<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ to ______________
COMMISSION FILE NUMBER 0-23067
CONCORD COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2710876
(State of incorporation) (IRS Employer
Identification Number)
600 NICKERSON ROAD
MARLBORO, MASSACHUSETTS 01752
(508) 460-4646
(ADDRESS AND TELEPHONE OF PRINCIPAL EXECUTIVE OFFICES)
----------------
INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS
FOR THE PAST 90 DAYS.
YES X NO
16,281,466 SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE, WERE
OUTSTANDING AS OF APRIL 30, 2000.
THIS DOCUMENT CONTAINS 25 PAGES.
THE EXHIBIT INDEX IS ON PAGE 24.
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CONCORD COMMUNICATIONS, INC.
FORM 10-Q, MARCH 31, 2000
CONTENTS
<TABLE>
<CAPTION>
Item Number Page
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance sheets:
March 31, 2000 and December 31, 1999 3
Statements of income:
Three months ended March 31, 2000 and March 31, 1999 4
Statements of cash flows:
Three months ended March 31, 2000 and March 31, 1999 5
Notes to financial statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-19
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
EXHIBIT INDEX 24
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash, cash equivalents and marketable
securities $56,718,871 $63,569,201
Accounts receivable, net of allowance
of approximately $1,319,000 and
$971,000 in 2000 and 1999, respectively 16,120,127 13,976,929
Prepaid expenses and other current assets 935,291 1,191,147
------------ ------------
Total current assets 73,774,289 78,737,277
------------ ------------
Equipment and Improvements, at cost:
Equipment 10,565,910 9,024,983
Leasehold improvements 3,731,444 3,110,369
------------ ------------
14,297,354 12,135,352
Less -- Accumulated depreciation and
amortization 4,755,803 4,085,950
------------ ------------
9,541,551 8,049,402
------------ ------------
Deferred Tax Asset 3,963,000 3,000,000
------------ ------------
$ 87,278,840 $ 89,786,679
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 898,462
Accounts payable 4,850,502 4,940,420
Accrued expenses 6,605,307 7,423,907
Deferred revenue 12,323,451 10,261,334
------------ ------------
Total current liabilities 23,779,260 23,524,123
------------ ------------
Long-term debt, less current portion -- 2,064,004
Redeemable preferred stock:
Series A Redeemable Convertible
Preferred Stock, $0.01 par value;
5,500,000 shares authorized; 5,471,465
shares issued and outstanding at
December 31, 1999 (aggregate liquidation
value $5,471,465) -- 4,744,115
Series B Redeemable Convertible Preferred
Stock, $0.01 par value; 2,920,000
shares authorized and 2,800,000 issued
and outstanding at December 31, 1999
(aggregate liquidation value $7,000,000) -- 6,978,902
------------ ------------
Total redeemable preferred stock -- 11,723,017
------------ ------------
Common Stock, $0.01 par value:
Authorized -- 50,000,000 shares
Issued and outstanding -- 16,175,156
and 14,809,533 shares,
in 2000 and 1999, respectively 161,752 148,095
Additional paid-in capital 94,470,770 81,922,240
Deferred compensation (3,303,537) (3,557,794)
Accumulated other comprehensive income (1,467,275) (1,386,125)
Accumulated deficit (26,362,130) (24,650,881)
------------ ------------
Total stockholders' equity 63,499,580 52,475,535
------------ ------------
$ 87,278,840 $ 89,786,679
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
License revenues $ 14,852,527 $ 11,656,493
Service revenues 4,415,746 2,751,066
------------ ------------
Total revenues 19,268,273 14,407,559
Cost of Revenues 2,426,363 1,788,569
------------ ------------
Gross profit 16,841,910 12,618,990
Operating Expenses:
Research and development 4,788,080 3,068,580
Sales and marketing 9,226,056 6,449,743
General and administrative 1,415,687 1,150,153
Stock-based compensation 254,257 347,585
Acquisition-related charges 4,300,000 --
------------ ------------
Total operating expenses 19,984,080 11,016,061
------------ ------------
Operating (loss) income (3,142,170) 1,602,929
Other income, net 755,931 718,055
------------ ------------
(Loss) Income before income taxes (2,386,239) 2,320,984
(Benefit from) Provision for income taxes (963,000) 1,224,918
------------ ------------
Net (loss) income before extraordinary items $ (1,423,239) $ 1,096,066
============ ============
Extraordinary items (288,010) --
------------ ------------
Net (loss) income after extraordinary items $ (1,711,249) $ 1,096,066
============ ============
Accretion of redeemable preferred stock -- 31,026
------------ ------------
Net (loss) income applicable to common
stockholders $ (1,711,249) $ 1,065,040
============ ============
Net (loss) income per common and
potential common share:
Basic $ (0.11) $ 0.08
============ ============
Diluted $ (0.11) $ 0.06
============ ============
Weighted average common and potential
common shares outstanding:
Basic 15,731,684 14,154,601
============ ============
Diluted 15,731,684 16,697,575
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
CONCORD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income $ (1,711,249) $ 1,065,040
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 669,853 424,969
Stock-based compensation 254,257 347,585
Amortization of debt issuance costs
Unrealized loss on available-for-sale securities (81,150) (326,067)
Changes in current assets and liabilities:
Accounts receivable (2,143,198) (553,021)
Prepaid expenses and other current assets 255,856 (12,060)
Accounts payable (89,918) 822,639
