<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): April 25, 2000
CONCORD COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
MASSACHUSETTS 0-23067 04-2710876
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
600 NICKERSON ROAD, MARLBORO, MASSACHUSETTS 01752
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (508) 460-4646
<PAGE> 2
ITEM 5. OTHER EVENTS.
This Current Report on Form 8-K of Concord Communications, Inc. (the
"Company") is being filed to disclose the audited consolidated balance sheets of
the Company as of December 31, 1999 and 1998 and the related audited
consolidated statements of income, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1999, 1998
and 1997, with accompanying notes. These audited consolidated financial
statements give retroactive effect to the merger of F Acquisition Corp., a
wholly owned subsidiary of the Company, and FirstSense Software, Inc., which has
been accounted for as a pooling of interest.
This amendment is being filed to amend the Report on Form 8-K, dated April
25, 2000, and filed with the Commission on May 1, 2000 (as amended, the
"Report"). This amendment is being filed to add the Independent Auditors' Report
for FirstSense Software, Inc. to Exhibit 99.1 and Exhibit 23.2, Consent of KPMG
LLP. No other changes to the Report are being made.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
EXHIBITS.
Exhibit No. Description
----------- -----------
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG LLP
27.1 Restated Financial Data Schedule for
December 1999
27.2 Restated Financial Data Schedule for
December 1998
27.3 Restated Financial Data Schedule for
December 1997
99.1 The following audited financial statements
of Concord Communications, Inc.:
Independent Auditors' Report
Independent Auditor's Report for FirstSense
Software, Inc.
Consolidated Balance Sheets as of December
31, 1999 and 1998
Consolidated Statements of Income for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders'
Equity (Deficit) for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for
the years ended December 31, 1999, 1998 and
1997
Notes to the Consolidated Financial
Statements
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CONCORD COMMUNICATIONS, INC.
Dated: May 1, 2000
By: /s/ Melissa H. Cruz
---------------------------------------
Melissa H. Cruz
Executive Vice President of Finance and
Chief Financial Officer
<PAGE> 4
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG LLP
27.1 Restated Financial Data Schedule for
December 1999
27.2 Restated Financial Data Schedule for
December 1998
27.3 Restated Financial Data Schedule for
December 1997
99.1 The following audited financial statements
of Concord Communications, Inc.:
Independent Auditors' Report
Independent Auditors' Report for FirstSense
Software, Inc.
Consolidated Balance Sheets as of December
31, 1999 and 1998
Consolidated Statements of Income for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders'
Equity (Deficit) for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for
the years ended December 31, 1999, 1998 and
1997
Notes to the Consolidated Financial
Statements
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Concord Communications, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report dated January 17, 2000 (except with respect to the matter discussed in
Note 3 (b), as to which the date is February 4, 2000) included in this Form 8-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). Our report
dated January 17, 2000 included in the Company's Form 10-K for the year ended
December 31, 1999 is no longer appropriate since restated financial statements
have been presented giving effect to a business combination accounted for as a
pooling-of-interests.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
May 1, 2000
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
FirstSense Software, Inc.
We consent to the incorporation of our report dated April 5, 2000, with
respect to the balance sheets of FirstSense Software, Inc. as of December 31,
1999 and 1998, and the related statements of operations, stockholders' (deficit)
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999, which report appears in the Form 8-K/A of Concord
Communications, Inc. dated February 4, 2000 and filed with the Commission on
April 19, 2000 (as amended by a second amendment to Current Report on Form
8-K/A, dated February 4, 2000, and filed on April 21, 2000), into Concord
Communications, Inc.'s previously filed Registration Statements on Form S-8
(File nos. 333-31484, 333-7807, 333-51945, 333-40645 and 333-38363).
