards and
authorizations to make Purchases may be granted to any employee, officer or
director (whether or not also an employee) or consultant of the Company or any
Related Corporation. The Committee may take into consideration a recipient's
individual circumstances in determining whether to grant a Stock Right. The
granting of any Stock Right to any individual or entity shall neither entitle
that individual or entity to, nor disqualify such individual or entity from,
participation in any other grant of Stock Rights.
<PAGE> 3
4. STOCK. The stock subject to Stock Rights shall be authorized but
unissued shares of Common Stock of the Company, par value $.01 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company in any
manner. The aggregate number of shares which may be issued pursuant to the Plan
is 2,500,000, subject to adjustment as provided in paragraph 13. If any Option
granted under the Plan shall expire or terminate for any reason without having
been exercised in full or shall cease for any reason to be exercisable in whole
or in part or shall be repurchased by the Company, the unpurchased shares of
Common Stock subject to such Option shall again be available for grants of Stock
Rights under the Plan.
No employee of the Company or any Related Corporation may be granted
Options to acquire, in the aggregate, more than 70% of the aggregate number of
shares of Common Stock which may be issued pursuant to the Plan during any
fiscal year of the Company. If any Option granted under the Plan shall expire or
terminate for any reason without having been exercised in full or shall cease
for any reason to be exercisable in whole or in part or shall be repurchased by
the Company, the shares subject to such Option shall be included in the
determination of the aggregate number of shares of Common Stock deemed to have
been granted to such employee under the Plan.
5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan
at any time on or after October 16, 1997 and prior to October 15, 2007. The date
of grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant.
6. MINIMUM OPTION PRICE; ISO LIMITATIONS.
A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS AND PURCHASES.
Subject to paragraph 2(D) (relating to compliance with Section 162(m)
of the Code), the exercise price per share specified in the agreement
relating to each Non-Qualified Option granted, and the purchase price
per share of stock granted in any Award or authorized as a Purchase,
under the Plan may be less than the fair market value of the Common
Stock of the Company on the date of grant; provided that, in no event
shall such exercise price or such purchase price be less than the
lesser of (i) the book value per share of Common Stock as of the end
of the fiscal year of the Company immediately preceding the date of
such grant, or (ii) 50 percent of the fair market value per share of
Common Stock on the date of such grant.
B. PRICE FOR ISOS. The exercise price per share specified in
the agreement relating to each ISO granted under the Plan shall not be
less than the fair market value per share of Common Stock on the date
of such grant. In the case of an ISO to be granted to an employee
owning stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any
Related Corporation, the price per share specified in the agreement
relating to such ISO shall not be less than one hundred ten percent
(110%) of the fair market value per share of Common Stock on the date
of grant. For purposes of determining stock ownership under this
paragraph, the rules of Section 424(d) of the Code shall apply.
C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible
employee may be granted Options treated as ISOs only to the extent
that, in the aggregate under this Plan and all incentive stock option
plans of the Company and any Related Corporation, ISOs do not become
exercisable for the first time by such employee during any calendar
year with respect to stock having a fair market value (determined at
the time the ISOs were granted) in excess of $100,000. The Company
intends to designate any Options granted in excess of such limitation
as Non-Qualified Options, and the Company shall issue separate
certificates to the optionee with respect to Options that are
Non-Qualified Options and Options that are ISOs.
D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an
Option is granted under the Plan, the Company's Common Stock is
publicly traded, "fair market value" shall be determined as of the
date of grant or, if the prices or quotes discussed in this sentence
are unavailable for such date, the last business day for which such
prices or quotes are available prior to the date of grant and shall
mean (i) the average (on that date) of the high and low prices of the
Common Stock on the principal national securities exchange on which
the Common Stock is
<PAGE> 4
traded, if the Common Stock is then traded on a national securities
exchange; or (ii) the last reported sale price (on that date) of the
Common Stock on the Nasdaq National Market, if the Common Stock is not
then traded on a national securities exchange; or (iii) the closing
bid price (or average of bid prices) last quoted (on that date) by an
established quotation service for over-the-counter securities, if the
Common Stock is not reported on the Nasdaq National Market. If the
Common Stock is not publicly traded at the time an Option is granted
under the Plan, "fair market value" shall mean the fair value of the
Common Stock as determined by the Committee after taking into
consideration all factors which it deems appropriate, including,
without limitation, recent sale and offer prices of the Common Stock
in private transactions negotiated at arm's length.
7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee, but not more than (i) ten
years from the date of grant in the case of Options generally and (ii) five
years from the date of grant in the case of ISOs granted to an employee owning
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, as determined
under paragraph 6(B). Subject to earlier termination as provided in paragraphs 9
and 10, the term of each ISO shall be the term set forth in the original
instrument granting such ISO, except with respect to any part of such ISO that
is converted into a Non-Qualified Option pursuant to paragraph 16.