Accrued expenses (818,600) (429,021)
Deferred revenue 2,062,117 84,351
Deferred tax asset (963,000) (297,082)
------------ ------------
Net cash provided by operating activities (2,565,032) 1,151,453
------------ ------------
Cash Flows from Investing Activities:
Purchases of equipment and improvements (2,162,002) (861,660)
Proceeds from (Investments in) marketable securities 1,884,403 (10,943,600)
------------ ------------
Net cash used in investing activities (277,599) (11,805,260)
------------ ------------
Cash Flows from Financing Activities:
Repayments of and proceeds from bank borrowings (2,962,466) 1,258,672
Proceeds from issuance of preferred and common stock -- 125,285
Proceeds from shares issued in connection with
employee stock plans 839,170 1,828,124
------------ ------------
Net cash (used in) provided by
financing activities (2,123,296) 3,212,081
------------ ------------
Net Decrease in Cash and Cash Equivalents (4,965,927) (7,441,726)
Cash and Cash Equivalents, beginning of year 10,629,528 20,913,384
------------ ------------
Cash and Cash Equivalents, end of year $ 5,663,601 $ 13,471,658
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 33,592 $ 21,800
============ ============
Cash paid for taxes $ 147,306 $ --
============ ============
Supplemental Disclosure of Noncash Transactions:
Accretion of dividends on preferred stock $ -- $ 31,026
============ ============
Deferred compensation related to grants
of stock options $ 254,257 $ (325,165)
============ ============
Conversion of redeemable convertible
preferred stock to common stock $ 11,723,017 $ --
============ ============
Unrealized loss on available-for-sale securities $ (81,150) $ (326,067)
============ ============
Tax benefit associated with employee stock options $ -- $ 1,500,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
CONCORD COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FORM 10-Q, MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. INTERIM FINANCIAL STATEMENTS
The accompanying financial statements have been presented by Concord
Communications, Inc., (the "Company") without audit (except that the balance
sheet information as of December 31, 1999 has been derived from audited
financial statements) in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to Form
10-Q and Regulation S-X pertaining to interim financial statements. Accordingly,
these interim financial statements do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. The financial statements reflect all adjustments and accruals which
management considers necessary for a fair presentation of financial position as
of March 31, 2000 and December 31, 1999, and results of operations for the three
ended March 31, 2000 and 1999. The results for the interim periods presented are
not necessarily indicative of results to be expected for any future period. The
financial statements should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's 1999 Annual Report on
Form 10-K filed with the Securities and Exchange Commission in March 2000.
2. NET (LOSS) INCOME PER SHARE
The Company follows the provisions of SFAS No. 128, Earnings Per Share,
effective December 15, 1997. SFAS No. 128 establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. The dilutive effect of potential common
shares for the three months ended March 31, 1999, consisting of outstanding
stock options and redeemable preferred stock, is determined using the treasury
method. Calculations of basic and diluted net income per common share and
potential common share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31, MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Net (loss) income .......................................... $ (1,711,249) $ 1,065,040
============ ============
Weighted average common shares outstanding ............... 15,731,684 14,154,601
Potential common shares pursuant to stock options ........ -- 1,300,079
Potential common shares pursuant
to conversion of redeemable preferred stock ............. -- 1,242,895
------------ ------------
Diluted weighted average shares .......................... 15,731,684 16,697,575
============ ============
Basic net (loss) income per common share ................. $ (0.11) $ 0.08
============ ============
Diluted net (loss) income per common
and potential common share .............................. $ (0.11) $ 0.06
============ ============
</TABLE>
Diluted weighted average shares outstanding do not include 796,349 and
20,628 common equivalent shares for the three months ended March 31, 2000 and
1999, respectively, as their effect would have been antidilutive.
3. COMPREHENSIVE INCOME
6
<PAGE> 7
Comprehensive (loss) income for the three months ended March 31, 2000 and
1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net (loss) income $(1,711,249) $ 1,065,040
=========== ===========
Unrealized loss on
marketable securities (81,150) (326,067)
----------- -----------
Comprehensive income $ 1,792,399 $ 738,973
=========== ===========
</TABLE>
4. TAX PROVISION
The Company has recorded a tax benefit of $963,000 in the three months ended
March 31, 2000, based on its effective tax rate for 2000, computed in accordance
with SFAS No. 109, Accounting for Income Taxes. The Company's 2000 effective
tax rate includes the effect of the anticipated reversal of a valuation
allowance on deferred tax assets recorded by FirstSense prior to its
acquisition by the Company and research and development credits expected to be
earned during the year.