/s/ KPMG LLP
Boston, Massachusetts
April 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 10,629
<SECURITIES> 52,940
<RECEIVABLES> 14,948
<ALLOWANCES> 971
<INVENTORY> 0
<CURRENT-ASSETS> 1,191
<PP&E> 12,136
<DEPRECIATION> 4,086
<TOTAL-ASSETS> 89,787
<CURRENT-LIABILITIES> 23,524
<BONDS> 2,064
0
11,723
<COMMON> 82,070
<OTHER-SE> (29,594)
<TOTAL-LIABILITY-AND-EQUITY> 89,787
<SALES> 53,924
<TOTAL-REVENUES> 68,820
<CGS> 2,468
<TOTAL-COSTS> 8,502
<OTHER-EXPENSES> 52,801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,964
<INCOME-PRETAX> 10,481
<INCOME-TAX> 4,286
<INCOME-CONTINUING> 6,195
<DISCONTINUED> 0
<EXTRAORDINARY> 125
<CHANGES> 0
<NET-INCOME> 6,070
<EPS-BASIC> .42
<EPS-DILUTED> .36
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 17,381
<SECURITIES> 39,238
<RECEIVABLES> 6,059
<ALLOWANCES> 463
<INVENTORY> 0
<CURRENT-ASSETS> 627
<PP&E> 5,202
<DEPRECIATION> 1,755
<TOTAL-ASSETS> 67,981
<CURRENT-LIABILITIES> 14,928
<BONDS> 242
0
11,598
<COMMON> 70,664
<OTHER-SE> (29,451)
<TOTAL-LIABILITY-AND-EQUITY> 67,981
<SALES> 35,048
<TOTAL-REVENUES> 41,968
<CGS> 1,766
<TOTAL-COSTS> 4,884
<OTHER-EXPENSES> 34,486
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,516
<INCOME-PRETAX> 5,114
<INCOME-TAX> (986)
<INCOME-CONTINUING> 6,100
<DISCONTINUED> 0
<EXTRAORDINARY> 120
<CHANGES> 0
<NET-INCOME> 5,980
<EPS-BASIC> .44
<EPS-DILUTED> .37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 11,400
<SECURITIES> 28,681
<RECEIVABLES> 4,031
<ALLOWANCES> 280
<INVENTORY> 0
<CURRENT-ASSETS> 329
<PP&E> 7,223
<DEPRECIATION> 4,639
<TOTAL-ASSETS> 46,745
<CURRENT-LIABILITIES> 7,696
<BONDS> 189
0
5,471
<COMMON> 68,155
<OTHER-SE> (34,766)
<TOTAL-LIABILITY-AND-EQUITY> 46,746
<SALES> 18,455
<TOTAL-REVENUES> 20,876
<CGS> 1,558
<TOTAL-COSTS> 2,947
<OTHER-EXPENSES> 18,681
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 367
<INCOME-PRETAX> (385)
<INCOME-TAX> (174)
<INCOME-CONTINUING> (211)
<DISCONTINUED> 0
<EXTRAORDINARY> 44
<CHANGES> 0
<NET-INCOME> (255)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CONCORD COMMUNICATIONS, INC.
Financial Statements
December 31, 1999 and 1998
(with Independent Auditor's Report Thereon)
<PAGE> 2
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 (deficit) 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 did not audit the
financial statements of FirstSense Software, Inc., a company acquired during
2000 in a transaction accounted for as a pooling of interests, as discussed in
Note 3(b). Such statements are included in the consolidated financial statements
of Concord Communications, Inc. and reflect total assets of 6% and 12% as of
December 31, 1999 and December 31, 1998, respectively and total revenues of 2%,
1% and 1%, respectively, for each of the three years in the period ended
December 31, 1999, of the related consolidated totals. These statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to amounts included for FirstSense Software, Inc., is
based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Concord Communications, Inc. as of December 31, 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.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 17, 2000 (except with respect
to the matter discussed in Note 3 (b),
as to which the date is February 4, 2000)
F-1
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstSense Software, Inc.:
We have audited the balance sheets of FirstSense Software, Inc. as of December
31, 1999 and 1998, and the related statements of operations, stockholders'
(deficit) equity, and cash flows for each of the years in the three-year period
ended December 31, 1999 (not presented herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FirstSense Software, Inc. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 3, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
April 5, 2000
Boston, Massachusetts
F-2
<PAGE> 4
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 $ 63,569,201 $ 56,618,777
Accounts receivable, net of allowance of approximately
$971,490 and $463,060 in 1999 and 1998, respectively 13,976,929 5,595,791
Prepaid expenses and other current assets 1,191,147 626,560
-------------------- -------------------
Total current assets 78,737,277 62,841,128
Equipment and Improvements, at cost:
Equipment 9,024,983 4,717,510
Leasehold improvements 3,110,369 484,218
-------------------- -------------------
12,135,352 5,201,728
Less-- Accumulated depreciation and amortization 4,085,950 1,755,162
-------------------- -------------------
8,049,402 3,446,566
Deferred Tax Asset 3,000,000 1,692,806
==================== ===================