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through
12, each Option granted under the Plan shall be exercisable as follows:
A. VESTING. The Option shall either be fully exercisable on the
date of grant or shall become exercisable thereafter in such
installments as the Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable, it shall remain exercisable until expiration or
termination of the Option, unless otherwise specified by the
Committee.
C. PARTIAL EXERCISE. Each Option or installment may be
exercised at any time or from time to time, in whole or in part, for
up to the total number of shares with respect to which it is then
exercisable.
D. ACCELERATION OF VESTING. The Committee shall have the right
to accelerate the date that any installment of any Option becomes
exercisable; provided that the Committee shall not, without the
consent of an optionee, accelerate the permitted exercise date of any
installment of any Option granted to any employee as an ISO (and not
previously converted into a Non-Qualified Option pursuant to paragraph
16) if such acceleration would violate the annual vesting limitation
contained in Section 422(d) of the Code, as described in paragraph
6(C).
9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the agreement
relating to such ISO, if an ISO optionee ceases to be employed by the Company
and all Related Corporations other than by reason of death or disability as
defined in paragraph 10, no further installments of his or her ISOs shall become
exercisable, and his or her ISOs shall terminate after the passage of 60 days
from the date of termination of his or her employment, but in no event later
than on the specified expiration dates of such ISOs, except to the extent that
such ISOs (or unexercised installments thereof) have been converted into
Non-Qualified Options pursuant to paragraph 16. For purposes of this paragraph
9, a leave of absence with the written approval of the Committee shall not be
considered an interruption of employment under the Plan, provided that such
written approval contractually obligates the Company or any Related Corporation
to continue the employment of the employee after the approved period of absence.
Employment shall also be considered as continuing uninterrupted during any other
bona fide leave of absence (such as those attributable to illness, military
obligations or governmental service) provided that the period of such leave does
not exceed 90 days or, if longer, any period during which such optionee's right
to reemployment is guaranteed by statute or by contract. A bona fide leave of
absence with the written approval of the Committee shall not be considered an
interruption of employment under this paragraph 9, provided that such written
approval contractually obligates the Company or any Related Corporation to
continue the employment of the
<PAGE> 5
optionee after the approved period of absence. ISOs granted under the Plan shall
not be affected by any change of employment within or among the Company and
Related Corporations, so long as the optionee continues to be an employee of the
Company or any Related Corporation. Nothing in the Plan shall be deemed to give
any grantee of any Stock Right the right to be retained in employment or other
service by the Company or any Related Corporation for any period of time.
10. DEATH; DISABILITY.
A. DEATH. If an ISO optionee ceases to be employed by the
Company and all Related Corporations by reason of his or her death,
any ISO owned by such optionee may be exercised, to the extent
otherwise exercisable on the date of death, by the estate, personal
representative or beneficiary who has acquired the ISO by will or by
the laws of descent and distribution, at any time prior to the earlier
of (i) the specified expiration date of the ISO or (ii) 180 days from
the date of the optionee's death.
B. DISABILITY. If an ISO optionee ceases to be employed by the
Company and all Related Corporations by reason of his or her
disability, such optionee shall have the right to exercise any ISO
held by him or her on the date of termination of employment, for the
number of shares for which he or she could have exercised it on that
date, at any time prior to the earlier of (i) the specified expiration
date of the ISO or (ii) 180 days from the date of the termination of
the optionee's employment. For the purposes of the Plan, the term
"disability" shall mean "permanent and total disability" as defined in
Section 22(e)(3) of the Code or any successor statute.
11. ASSIGNABILITY. No ISO shall be assignable or transferable by the
optionee except by will or by the laws of descent and distribution, and during
the lifetime of the optionee shall be exercisable only by such optionee. Stock
Rights other than ISOs shall be transferable to the extent set forth in the
agreement relating to such Stock Right.