5. ACQUISITIONS
On February 4, 2000, the Company consummated a transaction pursuant to which
it acquired FirstSense Software, Inc. ("FirstSense"). Under the terms of the
agreement, the shareholders and option holders of FirstSense received an
aggregate of 1,940,000 equivalent Concord shares to effect the business
combination. The transaction is being accounted for as a pooling of interests.
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.
7
<PAGE> 8
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, MARCH 31, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Concord develops, markets and supports next-generation performance management
solutions. With the recent acquisitions of Empire Technologies, Inc. and
FirstSense Software, Inc., 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.
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. In particular, some statements contained
in this Form 10-Q and the Company's Annual Report and Form 10-K, for the fiscal
year ended December 31, 1999, are not historical statements (including, but not
limited to, statements concerning the plans and objectives of management;
increases in sales and marketing, research and development and general and
administrative expenses; expenses; statements related to acquisitions and the
integration of acquired companies; and our expected liquidity and capital
resources). This document contains forward looking statements. Any statements
contained herein that do not describe historical facts are forward looking
statements. We make such forward looking statements under the provisions of the
"safe harbor" section of the Private Securities Litigation Reform Act of 1995.
The forward looking statements contained herein are based on current
expectations, but are subject to a number of risks and uncertainties. The facts
that could cause actual results to differ materially from current expectations
include the following: risks of intellectual property rights and litigation,
risks in technology development and commercialization, risks in product
development and market acceptance of and demand for the our products, risks of
downturns in economic conditions generally, and in the software, networking and
telecommunications industries specifically, risks associated with competition
and competitive pricing pressures, risks associated with international sales,
risks associated with the integration of acquired products and other risks
detailed in the our filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as percentages of the Company's total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31, MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Revenues:
License revenues 77.1% 80.9%
Service revenues 22.9% 19.1%
----- -----
Total revenues 100.0% 100.0%
Cost of revenues 12.6% 12.4%
----- -----
Gross profit 87.4% 87.6%
Operating expenses:
Research and development 24.8% 21.3%
Sales and marketing 47.9% 44.8%
General and administrative 7.3% 8.0%
Stock-based compensation 1.3% 2.4%
Acquisition-related charges 22.3% --
----- -----
(Loss) Income from operations (16.3%) 11.1%
----- -----
Other income, net 3.9% 5.0%
----- -----
Extraordinary items (1.5%) --
----- -----
(Loss) Income before income taxes (13.9%) 16.1%
----- -----
(Benefit from) Provision for
income taxes (5.0%) 4.9%
----- -----
Net (loss) income (8.9%) 11.2%
----- -----
Accretion of redeemable preferred
stock -- (0.2%)
----- -----
Net (loss) income available to
common stockholders (8.9%) 11.0%
----- -----
</TABLE>
8
<PAGE> 9
REVENUES. The Company's revenues consist of software license revenues and
service revenues. Software license revenues are recognized in accordance with
the American Institute of Certified Public Accountants' Statement of Position
("SOP") 97-2, Software Revenue Recognition. Under SOP 97-2, software license
revenues are recognized upon execution of a contract and delivery of software,
provided that the license fee is fixed and determinable, no significant
production, modification or customization of the software is required and
collection is considered probable by management. In 1999, software license
revenues are recognized in accordance with SOP 97-2, as modified by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition with respect to Certain
Transactions. Service revenues are recognized as the services are performed.
Maintenance revenues are derived from customer support agreements generally
entered into in connection with initial license sales and subsequent renewals.
Maintenance revenues are recognized ratably over the term of the maintenance
period. Payments for maintenance fees are generally made in advance.
INTERNATIONAL REVENUES. The Company recognized $7.0 million and $2.2 million
of revenues from international locations in the three months ended March 31,
2000 and 1999, representing 36.3% and 15.3% 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 18.8% and 11.8% of total revenues in the three months ended March 31, 2000
and 1999, respectively. The continued increase in revenues from international
locations is primarily the result of the Company's expansion of its operations
outside the United States, which has included 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. The Company's total revenues increased 33.7% to $19.3 million
in the three months ended March 31, 2000 from $14.4 million in the three months
ended March 31, 1999.
LICENSE REVENUES. The Company's license revenues are derived from the
licensing of software products. License revenues increased 27.4% to $14.8
million, or 77.1% of total revenues, in the three months ended March 31, 2000
from $11.7 million, or 80.9% of total revenues, in the three months ended March
31, 1999. The increase in license revenues resulted from increased sales to new
customers and additional sales to existing customers for new products and
upgrades of existing licenses.
SERVICE REVENUES. The Company's service revenues consist of fees for
maintenance, training and professional services. Service revenues increased
60.5% to $4.4 million, or 22.9% of total revenues, in the three months ended
March 31, 2000 from $2.8 million, or 19.1% of total revenues, in the three
months ended March 31, 1999. The increase in service revenues was attributed to
an increase in revenue from maintenance contracts, training and professional
services for new and existing customers.