$ 89,786,679 $ 67,980,500
==================== ===================
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (notes 4 and 9) $ 898,462 $ 117,372
Accounts payable 4,940,420 3,820,276
Accrued expenses 7,423,907 5,350,441
Deferred revenue 10,261,334 5,640,030
-------------------- -------------------
Total current liabilities 23,524,123 14,928,119
Long-term debt, less current portion (notes 4 and 9) 2,064,004 242,107
Redeemable Preferred Stock:
Series A Redeemable Convertible Preferred Stock, $0.01 par
value; 5,500,000 shares authorized; 5,471,465 shares issued
and outstanding at December 31, 1999 and 1998 (aggregate
liquidation value $5,471,465) 4,744,115 4,622,659
Series B Redeemable Convertible Preferred Stock, $0.01 par
value; 2,920,000 and 2,800,000 shares authorized at December
31, 1999 and 1998, respectively; 2,800,000 issued and
outstanding at December 31, 1999 and 1998 (aggregate liquidation
value $7,000,000) 6,978,902 6,975,073
-------------------- -------------------
Total redeemable preferred stock 11,723,017 11,597,732
-------------------- -------------------
Commitments and Contingencies (Note 8)
Common Stock, $0.01 par value
Authorized -- 50,000,000 shares
Issued and outstanding -- 14,809,533 and 13,522,440 shares,
in 1999 and 1998 respectively 148,095 135,224
Additional paid-in capital 81,922,240 70,528,649
Deferred compensation (3,557,794) (687,939)
Accumulated other comprehensive income (1,386,125) 149,606
Accumulated deficit (24,650,881) (28,912,998)
-------------------- -------------------
Total stockholders' equity 52,475,535 41,212,542
==================== ===================
$ 89,786,679 $ 67,980,500
==================== ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 5
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 $ 53,924,271 $ 35,047,711 $ 18,454,613
Service revenues 14,896,175 6,920,723 2,421,462
---------------- ---------------- ----------------
Total revenues 68,820,446 41,968,434 20,876,075
Cost of Revenues 8,502,291 4,883,811 2,946,834
---------------- ---------------- ----------------
Gross profit 60,318,155 37,084,623 17,929,241
Operating Expenses:
Research and development 14,432,334 9,879,812 5,928,931
Sales and marketing 29,442,304 19,884,752 10,324,838
General and administrative 5,336,912 3,595,052 2,363,355
Stock-based compensation (Notes 3 & 5) 3,038,796 1,126,156 64,280
Acquisition-related charges (Note 3) 550,601 -- --
---------------- ---------------- ----------------
Total operating expenses 52,800,947 34,485,772 18,681,404
---------------- ---------------- ----------------
Operating income 7,517,208 2,598,851 (752,163)
---------------- ---------------- ----------------
Other Income (Expense):
Interest income 3,136,026 2,611,289 503,734
Interest expense (39,560) (514) (126,836)
Other (132,809) (95,211) (10,320)
---------------- ---------------- ----------------
Total other income, net 2,963,657 2,515,564 366,578
---------------- ---------------- ----------------
Income (loss) before income taxes 10,480,865 5,114,415 (385,585)
Provision for (benefit from) income taxes 4,285,509 (985,822) (174,384)
---------------- ---------------- ----------------
Net income (loss) $ 6,195,356 $ 6,100,237 $ (211,201)
================ =============== ===============
Accretion of redeemable preferred stock 125,285 120,420 43,597
---------------- ---------------- ----------------
Net income (loss) applicable to common stockholders $ 6,070,071 $ 5,979,817 $ (254,798)
================ =============== ===============
Pro forma provision for income taxes on
Subchapter S-Corporation income (unaudited) 146,325 41,400 --
---------------- ---------------- ----------------
Pro forma net income (loss) (unaudited) $ 5,923,746 $ 5,938,417 $ (254,798)
================ =============== ===============
Net income (loss) per common and potential common
share:
Basic $ 0.42 $ 0.44 $ (0.07)
================ =============== ===============
Diluted $ 0.36 $ 0.37 $ (0.07)
================ =============== ===============
Pro forma diluted (unaudited) $ 0.35 $ 0.37 $ (0.02)
================ =============== ===============
Weighted average common and potential common
shares outstanding:
Basic 14,395,339 13,569,640 3,896,265
Diluted 16,722,140 16,199,651 3,896,265
Pro forma diluted (unaudited) 16,722,140 16,199,651 10,473,035
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 6
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
-----Common Stock----- Unrealized Accumulated
Additional Gain On Other
Number $0.01 Paid-in Deferred Marketable Accumulated Comprehensive Comprehensive