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any
Non-Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to time confer authority
and responsibility on one or more of its own members and/or one or more officers
of the Company to execute and deliver such instruments. The proper officers of
the Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common
Stock shall be subdivided or combined into a greater or smaller number
of shares or if the Company shall issue any shares of Common Stock as
a stock dividend on its outstanding Common Stock, the number of shares
of Common Stock deliverable upon the exercise of Options shall be
appropriately increased or decreased proportionately, and appropriate
adjustments shall be made in the purchase price per share to reflect
such subdivision, combination or stock dividend.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be
consolidated with or acquired by another entity in a merger or other
reorganization in which the holders of the outstanding voting stock of
the Company immediately preceding the consummation of such event,
shall, immediately following such event, hold, as a group, less than a
majority of the voting securities of the surviving or successor
entity, or in the event of a sale of all or substantially all of the
Company's assets or otherwise (each, an "Acquisition"), the Committee
may take one or more
<PAGE> 6
of the following actions: (i) provide for the acceleration and/or
termination of any time period relating to the exercise of the
Options, (ii) provide for the purchase of the Options, upon the
optionee's request, for the amount in cash that could have been
received upon the exercise of the Options and sale of the shares
obtained thereby, (iii) adjust the terms of the Options in a manner
determined by the Committee, (iv) cause the Options to be assumed, or
new rights substituted therefor, by another entity or (v) make such
other provision as the Committee may consider equitable and in the
best interests of the Company.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a
transaction described in subparagraph B above) pursuant to which
securities of the Company or of another corporation are issued with
respect to the outstanding shares of Common Stock, an optionee upon
exercising an Option shall be entitled to receive for the purchase
price paid upon such exercise the securities he or she would have
received if he or she had exercised such Option prior to such
recapitalization or reorganization.
D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any
adjustments made pursuant to subparagraphs A, B or C with respect to
ISOs shall be made only after the Committee, after consulting with
counsel for the Company, determines whether such adjustments would
constitute a "modification" of such ISOs (as that term is defined in
Section 424 of the Code) or would cause any adverse tax consequences
for the holders of such ISOs. If the Committee determines that such
adjustments made with respect to ISOs would constitute a modification
of such ISOs or would cause adverse tax consequences to the holders,
it may refrain from making such adjustments.
E. RESTRICTED SECURITIES. If any person or entity owning
restricted Common Stock obtained by exercise of an Option made
hereunder receives new or additional or different shares or securities
("New Securities") in connection with a transaction described in
subparagraphs A, B or C above, as a result of owning such restricted
Common Stock, such New Securities shall be subject to all of the
conditions and restrictions applicable to the restricted Common Stock
with respect to which such New Securities were issued.
F. ISSUANCES OF SECURITIES. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect
to, the number or price of shares subject to Options. No adjustments
shall be made for dividends paid in cash or in property other than
securities of the Company.
G. FRACTIONAL SHARES. No fractional shares shall be issued
under the Plan. Any fractional shares which, but for this subparagraph
G, would have been issued to an optionee pursuant to an Option, shall
be deemed to have been issued and immediately sold to the Company for
their fair market value, and the optionee shall receive from the
Company cash in lieu of such fractional shares.
H. ADJUSTMENTS. Upon the happening of any of the events
described in subparagraphs A, B or C above, the class and aggregate
number of shares set forth in paragraph 4 hereof that are subject to
Stock Rights which previously have been or subsequently may be granted
under the Plan shall also be appropriately adjusted to reflect the
events described in such subparagraphs. The Committee shall determine
the specific adjustments to be made under this paragraph 13 and,
subject to paragraph 2, its determination shall be conclusive.
14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment
thereof) shall be exercised by giving written notice to the Company at its
principal office address, or to such transfer agent as the Company shall
designate. Such notice shall identify the Option being exercised and specify the
number of shares as to which such Option is being exercised, accompanied by full
payment of the purchase price therefor either (a) in United States dollars in
cash or by check, (b) at the discretion of the Committee, through delivery of
shares of Common Stock having a fair market value equal as of the date of the
exercise to the cash exercise price of the Option, (c) at
<PAGE> 7
the discretion of the Committee, by delivery of the optionee's personal recourse
note bearing interest payable not less than annually at no less than 100% of the
lowest applicable Federal rate, as defined in Section 1274(d) of the Code, (d)
at the discretion of the Committee and consistent with applicable law, through
the delivery of an assignment to the Company of a sufficient amount of the
proceeds from the sale of the Common Stock acquired upon exercise of the Option
and an authorization to the broker or selling agent to pay that amount to the
Company, which sale shall be at the participant's direction at the time of
exercise, or (e) at the discretion of the Committee, by any combination of (a),
(b), (c) and (d) above. If the Committee exercises its discretion to permit
payment of the exercise price of an ISO by means of the methods set forth in
clauses (b), (c), (d) or (e) of the preceding sentence, such discretion shall be
exercised in writing at the time of the grant of the ISO in question. The holder
of an Option shall not have the rights of a shareholder with respect to the
shares covered by such Option until the date of issuance of a stock certificate
to such holder for such shares. Except as expressly provided above in paragraph
13 with respect to changes in capitalization and stock dividends, no adjustment
shall be made for dividends or similar rights for which the record date is
before the date such stock certificate is issued.