COST OF REVENUES. Cost of revenues includes expenses associated with royalty
costs, production, fulfillment and product documentation, along with personnel
costs associated with providing customer support in connection with maintenance
and professional service contracts. Royalty costs are comprised of third party
software costs. Cost of revenues increased 35.7% to $2.4 million, or 12.6% of
total revenues, in the three months ended March 31, 2000 from $1.8 million, or
12.4% of total revenues, in the three months ended March 31, 1999, resulting in
gross margins of 87.4% and 87.6% in each respective period. The increase in cost
of revenues was primarily the result of increased spending in customer support
to be more responsive to a growing customer base.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist
primarily of personnel costs associated with software development. Research and
development expenses increased 56.0% to $4.8 million, or 24.8% of total
revenues, in the three months ended March 31, 2000 from $3.1 million, or 21.3%
of total revenues, in the three months ended March 31, 1999. The increase in
research and development expenses was primarily due to the use of outside
contractors for consulting and recruiting along with increased headcount in
research and development from 80 to 103 for the period from March 31, 1999 to
March 31, 2000. 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, advertising and other promotional expenses.
Sales and marketing expenses increased 43.0% to $9.2 million, or 47.9% of total
revenues, in the three months ended March 31, 2000 from $6.4 million, or 44.8%
of total revenues, in the three months ended March 31, 1999. The increase in
absolute dollars was primarily the result of increased headcount to continue to
build the direct sales force along with additional marketing and promotional
activities to penetrate the market.
9
<PAGE> 10
Headcount in sales and marketing increased from 109 to 132 people from March 31,
1999 to March 31, 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries for financial, administrative and management
personnel and related travel expenses, as well as legal and accounting expenses.
General and administrative expenses increased 21.8% to $1.4 million, or 7.3% of
total revenues, in the three months ended March 31, 2000 from $1.2 million, or
8.0% of total revenues, in the three months ended March 31, 1999. The increase
in absolute dollars is associated with an increase of costs in general support
areas. Headcount in general and administrative functions increased from 30 to 47
people from March 31, 1999 to March 31, 2000. General and administrative
expenses declined as a percentage of total revenues during the period due to a
significant increase in revenues during that period.
OTHER INCOME. Other income consists of interest earned on funds available for
investment net of interest paid in connection with an outstanding term loan. The
Company had net other income of $756,000 for the three months ended March 31,
2000 and net other income of $718,000 for the three months ended March 31, 1999.
The increase in net other income is attributed to the investment of cashflows
from the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company 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 yielding the Company net proceeds of approximately $34.7
million. The Company had yielding working capital of $50.0 million at March 31,
2000.
Net cash (used in) provided by operating activities was ($2.6) million and
$1.2 million for the three months ended March 31, 2000 and 1999, respectively.
Cash, cash equivalents and marketable securities were $56.7 million and $63.6
million at March 31, 2000 and 1999, respectively. The decrease in cash was the
result of acquisition-related charges and repayment of acquisition-related debt.
Deferred revenues increased for the three months ended March 31, 2000 by $2.1
million due to an increase in overall sales activity; the increase was primarily
generated from deferred maintenance contracts.
Investing activities have consisted of the acquisition of property and
equipment, most notably computer and networking equipment to support the growing
employee base and corporate infrastructure and also investments in marketable
securities. The Company manages its market risk on its investment securities by
selecting investment grade securities with the highest credit ratings of
relatively short duration that trade in highly liquid markets. Financing
activities consisted primarily of the issuance of common stock and exercise of
options during the three months ended March 31, 2000 and 1999 and from the
proceeds from borrowings on a subordinated debt financing.
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 is limited. The Company has determined that its
initial public offering did not cause another ownership change. In addition, NOL
carryforwards acquired as a result of the FirstSense acquisition are also
restricted as a result of a prior ownership change. The Company has deferred tax
assets of approximately $19.7 million composed primarily of net operating loss
carryforwards and research and development credits. The Company has partially
reserved for these deferred tax assets by recording a valuation allowance of
$16.7 million. The net tax asset is based on the Company's estimate of NOL
carryforwards it expects to use in the next two years; all other tax assets have
been fully reserved.
Pursuant to paragraphs 20 to 25 of SFAS No. 109, the Company considered both
positive and negative evidence in assessing the need for a valuation allowance
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
10
<PAGE> 11
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.
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 March 31, 2000, 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.
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RISK FACTORS
References in these risk factors to "we," "our" the "Company" and "us"
refer to Concord Communications, Inc., a Massachusetts corporation. Any
investment in our common stock involves a high degree of risk. If any of the
following risks actually occur, our business, results of operations and
financial condition would likely suffer.
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(R) product in 1995.
Accordingly, we have only a limited operating history in the network performance
management market upon which you can evaluate our business and prospects can be
based. We incurred significant net losses in each of the five fiscal years prior
to earning a small profit in 1997. 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. Our prospects must be considered
in light of the risks, costs and difficulties frequently encountered by emerging
companies, particularly companies in the competitive software industry.
WE CANNOT ASSURE THAT OUR REVENUES WILL GROW OR THAT WE WILL REMAIN PROFITABLE.