of Shares Par Value Capital Compensation Securities Deficit Income Total Income
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 28,
1996 949,817 $ 9,498 $18,158,012 -- -- $(32,732,841) -- $(14,565,331) --
Issuance of common
stock, net of
issuance costs of
$955,359 3,111,496 31,115 34,640,157 -- -- -- -- 34,671,272 --
Accretion of
dividends on preferred
stock -- -- (43,597) -- -- (441,557) -- (485,154) --
Conversion of
redeemable convertible
preferred stock to
common stock 8,108,258 81,083 14,838,203 -- -- -- -- 14,919,286 --
Exercise of stock
options 331,448 3,314 188,594 -- -- -- -- 191,908 --
Deferred compensation
related to grants of
stock options and
restricted stock -- -- 387,625 (387,625) -- -- -- -- --
Amortization of
deferred compensation
related to grants of
stock options -- -- -- 59,030 -- -- -- 59,030 --
Unrealized gains on
available-for-sale
securities -- -- - -- 19,750 -- 19,750 19,750 19,750
Distribution to
shareholders -- -- - -- -- (119,698) -- (119,698) --
Net income -- -- - -- -- (211,201) -- (211,201) (211,201)
------------------------------------------------------------------------------------------------------------
Comprehensive Income -- -- - -- -- -- 19,750 -- --
BALANCE, DECEMBER 31,
1997 12,501,019 125,010 68,168,994 (328,595) 19,750 (33,505,297) -- 34,479,862 --
Shares issued in
connection with
employee stock plans 1,021,421 10,214 1,495,575 -- -- -- -- 1,505,789 --
Accretion of
dividends on
preferred stock -- -- (120,420) -- -- -- -- (120,420) --
Tax benefit
associated with
employee stock options -- -- 500,000 -- -- -- -- 500,000 --
Deferred compensation
related to grants of
stock options and
restricted stock -- -- 484,500 (484,500) -- -- -- -- --
Amortization of
deferred compensation
related to grants of
stock options -- -- -- 125,156 -- -- -- 125,156 --
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 -- -- - -- -- 6,100,237 -- 6,100,237 6,100,237
------------------------------------------------------------------------------------------------------------
Comprehensive Income -- -- - -- -- -- 149,606 -- 6,230,093
BALANCE, DECEMBER 31,
1998 13,522,440 135,224 70,528,64 (687,939) 149,606 (28,912,998) -- 41,212,542 --
Shares issued in
connection with
employee stock plans 1,287,093 12,871 2,844,365 -- -- -- -- 2,857,236 --
Accretion of
dividends on
preferred stock -- -- (125,285) -- -- -- -- (125,285) --
Tax benefit associated
with employee stock
options -- -- 4,900,000 -- -- -- -- 4,900,000 --
Deferred compensation
related to grants of
stock options and
restricted stock -- -- 3,417,025 (3,417,025) -- -- -- -- --
Amortization of
deferred compensation
related to grants of
stock options -- -- - 547,170 -- -- -- 547,170 --
Issuance of warrants -- -- 357,486 -- -- -- -- 357,486 --
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 -- -- - -- -- 6,195,356 -- 6,195,356 6,195,356
------------------------------------------------------------------------------------------------------------
Comprehensive Income -- -- - -- -- -- (1,386,125) 4,659,625
=========== =========
BALANCE, DECEMBER 31,
1999 14,809,533 $148,095 $81,922,240 $(3,557,794) $(1,386,125) $(24,650,881) $52,475,535
========== ======== =========== =========== =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statement
F-5
<PAGE> 7
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 6,195,356 $ 6,100,237 $ (211,201)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,280,469 967,223 607,463
Gain on sale of fixed asset -- (6,720) --
Stock-based compensation 489,796 125,156 64,280
Amortization of debt issuance costs 59,502 -- --
Deferred tax provision (1,307,194) (1,518,422) (174,384)
Changes in current assets and liabilities:
Accounts receivable (8,339,081) (1,844,907) (1,382,331)
Prepaid expenses and other current assets (725,395) (297,234) (177,454)
Accounts payable 1,120,144 1,878,711 336,526
Accrued expenses 6,973,466 2,540,316 1,380,987
Deferred revenue 4,740,055 3,286,601 1,001,678
-------------- ------------- -------------
Net cash provided by operating activities 12,794,312 12,749,383 1,619,948
-------------- ------------- -------------
Cash Flows from Investing Activities:
Purchases of equipment and improvements (6,883,305) (2,270,586) (1,615,999)
Proceeds received on sale of fixed assets -- 15,000 --
Other Assets -- -- --
Investments in marketable securities (15,237,724) (10,296,851) (28,641,617)
-------------- ------------- -------------
Net cash used in investing activities (22,121,029) (12,552,437) (30,257,616)
-------------- ------------- -------------
Cash Flows from Financing Activities:
Proceeds from issuance of notes payable and warrants 3,120,736 362,346 583,707
Repayments of notes payable (219,765) (30,195) (1,508,209)
Distribution to shareholders (1,938,875) (1,507,938) (119,698)
Proceeds from issuance of common stock 4,797 6,973,156 39,127,091
Proceeds from shares issued in connection with
employee stock plans 2,915,449 1,505,633 191,909
-------------- ------------- -------------
Net cash provided by financing activities 3,882,342 7,303,002 38,274,800
-------------- ------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents (6,751,569) 5,981,526 9,462,748
Cash and Cash Equivalents, beginning of year 17,381,097 11,399,571 1,936,823
-------------- ------------- -------------
Cash and Cash Equivalents, end of year $ 10,629,528 $ 17,381,097 $ 11,399,571
============== ============= =============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 93,848 $ 28,135 $ 126,836
============== ============= =============
Cash paid for taxes $ 341,837 $ 46,159 $ 1,539
============== ============= =============
Supplemental Disclosure of Noncash Transactions:
Deferred compensation related to grants of stock
options $ 3,417,025 $ 484,500 $ 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 $ --
============== ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE> 8
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 and
availability 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 inter-company
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 $63,569,201 and $56,618,777 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. All payments
received in advance of the services rendered are recorded as deferred revenue.
(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.
F-7
<PAGE> 9
(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
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 (Loss) 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 redeemable
convertible preferred stock, is determined using the treasury stock method and
the if-converted method, respectively, in accordance with SFAS No. 128; such
amounts have been excluded in 1997 because their inclusion would be
anti-dilutive. 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. Pro forma diluted net income per share for
1997 also assumes the conversion of preferred stock to common stock prior to the
Company's initial public offering. Calculations of basic, diluted and pro forma
diluted net income per common share and potential common share are as follows:
F-8
<PAGE> 10
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) applicable to common stockholders $ 6,070,071 $ 5,979,817 $ (254,798)
Pro forma provision for income taxes on
Subchapter S-Corporation income (unaudited) 146,325 41,400 --
----------- ----------- -----------
Pro forma net income (loss) (unaudited) $ 5,923,746 $ 5,938,417 $ (254,798)
=========== =========== ===========
Weighted average common shares outstanding 14,395,339 13,569,640 3,896,265
Potential common shares pursuant to stock options 1,083,906 1,492,317
Potential common shares pursuant to conversion of
redeemable convertible preferred stock 1,242,895 1,137,694 --
----------- ----------- -----------
Diluted weighted average shares 16,722,140 16,199,651 3,896,265
Pro forma conversion of redeemable convertible preferred stock -- -- 6,576,770
----------- ----------- -----------
Pro forma diluted weighted average shares outstanding 16,722,140 16,199,651 10,473,035
=========== =========== ===========
Basic net income (loss) per common share $ 0.42 $ 0.44 $ (0.07)
----------- ----------- -----------
Diluted net income (loss) per common and potential common share $ 0.36 $ 0.37 $ (0.07)
----------- ----------- -----------
Pro forma diluted net income (loss) per common and potential common
share $ 0.35 $ 0.37 $ (0.02)
----------- ----------- -----------
</TABLE>
Diluted weighted average shares outstanding do not include 738,801, 41,632
and 51,918 common equivalent shares for the years ended December 31, 1999, 1998
and 1997, respectively, as their effect would have been antidilutive.
(2) Marketable securities
It is the Company's intent to maintain a liquid investment portfolio to
support current operations and to take advantage of investment opportunities;
therefore, all marketable securities are considered to be available-for-sale and
are classified as current assets.
The amortized cost, unrealized gains (losses) and fair value of marketable
securities available-for-sale as of December 31, 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>
F-9
<PAGE> 11
(3) Acquisitions
(a) Empire Technologies, Inc.