15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board in July
1997 and by the stockholders of the Company on September 9, 1997. The Plan was
amended on March 12, 1998 to increase the number of shares authorized for
issuance under the Plan by 750,000 shares to 1,500,000, and such amendment was
approved by the stockholders of the Company at the Annual Meeting held on April
30, 1998. On March 1, 1999, the Board of Directors further amended the Plan to
increase the number of shares authorized for issuance under the Plan by
1,000,000 shares to 2,500,000 shares and to make certain other minor
modifications, subject to approval of the amendment of the Plan by the
stockholders of the Company at the next Meeting of Stockholders. If the approval
of the amendment by the stockholders is not obtained prior to March 1, 2000, any
grants of ISOs under the Plan which include shares from the additional number of
shares authorized by the amendment made prior to that date but subsequent to the
date of the amendment will be rescinded. The Plan shall expire at the end of the
day on October 15, 2007 (except as to Options outstanding on that date). Subject
to the provisions of paragraph 5 above, Options may be granted under the Plan
prior to the date of stockholder approval of the Plan. The Board may terminate
or amend the Plan in any respect at any time, except that, without the approval
of the stockholders obtained within 12 months before or after the Board adopts a
resolution authorizing any of the following actions: (a) the total number of
shares that may be issued under the Plan may not be increased (except by
adjustment pursuant to paragraph 13); (b) the provisions of paragraph 3
regarding eligibility for grants of ISOs may not be modified; (c) the provisions
of paragraph 6(B) regarding the exercise price at which shares may be offered
pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph
13); and (d) the expiration date of the Plan may not be extended. Except as
otherwise provided in this paragraph 15, in no event may action of the Board or
stockholders alter or impair the rights of a grantee, without such grantee's
consent, under any Stock Right previously granted to such grantee.
16. MODIFICATIONS OF ISOS; CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS.
Subject to paragraph 13(D), without the prior written consent of the holder of
an ISO, the Committee shall not alter the terms of such ISO (including the means
of exercising such ISO) if such alteration would constitute a modification
(within the meaning of Section 424(h)(3) of the Code). The Committee, at the
written request or with the written consent of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period of such ISOs. At the time of such conversion, the Committee (with the
consent of the optionee) may impose such conditions on the exercise of the
resulting Non-Qualified Options as the Committee in its discretion may
determine, provided that such conditions shall not be inconsistent with this
Plan. Nothing in the Plan shall be deemed to give any optionee the right to have
such optionee's ISOs converted into Non-Qualified Options, and no such
conversion shall occur until and unless the Committee takes appropriate action.
Upon the taking of such action, the Company shall issue separate certificates to
the optionee with respect to Options that are Non-Qualified Options and Options
that are ISOs. The Committee, with the consent of the optionee, may also
terminate any portion of any ISO that has not been exercised at the time of such
conversion.
17. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.
<PAGE> 8
18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO
granted under the Plan, each optionee agrees to notify the Company in writing
immediately after such optionee makes a Disqualifying Disposition (as described
in Sections 421, 422 and 424 of the Code and regulations thereunder) of any
stock acquired pursuant to the exercise of ISOs granted under the Plan. A
Disqualifying Disposition is generally any disposition occurring on or before
the later of (a) the date two years following the date the ISO was granted or
(b) the date one year following the date the ISO was exercised.
19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option, the transfer of a Non-Qualified Stock Option pursuant to
an arm's-length transaction, the grant of an Award, the making of a Purchase of
Common Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 18), the vesting or transfer of restricted
stock or securities acquired on the exercise of an Option hereunder, or the
making of a distribution or other payment with respect to such stock or
securities, the Company may withhold, or may require the grantee to pay,
additional withholding taxes in respect of amounts that constitute compensation
includible in gross income. The Committee in its discretion may condition (i)
the exercise of an Option, (ii) the transfer of a Non-Qualified Stock Option,
(iii) the grant of an Award, (iv) the making of a Purchase of Common Stock for
less than its fair market value, or (v) the vesting or transferability of
restricted stock or securities acquired by exercising an Option, on the
grantee's making satisfactory arrangement for such withholding. Such arrangement
may include payment by the grantee in cash or by check of the amount of the
withholding taxes or, at the discretion of the Committee, by the grantee's
delivery of previously held shares of Common Stock or the withholding from the
shares of Common Stock otherwise deliverable upon exercise of a Option shares
having an aggregate fair market value equal to the amount of such withholding
taxes.
20. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares. Government regulations may impose reporting or other
obligations on the Company with respect to the Plan. For example, the Company
may be required to send tax information statements to employees and former
employees that exercise ISOs under the Plan, and the Company may be required to
file tax information returns reporting the income received by grantees of
Options in connection with the Plan.