Although we have achieved recent revenue growth and profitability for the
fiscal years ended 1999, 1998 and 1997, we cannot assure that we can generate
substantial additional revenue growth on a quarterly or annual basis, or that we
can sustain any revenue growth that we achieve. In addition, we have increased,
and plan to increase further, our operating expenses in order to:
- - fund higher levels of research and development;
- - increase our sales and marketing efforts;
- - develop new distribution channels;
- - broaden our customer support capabilities; and
- - expand our administrative resources in anticipation of future growth.
To the extent that increases in our expenses precede or are not followed
by increased revenue, our profitability will suffer. Our revenue must grow
substantially in order for us to remain profitable on a quarterly or annual
basis. In addition, in view of recent revenue growth, the rapidly evolving
nature of our business and markets, our recent acquisitions and our limited
operating history in our current market, we believe that one should not rely on
period-to-period comparisons of our financial results as an indication of our
future performance. In light of our strong performance in 1998, we used all of
our remaining unrestricted tax net operating loss and credit carryforwards in
1998. Accordingly, we recorded a tax provision of $532,600 during 1998 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.
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OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
We are likely to experience significant fluctuations in our quarterly
operating results caused by many factors, including, but not limited to:
- - changes in the demand for our products;
- - 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. Increases in our revenues will depend on
our successful implementation of our distribution strategy. Due to the buying
patterns of certain of our customers and also to our own sales incentive
programs focused on annual sales goals, revenues in our fourth quarter could be
higher than revenues in our first quarter of the following year. There also may
be other factors, such as seasonality and the timing of receipt and delivery of
orders within a fiscal quarter, that significantly affect our quarterly results,
which are difficult to predict given our limited operating history.
Our quarterly sales and operating results depend generally on:
- - the volume and timing of orders within the quarter;
- - the tendency of sales to occur late in fiscal quarters; and
- - our fulfillment of orders received within the quarter.
In addition, our expense levels are based in part on our expectations of
future orders and sales, which are extremely difficult to predict. A substantial
portion of our operating expenses are related to personnel, facilities and sales
and marketing programs. Accordingly, we may not be able to adjust our fixed
expenses quickly enough to address any significant shortfall in demand for our
products in relation to our expectations.
Due to all of the foregoing factors, we believe that our quarterly operating
results are likely to vary significantly in the future. Therefore, in some
future quarter our results of operations may fall below the expectations of
securities analysts and investors. In such event, the trading price of our
common stock would likely suffer.
THE MARKET FOR PERFORMANCE MANAGEMENT SOFTWARE IS EMERGING.
The market for our products is in an early stage of development. Although the
rapid expansion and increasing complexity of computer networks, systems and
applications in recent years has increased the demand for performance management
software 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:
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- - the size of this market;
- - the appropriate features and prices for products to address this market;
- - the optimal distribution strategy; and
- - the competitive environment that will develop.
The development of this market and our growth will depend significantly upon
the willingness of telecommunications carriers, ISPs, systems integrators and
outsourcers to integrate performance management software into their product and
service offerings. The market for performance management software may not grow
or we may fail to assess properly and address the needs of this market.
OUR SUCCESS IS DEPENDENT UPON SALES TO TELECOMMUNICATIONS CARRIERS.
We derive a significant portion of our revenues, and likely will continue to,
from the sales of our products to telecommunications carriers. Our future
performance depends upon telecommunications carriers' increased incorporation of
our products and services as part of their package of product and service
offerings to end users. Our products may fail to perform favorably in and become
an accepted component of the telecommunications carriers' product and service
offerings. The volume of sales of our products and services to
telecommunications carriers may increase slower than we expect or may decrease.
MARKET ACCEPTANCE OF OUR eHEALTH(TM) PRODUCT FAMILY IS CRITICAL TO OUR SUCCESS.
We currently derive substantially all of our revenues from our eHealth(TM)
product family, and we expect that revenues from these products will continue to
account for substantially all of our revenues for the foreseeable future. Broad
market acceptance of these products is critical to our future success. We cannot
assure that market acceptance of our eHealth(TM) product will increase or even
remain at current levels. Factors that may affect the market acceptance of our
products include:
- - the availability and price of competing products and technologies; and
- - the success of our sales efforts and those of our marketing partners.
Moreover, if demand for performance management software products increases,
we anticipate that our competitors will introduce additional competitive
products and new competitors could enter our market and offer alternative
products. Product introductions by our competitors may also reduce future market
acceptance of our products.
OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE. OUR SUCCESS DEPENDS UPON
MAINTENANCE OF STANDARD PROTOCOLS.
The software industry is characterized by:
- - rapid technological change;
- - frequent introductions of new products;
- - changes in customer demands; and
- - evolving industry standards.
The introduction of products embodying new technologies and the emergence of
new industry standards can render existing products obsolete and unmarketable.
Our Network Health(R) products' analysis and reporting, as well as the quality
of its reports, depends upon its utilization of the industry-standard Simple
Network Management Protocol (SNMP) and the data resident in conventional
Management Information Bases (MIBs). Any change in these industry standards, the
development of vendor-specific proprietary MIB technology, or the emergence of
new network technologies could affect the compatibility of our Network Health(R)
products with these devices which, in turn, could affect its analysis and
generation of comprehensive reports or the quality of the reports. Furthermore,
although our products currently run on industry-standard UNIX operating systems
and Windows NT, any significant change in industry-standard operating systems
could affect the demand for, or the pricing of, our products.