On October 29, 1999, the Company issued 815,248 shares of common stock
for all of the issued and outstanding shares of Empire Technologies, Inc.
(Empire) in a transaction accounted for as a pooling-of-interests. Accordingly,
all prior period financial statements presented have been restated as required
by Accounting Principles Board Opinion No. 16, Accounting for Business
Combinations. All inter-company transactions have been eliminated as a result of
the business combination.
As a part of the transaction, the Company incurred direct,
acquisition-related charges of approximately $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.
(b) FirstSense Software, Inc.
On February 4, 2000, the Company consummated a transaction pursuant to
which it acquired FirstSense Software, Inc. (FirstSense). Under the terms of
the agreement, the shareholders and option holders of FirstSense received an
aggregate of 1,940,000 equivalent Concord shares to effect the business
combination. The transaction is being accounted for as a pooling of interests.
All inter-company transactions have been eliminated as a result of the business
combination.
As a part of the transaction, the Company incurred direct,
acquisition-related charges of approximately $4,300,000. All of such costs have
been expensed in fiscal 2000 upon consummation of the FirstSense acquisition in
February 2000.
Separate and combined results of Concord, Empire and FirstSense during the
periods preceding the merger were as follows:
<TABLE>
<CAPTION>
Concord Empire FirstSense Eliminations Combined
<S> <C> <C> <C> <C> <C>
1999
Net Revenues 64,762,253 2,713,962 1,562,240 (218,009) 68,820,446
Net Income (Loss) 12,434,597 471,655 (8,101,318) 1,265,137 6,070,071
1998
Net Revenues 39,481,330 1,976,022 511,082 -- 41,968,434
Net Income (Loss) 9,078,471 747,615 (5,364,691) 1,518,422 5,979,817
1997
Net Revenues 19,569,594 1,110,306 196,175 -- 20,876,075
Net Income (Loss) 130,755 629,568 (1,189,505) 174,384 (254,798)
</TABLE>
Intercompany eliminations represent transactions among the Companies prior to
the combinations
(4) Line of Credit, Term Loan and Subordinated Debenture
Prior to the Company's acquisition of FirstSense, FirstSense had a
revolving line of credit (the Revolving Loan) and a term loan (the Term Loan)
with a bank. At December 31, 1999 borrowings of $0 and $298,567 were outstanding
under the Revolver Loan and the Term Loan, respectively. Immediately following
the acquisition, the Company repaid all amounts due and the related agreements
terminated.
F-10
<PAGE> 12
FirstSense also entered into a subordinated debt agreement with another
lender in July 1999. Under the terms of this agreement, FirstSense borrowed
$3,000,000 in 1999. FirstSense also granted the lender a warrant to purchase its
Series B Preferred Stock. FirstSense allocated $357,486 to the value of the
warrant, based on the relative fair value of the subordinated note and warrant
at the date of issuance. FirstSense was amortizing the resulting original
issuance discount over the life of the subordinated note. As of December 31,
1999, the carrying value of the debt and unamortized original issue discount
were $2,961,883 and $297,984 respectively. Immediately following the
acquisition, the Company repaid all amounts due under this agreement; upon the
early extinguishments of this debt, the Company recorded an extraordinary loss
of $288,010 in fiscal 2000.
Pursuant to the terms of the related warrant agreement, certain of the
warrant's terms did not become fixed until the Company's acquisition of
FirstSense. The Company applied the applicable provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, and determined that no further value
should be attributed to the warrant. Concurrent with the closing of the
acquisition, the warrant holder exercised the warrant.
(5) Stock Option Plans
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 Non-Employee 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. Concurrent with the
merger, the Company assumed the 1996 and 1997 FirstSense option plans. The
total number of shares which may be issued under the 1996 and 1997 Plans are
4,552, and 280,991, respectively.
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 $44.24, $25.86 and $7.85, 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:
F-11
<PAGE> 13
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Net income (loss), available to common stockholders as
reported.............................................. $ 6,070,071 $ 5,979,817 $ (254,798)
============== =============== ===============
Net (loss) income, pro forma............................ $ (8,603,695) $ 2,577,125 $ (795,047)
============== =============== ===============
Net income (loss) per share, as reported
Basic................................................. $ 0.42 $ 0.44 $ (0.07)
============== =============== ===============
Diluted............................................... $ 0.36 $ 0.37 $ (0.07)
============== =============== ===============
Pro forma diluted..................................... $ 0.35 $ 0.37 $ (0.02)
============== =============== ===============
Net (loss) income per share, pro forma
Basic................................................. $ (0.60) $ 0.19 $ (0.20)
============== =============== ===============
Diluted............................................... $ (0.51) $ 0.16 $ (0.20)
============== =============== ===============
Pro forma diluted..................................... $ (0.51) $ 0.16 $ (0.08)
============== =============== ===============
</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.