21. GOVERNING LAW. The validity and construction of the Plan and the
instruments evidencing Stock Rights shall be governed by the laws of the
Commonwealth of Massachusetts, or the laws of any jurisdiction in which the
Company or its successors in interest may be organized.
<PAGE> 1
Exhibit 13.01
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company develops, markets and supports next-generation performance
management solutions. Substantially all of the Company's revenues have been
derived from the Network Health product family which began shipping in the first
quarter of 1995.
The Company does not provide forecasts of its future financial performance. From
time to time, however, the information provided by the Company or statements
made by its employees may contain forward looking statements. In particular,
some statements contained in this Annual Report and the Company's Form 10-K, for
the fiscal year ended December 31, 1999, 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; expenses associated with Year 2000 and the
Company'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 October 19, 1999, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") providing for the merger (the "Merger")
of E Acquisition Corp., a Georgia corporation and wholly-owned subsidiary of the
Company ("Merger Sub"), with and into Empire Technologies, Inc. ("Empire"). The
Merger was effected on October 29, 1999 (the "Effective Date") pursuant to a
Certificate of Merger filed with the Secretary of State of the State of Georgia
on that date. Pursuant to the Merger Agreement, at the effective time of the
Merger, each issued and outstanding share of the common stock, no par value per
share, of Empire (the "Empire Common Stock") was converted into 815,248 shares
of common stock, $.01 par value per share, of the Company (the "Concord Common
Stock"). 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. Empire is a provider
of solutions for proactive self-management of UNIX and Windows NT systems, as
well as mission-critical applications. The Merger was accounted for as a
pooling-of-interests. All transactions between the two companies have been
eliminated in the combined results. The Results of Operations reflect these
combined results.
SUBSEQUENT EVENT
On February 4, 2000, the Company completed a merger with privately-held
FirstSense Software, Inc. FirstSense is a provider of application and service
response management solutions. The Company has reserved for issuance in
connection with the merger, 1,940,000 shares of Concord's common stock. The
transaction is being accounted for as a pooling-of-interests.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as percentages of the Company's total revenue. All prior-period
financial statements presented have been reinstated for the acquisition of
Empire Technologies, Inc. (See Note 3 to financial statements).
Fiscal Year
1999 1998 1997
- --------------------------------------------------------------------------------
Revenues:
License revenues 78.3 % 83.5 % 89.2 %
Service revenues 21.7 % 16.5 % 10.8 %
---------------------------------------
Total revenues 100.0 % 100.0 % 100.0 %
Cost of revenues 12.0 % 11.3 % 14.1 %
---------------------------------------
Gross Profit 88.0 % 88.7 % 85.9 %
---------------------------------------
Operating expenses:
Research and development 16.9 % 17.8 % 24.5 %
Sales and marketing 38.1 % 42.3 % 49.2 %
General and administrative 5.5 % 6.8 % 10.0 %
Stock-based compensation 3.8 % 2.4 % --
Acquisition-related charges 0.8 % -- --
---------------------------------------
Operating income 22.9 % 19.5 % 2.2 %
Other income, net 4.6 % 5.5 % 1.5 %
---------------------------------------
Income before income taxes 27.5 % 25.0 % 3.7 %
Provision for income taxes 8.8 % 1.3 % --
---------------------------------------
Net income 18.7 % 23.7 % 3.7 %
---------------------------------------
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") No. 97-2, Software Revenue Recognition, as modified by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition with respect to Certain
Transactions. 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 $16.3 million, $7.3 million and $2.4 million of
revenues from international locations in 1999, 1998 and 1997, representing
24.2%, 17.6% and 11.6% 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 13.1%, 12.6% and
10.3% of total revenues in 1999, 1998 and 1997, respectively. The continued
increase in revenues from international locations as a percentage of total
revenues is primarily the result of the Company'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 agreements. The
Company believes that continued growth and profitability will require further
expansion of its sales in international markets. The Company expects to commit
additional time and development resources to customizing its products and
services for selected international markets.
TOTAL REVENUES
Total revenues were $67.3 million, $41.5 million and $20.7 million in 1999, 1998
and 1997, respectively, representing increases of 62.4% from 1998 to 1999 and
100.5% from 1997 to 1998.
LICENSE REVENUES
The Company's license revenues are derived from the licensing of software
products. License revenues were $52.7 million, $34.6 million and $18.5 million,
in 1999, 1998 and 1997, respectively, representing increases of 52.3% from 1998
to 1999 and 87.5% from 1997 to 1998. License revenues accounted for 78.3%, 83.5%
and 89.2% of total revenues in 1999, 1998 and 1997, respectively. The increase
in license revenues in absolute dollars resulted from 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 1999.