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WE MUST INTRODUCE PRODUCT ENHANCEMENTS AND NEW PRODUCTS ON A TIMELY BASIS.
Because of rapid technological change in the software industry and potential
changes in the performance management software market and industry standards,
the life cycle of versions of our eHealth(TM) products is difficult to estimate.
We cannot assure that:
- - we will successfully develop and market enhancements to our eHealth(TM)
products or successfully develop new products that respond to technological
changes, evolving industry standards or customer requirements;
- - we will not experience difficulties that could delay or prevent the
successful development, introduction and sale of such enhancements or new
products; or
- - that such enhancements or new products will adequately address the
requirements of the marketplace and achieve any significant degree of market
acceptance.
OUR ACQUISITIONS MAY NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.
In October 1999, we acquired Empire Technologies, Inc. Empire is a provider
of solutions for proactive self-management of UNIX and Windows NT systems, as
well as mission-critical applications. In February 2000, we acquired FirstSense
Software, Inc. FirstSense is a provider of application response management
solutions. Because these acquisitions will be recorded as
"poolings-of-interests" for accounting and financial reporting purposes, we
recorded the expenses of these acquisitions, which are substantial, in the
period in which each acquisition occurred. The reporting of expenses of each
acquisition as a current charge will have a significant adverse impact on our
post-acquisition results of operations.
INTEGRATING OUR ACQUIRED PRODUCTS AND SERVICES MAY BE DIFFICULT.
The anticipated benefits of our acquisitions may not be achieved unless,
among other things, our operations, products, services and personnel are
successfully combined with those of our acquired companies in a timely and
efficient manner. The diversion of our attention, and any difficulties
encountered in our transition processes, could harm the combined enterprise. We
cannot assure that we will successfully integrate our acquired companies,
because, among other things:
- the products and services offered by us and our acquired companies
are highly complex and have been developed independently; and
- integration of our product lines with those of our acquired
companies will require coordination of separate development and
engineering teams from each company.
If the anticipated benefits of our acquisitions are not achieved or are not
achieved in a timely fashion, then our acquisitions could harm our operating
results for a significant period of time that cannot now be determined.
THE MARKET FOR OUR PRODUCTS IS INTENSELY COMPETITIVE.
The market for our products is new, intensely competitive, rapidly evolving
and subject to technological change. Our current and future competitors include:
- - remote monitoring (RMON) probe vendors;
- - element management software vendors;
- - 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
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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 or superior technology. We have registered or applied for
registration for certain trademarks, and will continue to evaluate the
registration of additional trademarks as appropriate. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or services or to obtain and use information that we regard as
proprietary. Third parties may also independently develop similar technology
without breach of our proprietary rights. In addition, the laws of some foreign
countries do not protect proprietary rights to as great an extent as do the laws
of the United States. In addition, our products are licensed under shrink wrap
license agreements that are not signed by licensees and therefore may not be
binding under the laws of certain jurisdictions.
WE LICENSE CERTAIN TECHNOLOGIES FROM THIRD PARTIES.
We license from third parties, generally on a non-exclusive basis, certain
technologies used by our products. The termination of any such licenses, or the
failure of the third-party licensors to maintain adequately or update their
products, could result in delay in our shipment of certain of our products while
we seek to implement technology offered by alternative sources, and any required
replacement licenses could prove costly. While it may be necessary or desirable
in the future to obtain other licenses relating to one or more of our products
or relating to current or future technologies, we cannot assure that we will be
successful in doing so on commercially reasonable terms or at all.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WOULD HARM OUR BUSINESS.
Although we do not believe that we are infringing the intellectual property
rights of others, claims of infringement are becoming increasingly common as the
software industry develops and legal protections, including patents, are applied
to software products. Litigation may be necessary to protect our proprietary
technology, and third parties may assert infringement claims against us with
respect to their proprietary rights. Any claims or litigation can be
time-consuming and expensive regardless of their merit. Infringement claims
against us can cause product release delays, require us to redesign our products
or require us to enter into royalty or license agreements, which agreements may
not be available on terms acceptable to us or at all.
PRODUCT DEFECTS COULD RESULT IN LOSS OR DELAY IN MARKET ACCEPTANCE OF OUR
PRODUCTS.
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. We
cannot assure that, despite testing by us and testing and use by current and
potential customers, errors will not be found in new products we begin of
commercial shipments or, if discovered, that we will successfully correct such
errors in a timely manner or at all. The occurrence of errors and failures in
our products could result in loss of or delay in market acceptance of our
products, and alleviating such errors and failures could require significant
expenditure of capital and other resources by us.
WE MAY NOT HAVE SUFFICIENT PROTECTION AGAINST PRODUCT LIABILITY CLAIMS.
Since our products are used by our customers to predict future network
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
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provisions designed to limit our exposure to potential claims as well as any
liabilities arising from such claims, such provisions may not effectively
protect us against such claims and the liability and costs associated therewith.