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> <C>
$ .10 - 1.90 489,756 5.86 $ 1.00 200,021 $ .91
2.33 - 17.38 399,418 6.75 8.57 101,379 9.91
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 7.09 53.08 625 56.75
--------- -------
3,102,184 455,364
========= -------
</TABLE>
The following schedule summarizes the activity under the stock option plans
for the three-year period ended December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Number of Price per Average
Shares Share Price
--------- --------- --------
<S> <C> <C> <C>
Outstanding at December 28, 1996 1,705,889 $ .10 - 1.90 $ .23
Granted................... 873,953 .67 - 22.06 6.65
Exercised................. (331,439) .10 - 1.90 .58
Terminated................ (26,503) .10 - 8.50 2.56
--------- -------------- ------
Outstanding at December 31, 1997 2,221,900 .10 - 22.06 2.68
Granted................... 658,112 .67 - 56.75 20.51
Exercised................. (984,707) .10 - 21.38 .98
Terminated................ (49,126) .10 - 41.00 5.28
--------- -------------- ------
Outstanding at December 31, 1998 1,846,179 $ .10 - 56.75 $ 9.87
========= ============== ======
</TABLE>
F-12
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Granted................... 1,907,624 1.66 - 64.25 41.37
Exercised................. (538,648) .10 - 44.38 3.79
Terminated................ (112,971) .10 - 58.25 24.07
--------- -------------- ------
Outstanding at December 31, 1999 3,102,184 $ .10 - 64.25 $29.78
========= ============== ======
Exercisable at December 31, 1999 455,364 $ .10 - 56.75 $10.74
========= ============== ======
Exercisable at December 31, 1998 201,280 $ .10 - 19.46 $ 4.04
========= ============== ======
Exercisable at December 31, 1997 527,598 $ .10 - 4.53 $ .20
========= ============== ======
</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. Prior to the Company's acquisition of
FirstSense, FirstSense recorded deferred compensation of $3,417,025, $484,500
and $195,750 in 1999, 1998 and 1997 respectively, representing the difference
between the exercise price of stock options granted and the estimated fair
market value of the underlying common stock at the date of grant. The difference
is recorded as a reduction of stockholders' equity and is being amortized over
the vesting period of applicable options, typically four years. The Company
amortized $489,796, $125,156 and $59,030 in 1999, 1998 and 1997, respectively.
The amortization of deferred compensation is recorded as an operating expense.
The exercise price of all other options outstanding represents the fair
market value per share of common stock as of the date of grant.
(6) Redeemable Convertible Preferred Stock
Prior to the combination with the Company, FirstSense had issued Series
A Redeemable Convertible Preferred Stock (the "Series A Preferred Stock") and
Series B Redeemable Convertible Preferred Stock (the "Series B Preferred
Stock"). Concurrent with the acquisition of FirstSense by the Company (Note 3),
the Preferred Stockholders converted all of such shares into FirstSense common
stock; such common stock was then exchanged for Company common stock.
(7) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This standard requires, among other things,
recognition of future tax effects, measured by enacted tax rates, attributable
to deductible temporary differences between the financial statement and income
tax bases of assets and liabilities.