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
SERVICE REVENUES
The Company's service revenues consist of fees for maintenance, training and
professional services. Service revenues were $14.6 million, $6.9 million and
$2.2 million in 1999, 1998 and 1997, respectively, representing increases of
113.4% from 1998 to 1999 and 208.2% from 1997 to 1998. Service revenues
accounted for 21.7%, 16.5% and 10.8% of total revenues in 1999, 1998 and 1997,
respectively. The increase in service revenues was attributed to an increase in
revenue from maintenance contracts, training and professional services generated
by new and existing service offerings into an expanded installed customer 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 services contracts. Royalty costs are composed of third party
software costs. Cost of revenues were $8.1 million, $4.7 million and $2.9
million in 1999, 1998 and 1997, respectively, representing increases of 72.9%
from 1998 to 1999 and 59.9% from 1997 to 1998. Cost of revenues accounted for
12.0%, 11.3% and 14.1% of total revenues in 1999, 1998 and 1997, respectively,
resulting in gross margins of 88.0%, 88.7% and 85.9% in each respective period.
The increase in cost of revenues, as well as the decrease in the gross margin
percentages from 1998 to 1999 was primarily the result of increased spending in
customer support to be more responsive to growing customer needs. The
improvement in the gross margin percentages from 1997 to 1998 was attributable
to lower royalty unit costs associated with the higher sales volumes during the
1998 period.
RESEARCH AND DEVELOPMENT
Expenses Research and development expenses consist primarily of personnel costs
associated with software development. Research and development expenses were
$11.4 million, $7.4 million and $5.1 million in 1999, 1998 and 1997,
respectively, representing an increase of 54.5% from 1998 to 1999 and 45.7% from
1997 to 1998. Research and development expenses accounted for 20.7%, 20.2% and
24.5% of total revenues in 1999, 1998 and 1997, respectively. The increase in
absolute dollars was primarily due to increased headcount in research and
development from 57 to 81 people from 1998 to 1999 and 42 to 57 people from 1997
to 1998. The Company anticipates that it will continue to commit substantial
resources to research and development in the future and that product development
expenses may increase in absolute dollars in future periods.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of salaries, commissions to sales
personnel and agents, travel, tradeshow participation, public relations and
other promotional expenses. Sales and marketing expenses were $25.7 million,
$17.5 million and $10.2 million in 1999, 1998 and 1997, respectively,
representing an increase of 46.6% from 1998 to 1999 and 72.2% from 1997 to 1998.
Sales and marketing expenses accounted for 38.1%, 42.3% and 49.2% of total
revenues in 1999, 1998 and 1997, respectively. The increase in absolute dollars
was primarily the result of increased headcount to continue to build the direct
sales force along with additional marketing and promotional activities to
penetrate the market. The decline in sales and marketing expenses as a
percentage of total revenues is due to sales productivity improvements resulting
from the expansion of the Network Health product family, increased revenues from
existing customers and improved lead generation. Headcount in sales and
marketing at the end of 1999, 1998 and 1997 was 119, 76 and 45 people,
respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of salaries for financial,
administrative and management personnel and related travel expenses, as well as
legal and accounting expenses. General and administrative expenses were $3.7
million, $2.8 million and $2.1 million in 1999, 1998 and 1997, respectively,
representing an increase of 31.3% from 1998 to 1999 and 36.1% from 1997 to 1998.
General and administrative expenses accounted for 5.5%, 6.8% and 10.0% of total
revenues in 1999, 1998 and 1997, respectively. The increase in absolute dollars
reflects personnel growth and associated costs in general support areas. General
and administrative expenses declined as a percentage of total revenues due to a
significant increase in revenues.
ACQUISITION-RELATED EXPENSES
Acquisition-related expenses included accounting, legal and investment banking
fees associated with the acquisition of Empire Technologies, Inc.
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. The
Company realized net other income of $3.1 million, $2.3 million and $306,000,
respectively, in 1999, 1998 and 1997.
INCOME TAXES
The difference between the expected combined federal and state tax rate and the
Company's effective tax rate in 1999 relates primarily to the use of
currently-generated tax credits and tax assets acquired as a part of the Empire
acquisition. The difference in 1998 and 1997 relates primarily to the use of
substantially all of the Company's unrestricted NOL carryforwards. In addition,
the Company received a tax benefit of approximately $500,000 pursuant to the
exercise of employee stock options in 1998 and a tax benefit of approximately
$4.9 million pursuant to the exercise of employee stock options in 1999. The
Company recorded this benefit as a component of additional paid-in capital.