We provide warranties for our products for a period of time (currently three
months) after purchase. Our license agreements generally do not permit product
returns by the customer, and product returns for fiscal 1999, 1998 and 1997
represented less than 1.0% of total revenues during each of such periods. We
cannot assure that product returns will not increase as a percentage of total
revenues in future periods.
WE RELY ON STRATEGIC PARTNERS AND OTHER EVOLVING DISTRIBUTION CHANNELS.
Our distribution strategy is to develop multiple distribution channels,
including sales through:
- - strategic marketing partners, such as Cisco Systems;
- - value added resellers, such as Empowered Networks;
- - telecommunications carriers, such as MCI 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 MANAGE SUCCESSFULLY OUR GROWTH.
We have experienced significant growth in our sales and operations and in the
complexity of our products and product distribution channels. We have increased
and are continuing to increase the size of our sales force and coverage
territories. Furthermore, we have established and are continuing to establish
additional distribution channels through third party relationships. Our growth,
coupled with the rapid evolution of our markets, has placed, and is likely to
continue to place, significant strains on our administrative, operational and
financial resources and increase demands on our internal systems, procedures and
controls.
OUR SUCCESS DEPENDS ON OUR RETENTION OF KEY PERSONNEL.
Our performance depends substantially on the performance of our key technical
and senior management personnel, none of whom is bound by an employment
agreement. We may lose the services of any of such persons. We do not maintain
key person life insurance policies on any of our employees. Our success depends
on our continuing ability to identify, hire, train, motivate and retain highly
qualified management, technical, and sales and marketing personnel, including
recently hired officers and other employees. We experience intense competition
for such personnel. We cannot assure that we will successfully attract,
assimilate or retain highly qualified technical, managerial or sales and
marketing personnel in the future.
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OUR FAILURE TO EXPAND INTO INTERNATIONAL MARKETS COULD HARM OUR BUSINESS.
We intend to continue to expand our operations outside of the United States
and enter additional international markets, primarily through the establishment
of additional reseller arrangements. We expect to commit additional time and
development resources to customizing our products and services for selected
international markets and to developing international sales and support
channels. We cannot assure that such efforts will be successful.
We face certain difficulties and risks inherent in doing business
internationally, including, but not limited to:
- - costs of customizing products and services for international markets;
- - dependence on independent resellers;
- - multiple and conflicting regulations;
- - exchange controls;
- - longer payment cycles;
- - unexpected changes in regulatory requirements;
- - import and export restrictions and tariffs;
- - difficulties in staffing and managing international operations;
- - greater difficulty or delay in accounts receivable collection;
- - potentially adverse tax consequences;
- - the burden of complying with a variety of laws outside the United States;
- - the impact of possible recessionary environments in economies outside the
United States; and
- - political and economic instability.
Our successful expansion into certain countries will require additional
modification of our products, particularly national language support. Our
current export sales are denominated in United States dollars and we currently
expect to continue this practice as we expand internationally. To the extent
that international sales continue to be denominated in U.S. dollars, an increase
in the value of the United States dollar relative to other currencies could make
our products and services more expensive and, therefore, potentially less
competitive in international markets. To the extent that future international
sales are denominated in foreign currency, our operating results will be subject
to risks associated with foreign currency fluctuation. We would consider
entering into forward exchange contracts or otherwise engaging in hedging
activities. To date, as all export sales are denominated in U.S. dollars, we
have not entered into any such contracts or engaged in any such activities. As
we increase our international sales, seasonal fluctuations resulting from lower
sales that typically occur during the summer months in Europe and other parts of
the world may affect our total revenues.
OUR COMMON STOCK PRICE COULD EXPERIENCE SIGNIFICANT VOLATILITY.
We completed an initial public offering of our common stock during October
1997. The market price of our common stock may be highly volatile and could be
subject to wide fluctuations in response to:
- - variations in results of operations;
- - announcements of technological innovations or new products by us or our
competitors;
- - changes in financial estimates by securities analysts; or
- - other events or factors.
In addition, the financial markets have experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of such companies or have resulted from the failure
of the operating results of such companies to meet market expectations in a
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particular quarter. Broad market fluctuations or any failure of our operating
results in a particular quarter to meet market expectations may adversely affect
the market price of our common stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of our attention
and resources.
WE MAY NEED FUTURE CAPITAL FUNDING.
We plan to continue to expend substantial funds on the continued development,
sales and marketing of the eHealth(TM) product family. We cannot assure that our
existing capital resources, the proceeds from our initial public offering during
October 1997 and any funds that may be generated from future operations together
will be sufficient to finance our future operations or that other sources of
funding will be available on terms acceptable to us, if at all. In addition,
future sales of substantial amounts of our securities in the public market could
adversely affect prevailing market prices and could impair our future ability to
raise capital through the sale of our securities.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments and Derivative
Commodity Instruments. The Company does not invest in derivative financial
instruments, other financial instruments or derivative commodity instruments for
which fair value disclosure would be required under SFAS No. 107. All of the
Company's investments are in investment grade securities with high credit
ratings of relatively short duration that trade in highly liquid markets and are
carried at fair value on the Company's books. Accordingly, the Company has no
quantitative information concerning the market risk of participating in such
investments.