The approximate income tax effects of these temporary differences are as
follows:
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
----------- -----------
<S> <C> <C>
Net operating loss and federal tax credit carryforwards. $ 13,121,000 $ 14,845,000
Accruals not yet deductible for tax purposes............ 2,472,000 1,261,000
Depreciation............................................ 62,000 92,000
Deferred revenue........................................ 1,695,000 1,373,000
Capitalized research and development expenses........... 2,257,000 2,262,000
Other 40,000 44,000
Valuation allowance..................................... (16,647,000) (18,184,000)
------------ ------------
$ 3,000,000 $ 1,693,000
</TABLE>
F-13
<PAGE> 15
The Company has available net operating loss carryforwards of
approximately $26,800,000 and federal research and development tax credit
carryforwards of approximately $2,548,000 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 through
2019 as follows:
<TABLE>
<CAPTION>
Research and
Net Operating Loss Development Tax
Fiscal Year Carryforwards Credit Carryforwards
------------------ ------------------ --------------------
<S> <C> <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
2014-2019.................................................... 12,537,000 323,000
---------- ---------
26,802,000 2,548,000
</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 (NOL) carryforwards will be limited. The Company has determined
that its initial public offering did not cause another ownership change. In
addition, NOL carryforwards acquired as a result of the FirstSense acquisition
are also restricted as a result of a prior ownership change. The Company has
deferred tax assets of approximately $19.7 million composed primarily of net
operating loss carryforwards and research and development credits. The Company
has partially reserved for these deferred tax assets by recording a valuation
allowance of $16.7 million. The net tax asset is based on the Company's estimate
of NOL carryforwards it expects to use in the next two years; all other tax
assets have been fully reserved.
Pursuant to paragraphs 20 to 25 of SFAS No. 109, the Company considered both
positive and negative evidence in assessing the need for a valuation allowance
at December 31, 1998 and 1999. The factors that weighed most heavily on the
Company's decision to record a valuation allowance were (i) the substantial
restrictions on the use of certain of its existing NOL carryforwards and (ii)
the uncertainty of future profitability.
As a result of the Company's ownership change described above, the future
use of approximately $10.9 million of the Company's NOL carryforwards are
limited to only $330,000 per year; the substantial majority of such NOL
carryforwards will expire before they can be used. The FirstSense NOL
carryforwards are limited to $4.2 million per year. Pursuant to the provisions
of SFAS No. 109, the Company used all of its remaining unrestricted NOL and
credit carryforwards in computing the 1998 tax provision. As a part of restating
its financial statements to reflect the FirstSense acquisition, the Company
determined that approximately $3.0 million of valuation allowance previously
recorded by FirstSense prior to the acquisition was not necessary, given the
Company's estimates of future taxable income. Accordingly, pursuant to SFAS No.
109, the Company recorded an asset and reduced its provision for income taxes in
the period in which such NOL carryforwards were generated by FirstSense. The
Company is also subject to rapid technological change, competition from
substantially larger competitors, a limited family of products and other related
risks, as more thoroughly described in the "Risk Factors" section of the
Company's Form 10-K, for the fiscal year ended December 31, 1999. The Company's
dependence on a single product family in an emerging market makes the prediction
of future results difficult, if not impossible, especially in the highly
competitive software industry. As a result, the Company found the evidence
described above to be the most reliable objective evidence available in
determining that a valuation allowance against its tax assets would be
necessary.
The Company's net operating loss deferred tax asset includes approximately
$3.4 million pertaining to the benefit associated with the exercise and
subsequent disqualifying disposition of incentive stock options by the Company's
employees. When and if the Company realizes this asset, the resulting change in
the valuation allowance will be credited directly to additional paid-in capital,
pursuant to the provisions of SFAS No. 109.
The Company received a tax benefit of approximately $4.9 million and
$500,000 in 1999 and 1998, respectively, pursuant to the exercise of employee
stock options. The Company recorded this benefit as a component of additional
paid-in capital.
F-14
<PAGE> 16
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
and FirstSense acquisitions (Note 3). The difference in 1998 and 1997 relates
primarily to the use of substantially all of the Company's unrestricted NOL
carryforwards and NOL carryforwards acquired in the FirstSense acquisition.
(8) 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:
Amount
------
2000.......................................... 1,926,000
2001.......................................... 2,321,000
2002.......................................... 2,327,000
2003.......................................... 2,036,000
2004.......................................... 2,073,000
Thereafter.................................... 3,218,000
------------
$ 13,901,000
============
Rent expense was approximately $2.6 million, $549,000 and $359,000 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 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.
F-15
<PAGE> 17
(9) 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....................................................... 3,335,481 1,845,150
----------- -----------
7,423,907 5,350,441
=========== ===========
</TABLE>
(10) Employee Benefit Plan
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code covering all eligible employees, as defined. The Plan
allows for employees to defer a portion of their salary up to 15% of pretax
compensation. While the Company has the discretion to make contributions to the
plan, no such contributions were made in 1999, 1998 or 1997.
(11) 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 $ 182,944 $ -- $463,060
1999.......................................... $ 463,060 $ 508,430 $ -- $971,490
</TABLE>
(12) 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.
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