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations, prior to its initial public offering,
primarily through the private sale of equity securities and a credit line for
equipment purchases. On October 24, 1997, the Company completed its initial
public offering of 3,335,000 shares of Common Stock at a price of $14.00 per
share. Of these shares, 2,735,000 were issued by the Company and 600,000 were
sold by selling shareholders. The Company received net proceeds of approximately
$34.7 million. The Company had working capital of $55.4 million at December 31,
1999.
Net cash provided by operating activities was $11.6 million, $16.1 million and
$2.3 million in 1999, 1998 and 1997, respectively. Cash, cash equivalents and
marketable securities were $62.0 million, $51.2 million and $36.9 million in
1999, 1998 and 1997, respectively. Deferred revenues increased for the year
ended December 31, 1999 by $4.4 million due to an increase in overall sales
activity; $4.1 million of this increase came from deferred maintenance contracts
and $294,000 was the result of service and software license sales with remaining
contingencies such as completion of services, product acceptance and credit
worthiness.
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 1999 and 1998 and from the proceeds from and repayments of bank
borrowings in connection with equipment purchases during 1997.
Pursuant to the Tax Reform Act of 1986, the utilization of net operating loss
carryforwards for tax purposes may be subject to an annual limitation if a
cumulative change of ownership of more than 50% occurs over a three-year period.
As a result of the Company's 1995 preferred stock financings, such a change in
ownership has occurred. As a result of this ownership change, the use of the net
operating loss carryforwards will be limited. The Company has determined that
its initial public offering did not cause another ownership change. The Company
has deferred tax assets of approximately $13.9 million composed primarily of net
operating loss carryforwards and research and development credits. The Company
has fully reserved for these deferred tax assets by recording a valuation
allowance of $13.9 million, as the Company believes that it is more likely than
not that it will not be able to realize this asset.
Pursuant to paragraphs 20 to 25 of Statement of Financial Accounting Standards
No. 109, the Company 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 the Company's decision to record a full valuation
allowance were (i) the substantial restrictions on the use of its existing net
operation loss (NOL) carryforwards and (ii) the uncertainty of future
profitability.
As a result of the 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. 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. The Company is also subject to rapid
technology changes, competition from substantially larger competitors, a limited
family of products and other related risks, as more thoroughly described 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 full 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 difference between the expected combined federal and state tax rate and the
Company's effective tax rate in 1999 relates primarily to the use of
currently-generated tax credits and tax assets acquired as a part of the Empire
acquisition. The difference in 1998 and 1997 relates primarily to the use of
substantially all of the Company's unrestricted NOL carryforwards.
In addition, the Company received a tax benefit of approximately $500,000
pursuant to the exercise of employee stock options in 1998 and a tax benefit of
approximately $4.9 million pursuant to the exercise of employee stock options in
1999. The Company recorded this benefit as a component of additional paid-in
capital.
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The Company's current export sales are denominated in United States dollars. To
the extent that international sales continue to be denominated in United States
dollars, an increase in the value of the United States dollar relative to other
currencies could make the Company's products and services more expensive and,
therefore, potentially less competitive in international markets.
As of December 31, 1999, the Company's principal sources of liquidity included
cash and marketable securities. The Company believes that its current cash and
market 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.
YEAR 2000 COMPLIANCE / YEAR 2000 READINESS DISCLOSURE STATEMENT
The Company was aware of the issues associated with the programming code in
existing computer systems and software products as the millennium (Year 2000)
approached. The Company set up a task force which consisted of the Director of
IT and Operations, the Manager of System Applications and representative
personnel from each functional area. This task force addressed the Year 2000
issue in the following categories: the Network Health product; internal business
computer systems and software applications; internal systems other than computer
hardware and software; and systems of the Company's external suppliers and
service providers. The Company also assessed its Year 2000 associated costs,
risks and potential contingency plans. Despite the Company's efforts with
respect to the Year 2000 issue, there can be no assurance that the Company's
business, results of operations or financial condition would not be materially
adversely affected by the failure of the Company's products, its internal
systems and applications or the systems of its third party suppliers and service
providers to properly operate or manage data beyond 1999.
NETWORK HEALTH PRODUCT
In 1997, the Company initiated the necessary development to ensure Year 2000
compliance in the Network Health family of applications and believes it has
achieved Year 2000 compliance in Network Health 4.1 which was released in August
1998. The Company's existing customers can receive this release, at no charge,
through their annual software maintenance contract. The Company requires its
customers to purchase software maintenance in order to receive product support.