Primary Market Risk Exposures. The Company's primary market risk exposure is
in the area of interest rate risk. The Company's investment portfolio of cash
equivalents is subject to interest rate fluctuations, but the Company believes
this risk is immaterial due to the short-term nature of these investments.
Substantially all of the Company's business outside the United States is
conducted in U.S. dollar-denominated transactions, whereas the Company's
operating expenses in its international branches are denominated in local
currency. The Company has no foreign exchange contracts, option contracts or
other foreign hedging arrangements. The Company believes that the operating
expenses of its foreign operations are immaterial, and therefore any associated
market risk is unlikely to have a material adverse effect on the Company's
business, results of operations or financial condition.
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CONCORD COMMUNICATIONS, INC.
FORM 10-Q, MARCH 31, 2000
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on the business, results of operations and financial
condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Issuance of Securities
On October 29, 1999, the Company completed a merger with Empire
Technologies, Inc. Concord issued an aggregate of 815,248 shares of Concord
Common Stock to the stockholders of Empire in the merger in a private placement
transaction pursuant to Section 4(2) under the Securities Act of 1933. The
merger was accounted for as a pooling of interests. The Company has filed a Form
S-3 Registration Statement to cover the resale of the securities issued in the
merger.
On February 4, 2000, the Company completed a merger with FirstSense Software,
Inc. The Company has reserved for issuance in connection with the merger,
1,940,000 shares of Concord Common Stock. The Company issued the shares in a
private placement transaction pursuant to Section 4(2) under the Securities Act
of 1933. The merger was accounted for as a pooling of interests. The Company has
filed a Form S-3 Registration Statement to cover the resale of the securities
issued in the merger.
(d) Use of Proceeds
On October 16, 1997, the Company commenced an initial public offering ("IPO")
of 2,900,000 shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company pursuant to the Company's final prospectus dated October
15, 1997 (the "Prospectus"). The Prospectus was contained in the Company's
Registration Statement on Form S-1, which was declared effective by the
Securities and Exchange Commission (SEC File No. 333-33227) on October 15, 1997.
Of the 2,900,000 shares of Common Stock offered, 2,300,000 shares were offered
and sold by the Company and 600,000 shares were offered and sold by certain
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.
The net proceeds to the Company from the IPO, after deducting underwriting
discounts and commissions and other offering expenses were approximately $34.7
million.
To date, the Company has not utilized any of the net proceeds from the IPO.
The Company has invested all such net proceeds primarily in US treasury
obligations and other interest bearing investment grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed in the accompanying Exhibit Index on page 23 are filed or
incorporated by reference as part of this Report.
(b) Reports on Form 8-K
- - Current Report on Form 8-K, date January 20, 2000, was filed with the
Commission on January 26, 2000 for announcement of the merger with
FirstSense Software, Inc.
- - Current Report on Form 8-K, dated February 4, 2000, was filed with the
Commission on February 10, 2000 to detail the acquisition of FirstSense
Software, Inc.
- - Amendment No. 1 to the Current Report on Form 8-K, dated February 4,
2000, was filed with the Commission on April 19, 2000 for disclosure of
the Financial Statements of FirstSense Software, Inc. as of December
31, 1999.
- - Amendment No. 2 to the Current Report on Form 8-K, dated February 4,
2000, was filed with the Commission on April 21, 2000 to include a
Financial Data Schedule for Amendment No. 1.
- - Current Report on Form 8-K, dated February 28, 2000, was filed with the
Commission on March 1, 2000 for disclosure of Consolidated Financial
Statements of the Company as of December 31, 1999.
22
<PAGE> 23
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, MARCH 31, 2000
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
Concord Communications, Inc.
/s/ Melissa H. Cruz
Date: May 15, 2000 Name: Melissa H. Cruz
Title: Executive Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
23
<PAGE> 24
CONCORD COMMUNICATIONS, INC.
FORM 10-Q, MARCH 31, 2000
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
27.01 Financial Data Schedule
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,664
<SECURITIES> 51,055
<RECEIVABLES> 17,439
<ALLOWANCES> 1,319
<INVENTORY> 0
<CURRENT-ASSETS> 935
<PP&E> 14,297
<DEPRECIATION> 4,755
<TOTAL-ASSETS> 87,279
<CURRENT-LIABILITIES> 23,779
<BONDS> 0
0
0
<COMMON> 94,632
<OTHER-SE> (31,132)
<TOTAL-LIABILITY-AND-EQUITY> 87,279
<SALES> 14,852
<TOTAL-REVENUES> 19,268
<CGS> 353
<TOTAL-COSTS> 2,426
<OTHER-EXPENSES> 19,984
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 756
<INCOME-PRETAX> (2,386)
<INCOME-TAX> (963)
<INCOME-CONTINUING> (1,423)
<DISCONTINUED> 0
<EXTRAORDINARY> 288
<CHANGES> 0
<NET-INCOME> (1,711)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