Specifically, the Company defines Year 2000 Compliance as the following: no
value for current date will cause any interruption in operation; date-based
functionality must behave consistently for dates prior to, during, and after
Year 2000; in all interfaces and data storage, the century in any date must be
specified either explicitly or by unambiguous algorithms or inferencing rules;
Year 2000 must be recognized as a leap year. The Company's definition of Year
2000 Compliance is adopted from the British Standard Institute's Definition of
Year 2000 Conformity Requirements (PD2000-1). A copy of the standard is
available for review on the Company's website. The Company makes no guarantee
of, claims no responsibility for, and disclaims any liability to its customers,
with respect to Year 2000 compliance of operating platforms, hardware, software,
or other products not developed by the Company, including equipment monitored by
the Network Health product. None of the Company's customers have reported any
Year 2000 related problems with the Company's Network Health product.
INTERNAL BUSINESS COMPUTER SYSTEMS AND SOFTWARE APPLICATIONS
In 1998, the Company commenced a Year 2000 date conversion project to address
all internal existing computer systems, software applications, and related
computer equipment (e.g. printers) used in conjunction with its internal
operations. The Company identified, modified, upgraded, and/or replaced any
systems that had been identified as non-Year 2000 compliant to minimize the
possibility of a material disruption to its business. The Company finished
assessing all existing internal systems and completed the compliance process on
these systems before the end of 1999.
INTERNAL SYSTEMS OTHER THAN COMPUTER HARDWARE AND SOFTWARE
The operation of office and facilities equipment such as fax machines,
photocopiers, telephone switches, security systems, elevators, and other common
devices could also have been affected by the Year 2000 issue. The Company
identified and remedied any Year 2000 issues on its office and facilities
equipment.
SYSTEMS OF EXTERNAL SUPPLIERS AND SERVICE PROVIDERS
The Company initiated communications with third party suppliers of the
computers, software, and other equipment used, operated, or maintained by the
Company to identify and, to the extent possible, to resolve any issues regarding
the Year 2000 issue. The Company also initiated communications with facilities
service providers upon which the Company relies for daily operations. All
external suppliers and service providers had been asked to provide
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
a written assurance that they were also preparing to be Year 2000 compliant in a
timely manner, and that their products/services will be available to the Company
up to and beyond the Year 2000, without interruption. A response was received
from 100% of these suppliers and service providers. There were no Y2000
associated problems with systems operated by other companies upon which the
Company relies.
ASSOCIATED COSTS
To date, the Company has not incurred any material costs related to the
assessment, upgrade or replacement of existing systems identified as non-Year
2000 compliant. Management has assessed the total Year 2000 compliance expense
and found that the amounts required to be expensed in 1999 did not have an
adverse material effect on its business, results of operations or financial
condition.
ASSOCIATED RISKS
The Company believes it has identified and resolved all Year 2000 issues that
could have materially adversely affected its business, financial condition or
results of operations. However, management realizes it may not be possible to
determine, at this time, with complete certainty that all Year 2000 problems
affecting the Company were corrected. As a result, the Company could be at risk
of experiencing a significant number of operational inconveniences and
inefficiencies that may divert management's time and attention from its ordinary
business activities and at risk of experiencing a lesser number of serious
system or product failures that may require significant efforts by the Company
to prevent or alleviate material business disruptions.
CONTINGENCY PLANS
The Company recognizes the importance of readiness for potential worst case
scenarios. As a result, the Company worked to identify scenarios with
significant risks, which could have required contingency plans and had
contingency plans in place before the end of 1999.
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.
PRICE RANGE OF COMMON STOCK
The Company effected its initial public offering on October 24, 1997 at a
price of $14.00 per share. Since that date, the Company'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 closing sales prices for
the Common Stock, all as reported by the Nasdaq National Market.
Period High Low
- --------------------------------------------------------------------------------
October 16, 1997 - December 31, 1997 $ 23.25 $ 15.75
Fiscal 1998:
First Quarter $ 28.75 $ 15.13
Second Quarter 29.38 21.25
Third Quarter 45.13 26.00
Fourth Quarter 56.75 31.25
Fiscal Year 56.75 15.13
Fiscal 1999:
First Quarter $ 68.25 $ 43.75
Second Quarter 58.00 36.56
Third Quarter 56.75 34.75
Fourth Quarter 64.00 38.00
Fiscal Year 68.25 34.75
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES
Concord Communications Securities Corporation
600 Nickerson Road
Marlboro, MA 01752
Empire Technologies, Inc.
2675 Pacers Ferry Road, Suite 150
Atlanta, GA 30339
Concord Communications International, Inc.
600 Nickerson Road
Marlboro, MA 01752
CCA Holdings, Inc.
600 Nickerson Road
Marlboro, MA 01752
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the incorporation of
our report dated January 17, 2000 included in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 (File nos. 333-31484,
333-78087, 333-51945, 333-40645 and 333-38363).
Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 27, 2000
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<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
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<CASH> 9,104
<SECURITIES> 52,940
<RECEIVABLES> 14,396
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<COMMON> 76,504
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